attitudes to core banking transformation in europe

IBM Global Business Services

Attitudes to Core Banking

Transformation in EuropeAn IBM survey

2 Attitudes to Core Banking Transformation in Europe

Table of contents

Executive summary 3

Introduction 4

Banking technology leaders’ perception of the industry 6

Current core banking platforms 9

Current challenges 11

Drivers for transformation 12

Impact of the challenges 13

Future plans: IT strategy for core banking transformation 15

Business benefits 17

Conclusions 19

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Executive summaryBanking technology leaders in Western Europe neither embrace fundamental transformation of core banking systems as a strategy nor see the need for it.

They are clear about where they want to get to and the broad direction of their journey, but find that the only practical way to get there is through incremental steps. No one is contemplating the complete replacement of core banking systems.

Most bank leaders are engaged in investments for which payback is expected in the same year for highly-targeted modernisation initiatives, driven mostly by front office digitisation and regulatory requirements, but also by cost reduction and operational improvement. Budgets are mostly tight, but adequate for incremental improvement. Business cases are typically generalised, high level, or, in some cases, non-existent.

Security is not a significant driver of core banking transformation. Agility, compliance and channel enablement are likely to be more common motivations for core banking transformation. The dominant trend in banking technology is to carry out tangibly beneficial investments accompanied by essential maintenance, repair and selective modernisation. Leaders at commercial banks with an international geographic spread are clearly investing more in transformational programmes than those at retail banks. Leaders at small banks invest proportionately more in transformational activity than those at large banks. Leaders at retail banks balance their investments between what they must do to avoid regulatory penalties and what the business demands with regard to mobile channel development.

Bank leaders are not yet actively thinking about cloud for core banking transformation. Few leaders plan to extend their use of external bank utilities, whether or not the utilities are already available for use. More leaders plan to extend the use of internal utilities when opportunities arise to avoid duplicative development and running costs.

Given the economic forces that hold sway over Europe, it can be argued that bank leaders are doing the right thing – and indeed the only possible thing – for the time being.

However, the emphasis on short-term, tactical change suggests that as a sector, core banking technology in Europe is mostly in a holding pattern and that it might be ill-equipped to face new sources of competition from online challengers and disintermediating innovation in payments. In addition, the incursion of foreign banks into European banking markets as the global economy moves slowly into growth is yet another challenge which remains to be addressed.


IntroductionEarly in 2014, IBM specialists undertook a survey among leaders at 27 banks and two core banking system solution providers from among banks and banking solutions providers across Europe to understand their attitudes and approaches to the transformation of core banking systems. This report describes the results and findings of the survey. The conclusion of this report attempts to outline how the findings of this survey can be applied to influence investment decisions in banking technology over the next three to five years.

In this survey, the following three key areas are addressed: • Industry perceptions• Current core banking platforms• Future plans

For this survey, a set of hypotheses are tested which are developed from the experience of IBM specialists that was gained by working with retail, corporate and global banks on core systems and front office modernisation programmes over many years.

These hypotheses underpin the fact that core systems of many banks might be vulnerable, thereby exposing the banks and the financial system itself to possible disruption.

These critical systems are often decades old, written in long-superseded languages, operationally and architecturally inflexible, and are ill-equipped to deal with new workloads generated by front office digitisation and the demands of real-time services.

The need for the modernisation of core systems of banks is felt acutely and yet this modernisation is likely to be deferred in favour of incremental enhancements that are driven by regulatory and business agendas.

In this survey, certain issues are explored such as the scope and nature of the core banking platforms that are currently used at banks, the issues that bank leaders face, the allocation of budgets, how the budgets are spent, and how adequate the budgets prove to be.

In addition, through this survey, it was discovered how banking technology leaders define core banking transformation and how they believe the technology of their organisations match the rest of the industry.

Informed by the survey findings, IBM specialists will shortly publish a white paper that details the IBM point of view regarding the transformation of core banking systems. The paper will attempt to offer guidance for leaders at banks who are considering investment for the transformation of their core banking systems.

Method and scopeLeaders at 27 banks and two core banking system solution providers were interviewed for their perspectives on core banking transformation and the relative importance of different delivery channels and technologies. The interviews were conducted between 1 February 2014 and 30 April 2014. The participants include leaders at a range of tier-1 banks (large domestic and international banks) and tier-2 banks (smaller domestic and sector-specialised banks). Domestic banks are defined as those banks with operations in one European country. Regional banks are banks with operations across a region in Europe; for example, the Benelux region. International banks are defined as banks with operations throughout different regions in Europe.

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Participants by geographical areaBanks and solution providers were selected to provide a representative spread of west European banking markets.

Figure 1. Participants by geographic distribution

Participants by core activityThe participants were selected to include a representative spread of different types of banks, sectors and sizes. Where a bank has activities in multiple business sectors, the dominant sector was used for the purpose of participant classification. The classification was based on the geographic and sector-based position of the participant.

Figure 2. Participants by core activity

Participants by roleThe interviewees were selected from IT board and IT functional leadership roles.

Figure 3. Participants by role

Business areas supportedThe participants typically supported more than one area of business activity, reflecting the scope of their leadership positions. Figure 4 identifies the frequency of occurrence of business areas supported by the each participant. Some of the participants are involved in more than one business area.

Figure 4. Business areas supported by the participants

Denmark, 1

Germany, 1

Italy, 2

Portugal, 1

Benelux, 9

UK, 9

Spain, 6

From 29 responses

From 29 responses

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From 29 responses

International commercial

Regionalcommercial

Domesticcommercial

Internationalretail

Domestic /Regional retail

Solutionsprovider

59%

7%3%

7%

10%

14%

From 29 responses

35%

3%

7%3%

32%

10%

10%

CEO

CIO

CTO

COO

IT directors

Operations directors

Senior architects


Banking technology leaders’ perception of the industryAll participants were asked about their perceptions of the industry’s stance towards core banking systems transformation, rather those of their own institutions. Five hypotheses were tested out:

• The proportion of the IT budget of the banking industry that is used for the core banking platforms

• The allocation of banking industry IT budgets for mandatory and regulatory change

• The impact of budget constraints on the capability of core banking systems to support front office digitisation

• The nature of transformation approaches deployed by IT leaders in the banking industry

• The imperative to transform core banking systems to remain competitive

Proportion of IT costsHypothesis 1: In most European institutions, the cost of maintaining core banking platforms represents an unusually high proportion of a bank’s IT budget.

Figure 5. The participants’ response to hypothesis 1

Two thirds of the participants in the survey agreed that the European banking industry has to spend a disproportionate amount of the total IT budget simply to maintain its core banking platforms.

Of those who disagreed, most were leaders at domestic banks with a correspondingly smaller core banking footprint. This finding is consistent with responses to the question on the adequacy of core banking budgets. Of the leaders at the banks who were interviewed, 33 percent reported that their core banking budgets are adequate as suggested in the section Future plans on page 15.

Budgetary discretionHypothesis 2: The budget for change is heavily skewed towards mandatory and regulatory change; therefore the availability of funds for investment in new capabilities is reduced.


From 27 responses

Disagree, 30%

Neutral, 7%Agree, 63%

Disagree, 24%

Neutral, 12%

Agree, 64%

From 25 responses

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Just under two thirds of the participants in the survey believe that IT budgets are heavily skewed towards regulation-driven changes. Of the leaders at the banks who were interviewed, 80 percent of those from commercial banks agree with or are neutral to this hypothesis. Among retail bank leaders, 72 percent of the participants agree or are neutral. This finding is consistent with the view of the participants on the situation of their own institutions as suggested in the sections Impact of the challenges on page 13 and Support for regulatory change on page 14.

“The traditional spend profile five to ten years ago was all about functional enhancement. Over the last five years it’s all about regulatory change.”- Director of a domestic retail bank

“Forty percent of the IT spend is focused on meeting mandatory and regulatory requirements. This is skewed.” - Head of department of a domestic retail bank

Adequacy of budget to support a digital front officeHypothesis 3: With reduced investment in core banking platforms, the platforms are not as flexible as required to support the level of innovation needed for digital front office initiatives.

This hypothesis evoked a mixed response with an unusually even division of opinion between those who agree, those who disagree and those who are neutral. This suggests that banking technology leaders believe that the industry as a whole is able to cope with the current situation.


“Architecture and systems make it difficult to change at speed and innovate without massive cost.” - Director of a domestic retail bank

Development approachHypothesis 4: The industry is seeing a trend towards an incremental approach to transformation. This incremental approach is taken with the objective of preserving more funds for discretionary spending to fulfil other needs.

From 26 responses

Disagree, 38%

Neutral, 27%

Agree, 35%



Just over half of the participants agree that there is a shift towards an incremental approach to core banking transformation with almost as many remaining neutral or disagreeing. This trend differs with the response of the individual bankers to the question on their own approach to core banking transformation, with almost three quarters adopting an incremental approach as suggested in the sections Future plans on page 15 and Transformation approach on page 15.

The responses of all banking industry leaders across the survey suggest that the participants believe that the use of an incremental approach is not only reasonably longstanding, but is also relatively successful till now.

“Especially with the cost of regulation, only an incremental approach is feasible.”- Director of a domestic retail bank

Mostly, retail bank leaders disagree with the hypothesis. If their response is viewed in the context of their response to other questions, it does not suggest that leaders at retail banks are more oriented towards radical transformation, but rather that they do not regard their focus on short-term enhancements as a recent shift.

“In the first instance an incremental approach is considered and solutions are looked at with a focus on the short term.” - COO of a domestic retail bank

Imperative to actHypothesis 5: For most bank leaders, ignoring core banking platform transformation will not be an option if they must remain competitive.


From 26 responses

Disagree, 23%

Neutral, 23%

Agree, 54%

From 26 responses

Disagree, 38%

Neutral, 8%

Agree, 54%

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A little more than half of the participants agree that the industry leaders must start thinking of transforming their core banking systems to remain competitive. The views of the participants on the prevalent thinking in the industry and each individual bank leader’s view of their own situation differ considerably. Individual bank leaders believe that their own organisations are in better shape than the industry as a whole.

“We should focus on what brings in more customers and revenues; focus on your strengths and have less dependency on old school solutions.” - COO of a domestic retail bank

Current core banking platformsBaseline position: The baseline position for this survey is defined by what banking industry leaders view as the scope of core banking systems and the footprint of the systems.

The scope of core banking platformsA broad consensus emerges among bank leaders on which systems make up a core banking platform. The only real point of debate is whether payment systems are part of the core banking platform. The scope of the core banking platform according to the broad consensus is represented in Figure 9.

“The core banking platform is functionally defined as the transactional part of the bank for customers, product systems and agreements or arrangements.”- Head of department of an international retail bank

Figure 10. The scope of the core banking platform according to survey participants

Only a few of the bank leaders consider channel and reporting systems as part of the core banking platform. While they are few in number, there was a clear rationale for their view.

“The core banking platform is defined as a process and application landscape of the core products and processes of the bank, including the channels and infrastructure. Next to that, the data involved, the ledger accounting and reporting part are all very relevant and essential key elements of the core banking platform.”- CIO of a domestic commercial bank

The footprint of the core banking platformIntegrated platforms: Nearly two thirds of the banks leaders interviewed run integrated platforms where a single system provides the majority of core banking capability. The remainder run a combination of separate specialist applications or an integrated solution with some more specialist applications in specific areas.

Included by many

Channel

Payments

Customer information file

Product definition and management

Collateral information

Common services

Reporting

CreditDeposits

(current account and savings account)

Securities(Mortgages)Broad

consensusIncluded by a very limited number


“We use integrated solutions with some specialised satellite solutions around it.”- CEO of a domestic retail bank

Implementation across geographic regionsWhile operating in more than one region, bank leaders generally implement a separate platform in each region. Very few examples are observed of a single implementation that supports activities across multiple regions. One notable exception has a single database, including customer details, that supports ten banks in different European countries. Among the positive aspects that emerge from the survey is the fact that though banks might have separate implementations, essentially multiple instances of the same software are being run.

“The bank is supported by one single implementation of the platform over multiple data centres and locations.” - CIO of a domestic commercial bank

Business line alignmentThe largest banks often have more than one platform, split by business line. For example, one platform might be used for wholesale and another for retail. The split in certain instances is also based on the size of the markets.

Bespoke solutions Two thirds of the bank leaders in the survey run bespoke solutions that have been developed internally over a number of years. While the remaining one third run package-based solutions, all but two of those have customised the solutions so much that the solutions cannot be managed and upgraded as a package. The degree of difference between solutions among different banks means that while banking experience is

transferable, knowledge of how their systems operate is not. In this survey, it is also found that commercial banks have a higher proportion of completely bespoke solutions than retail banks. All but one of the package-based solutions are used by retail banks, with only one commercial bank building its solution on a vendor package.

Across the three regions where the highest numbers of bank leaders were interviewed for the survey, there was no observable difference in approach to bespoke solutions against package solutions.

Use of banking utilitiesA banking utility in the context of this survey is defined as an internally or externally-provided common service used across multiple implementations.

The case for higher adoption of banking utilities is well understood by banking industry leaders who cite avoidable work and cost. They believe that investment in commoditised services does not differentiate the bank and recognise that better and more-quickly deployable solutions might be available in the market.

“We would invest in competitive edge systems but would use utilities for everything else.” - Head of department of a regional retail bank

However, concerns that the existing core banking platforms must be first renovated to facilitate the integration of utilities outweigh any reasons for the higher adoption of utilities. Leaders at organisations want to direct and own product processes in-house and they realise that there are few utilities that can be deployed as a core banking solution, or in support of it.

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“Greater flexibility can be achieved by building additional features and capabilities outside of the core banking applications.” - Director of an international retail bank

Only a quarter of the bank leaders surveyed use banking utilities within or along with their core banking platform. Most of these banks are in the Benelux region.

In this survey, no common approach to the use of utilities is identified, suggesting that no new pan-European or even single-region industry providers are emerging.

However, two repeated patterns are observable in the use of banking utilities. The first is the use of utilities in support of payments, though there was little evidence of a common approach. The second is the reuse of certain components as utilities across different brands at banks that have grown through merger or acquisition.

While the bank leaders surveyed expect the use of utilities to increase over the next few years, this appears to be a slow trend with the majority claiming that they have no immediate plans for significant use.

Current challengesThe banking industry leaders who were interviewed highlighted a number of challenges that they currently face with the ongoing maintenance and development of core banking systems. They also cite multiple challenges in the ongoing management of core banking platforms.

“Regulatory focus is massive. If we had an issue it would be a while before people noticed, now it is visible round the clock.” - Director of a domestic retail bank

The existing systems are rigid and inflexible because of the complexity and age of the design and there are multiple platforms which makes it hard to understand, run and change the platforms. Changing the platforms to comply with regulatory requirements and to respond to round-the-clock digital banking needs is difficult. Changes and investment are inevitable, but the business case is difficult to justify.

In more detail, five common themes can be easily identified:

Total cost of ownership: The cost of running core banking platforms is considered to be too high. Cost reduction is needed to restore the competitiveness of the banks.

Complexity: The complexity of core banking platforms and processes is seen as a very big challenge. This complexity has a significant impact on the ability of the IT team to track down issues. The cost of running, updating and changing the platform increases because of the complexity. The challenge is exacerbated in many organisations by the need to support and maintain multiple platforms, sometimes as a result of past renovation initiatives.

Age: Most organisations have aging systems that are forty years old or are even older. Keeping legacy platforms current requires ongoing investment in compliance, security, flexibility and speed to market. Finding ways to retain skills and knowledge of the legacy technologies and the systems themselves is also a challenge.


Regulations and compliance: Regulations and compliance are consistently reported as a significant challenge. The pressure is exacerbated by the speed at which bad news travels because of instant social media communication. The cost and time of making compliance changes is also a major challenge.

Batch-focused systems: Most core banking platforms are basically batch systems. Adapting them to support the always-on channel solutions of mobile and internet banking and making the bank appear to be functional round the clock is a significant challenge.

Drivers for transformationBanking industry leaders were asked what are the drivers that shape the core banking transformation thinking and goals. The following are their priorities:

Improved agility: Enhanced agility was a priority at banks of all types with the main goal being to enable capabilities for new business models. The participants in the survey are pursuing this goal through continuous improvement in the modularity and componentisation of system architecture, with leaders at large retail banks and banks involved in both retail and wholesale in particular favouring this low-risk approach.

Cost reduction: Reducing costs was a key factor driving core banking systems modernisation, as current spending on these systems still uses a large part of the application maintenance budget. Leaders at large banks have generally not been able to create significant synergies of scale even under strong pressure to reduce budgets because although some of them had initial success renegotiating external maintenance contracts, they now face the problem of having to reduce the amount of work required to maintain their core banking systems.

Sourcing strategy enablement: In a growing trend, bank leaders, including those at large retail banks, try to use new sourcing models for core banking systems. They are motivated by the need of IT management to have a predictable balance between costs and service levels for a predefined period.

Radical overhaul: A transformation driver cited by banking industry leaders is that core systems are simply too old, obsolescent and complex to be maintained effectively. Fast-evolving regulations also drive the need for transformation, most commonly in payments and lending.

Acceptable service level: The maintenance of an acceptable level of service is still a significant concern. This concern is especially true for regional and domestic banks as a result of the regulatory requirements that drive the need for high system stability and availability.

Architectural evolution: Most of the bank leaders wish to evolve the architecture of their core banking platform as a strategy to achieve their objectives. The adoption of enterprise-wide enabling technologies such as business rules engines, master data management, analytics and business process management are seen as significant reasons for their wish to move to a more flexible architecture. This trend was more pronounced for regional mid-size banks that can better balance costs, risks and benefits.

Integration and virtualisation: Front office transformation makes integration and virtualization transformation drivers. For example, a leader at a large regional bank expects to enable the creation of a single virtual product catalogue and a unified customer view across countries and channels by adapting all the related core banking platforms in five years. These changes are to be achieved by progressively adopting a service-oriented architecture.

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“We face high cost for licence to operate and (have) hardly any room to invest in agility.” - Head of IT of an international retail bank

Ability to deal with changeAlmost half of the bank leaders in the survey report that with their current platforms they are able to meet business demands, provided that budgets remain at the same level.

Some of them have already completed platform renovation to meet short to medium-term demands. A minority among them have undertaken transformation for the long term.

The other half of bank leaders in the survey say that they must actively address certain aspects of their core banking platforms such as flexibility, functions and a more modular structure in the next five years.

The difference in each individual bank leader’s perception of the level of change required in the industry relative to their own organisation is modest as suggested by the sections Banking technology leaders’ perception of the industry on page 6 and Imperative to act on page 8. All bank leaders apparently believe that their organisations are in better shape than the rest of the industry.

“The current platform is a real legacy system and in some areas, for example, loans, the capability to be adaptive to the change requests is very critical.”- Head of department of a regional commercial bank

The impact of the challengesThe participants identified a number of areas of impact as a result of the challenges the current systems face. Of these areas of impact, the two that occur significantly more often and with significantly more weight in the survey are the impact of regulatory change and the ability to support front office digitisation programmes. This section identifies the key areas of impact, the current capability to manage change and highlights the issues associated with regulatory change and front office digitisation.

Key areas of impactThe key areas of impact that are reported most often by the bank leaders interviewed are the following:

Lack of funding for discretionary change: The time and cost required to meet regulatory changes, particularly in retail banking, impacts the discretionary budget available for other changes.

Foregone business: The cost to the business of not being able to pursue change as quickly as required or of not being able to pursue change at all, hinders business growth resulting in lost opportunity.

Too slow to the market: Running with high operational and change costs impacts the time to market for new products.

Skills shortage impedes progress: High reliance on skills in legacy technologies that are difficult to scale impedes progress.

Inability to simplify IT: The balancing act between accommodating new business needs and keeping IT as simple as possible and costs as low as possible is vexing.


Support for front office digitisationMore than half of the banking technology leaders interviewed remark that core banking platforms will inhibit the development of front office solutions, rather than enable them. More than half also expect that this situation will change over the next three to five years, with the core banking platform enabling change, rather than impeding it.

This changing trend is driven by a subset of banks, where the leaders plan to implement transformation strategies that specifically address front office digitisation.

Bank leaders who plan to transform the core banking platform for front office digitisation expect to enable front office change by implementing enterprise middleware platforms that use well-defined system interfaces. For this purpose, they also plan to rewrite mainframe services to go along with the middleware and to rationalise the customer information data stores using master data management disciplines.

“Recently we have been discussing how to position a service bus and there is recognition in the business case of the need to rewrite mainframe elements along with it.” - Head of department of a domestic retail bank

The inflexibility of legacy systems was identified as the biggest inhibitor to enable front office digitisation programmes.

“Legacy systems substantially inhibit front office digitisation because of lack of flexibility and time to market.” - Head of department of a regional commercial bank

Support for regulatory changeMost bank leaders report that the level of mandatory and regulatory changes impacts their ability to invest in business-led change.

“Regulatory developments do not give us any additional value, so my strategy is trying to share developments with other similar banks in order to reduce costs.” - Director of a domestic retail bank

A quarter of the bank leaders in the survey believe that they have adequate discretionary budgets to handle regulatory change. They also remark that they have managed investment budgets adequately, adopted market-leading solutions and their international footprint has limited the impact of a single country or region. Commercial banks were less impacted than retail banks by regulatory change and commercial bank leaders have successfully managed compliance requirements over a period of time.

Less than a sixth of the bank leaders in the survey reported that they have no discretionary budget available for investment in business growth initiatives. The reason is that most of the burden of change associated with regulatory requirements rests with their core banking teams.

“The impact on the discretionary budget is increasing because of many regulations, the high number of implementation projects and the involvement of the few key professionals capable to conduct them.” - Head of department of a regional commercial bank

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Inhibitors to change In this survey, all the inhibitors to undertaking core banking transformation that the bank leaders recognise in their own organisation are looked at. At the top of the list were three related factors that inhibit the management and implementation of change:

• Customisation: The difficulty of customising the existing application

• Skills: Access to the skills required to change and customise applications

• Integration: The ease with which integration with the core banking system can be supported

The results of the survey suggest that there is less concern than expected with the ability to set realistic expectations. Only one third of the bank industry leaders believe that the ability to set realistic timescales, budget and overall expectation inhibits transformation.

Given the number of failed or problematic programmes that have occurred across the industry, the number of participants who believe that the ability to set realistic expectations inhibits change was expected to be higher. However, the adoption of incremental approaches, with consequentially smaller

budgets, timescales and expectations might be a factor for the limited concern as suggested by the section Transformation approach on page 15.

The low level of concern about setting unrealistic expectations corresponds with a lack of attention observed in the development of a business case as seen in the sections Future plans on page 15 and Business cases for core banking transformation on page 18.

Future plans: IT core banking strategy Because there is a wide spectrum of approaches that bank leaders can take to transform or modernise their core banking platforms, this section differentiates between those bank leaders who adopt an incremental approach and those who adopt an approach that results in step-change transformation. Notably, complete replacement of the core banking platform is not being contemplated by any of the bank leaders.

Transformation approachMore than four fifths of the bank leaders have plans for some form of core banking transformation. The majority plan incremental, progressive modernisation rather than programmatic transformation.

Figure 11. The participants’ view of the inhibitors to core banking platform transformationFrom 29 responses

Customisation

In-house expertiseIntegration

Support from the system supplierUnrealistic timescales

Unrealistic expectationsCultural issuesData migration

Unrealistic budgetStaff training

Organisational issuesInappropriate system selected

High Medium Low

0 20 40 60 80 100

From 29 responses

Customisation

In-house expertiseIntegration

Support from the system supplierUnrealistic timescales

Unrealistic expectationsCultural issuesData migration

Unrealistic budgetStaff training

Organisational issuesInappropriate system selected

High Medium Low

0 20 40 60 80 100


Figure 12. The bank leaders’ preference for transformation approach

Leaders at retail banks are the most likely to adopt an incremental approach while those at commercial banks are more likely to plan transformational approaches.

Relative to the size of the banks, leaders at larger banks plan for less change than those at the smaller banks and very few bank leaders plan for a radical transformation or overhaul. The bank leaders who plan more significant changes are those who are addressing specific parts of the core banking platform such as payments, loans, mortgages or those motivated by enterprise cost-saving initiatives such as business process outsourcing.

The following are the common themes that emerge on the transformation approach:

Preference for bespoke solutions over packages: Very few leaders at large banks plan to adopt a package-based solution in the next three to five years. Rather, they favour a bespoke development of current solutions.

Optimisation of development operations: Many bank leaders plan to improve the flexibility of existing systems by moving to more transformational application management practices and by introducing elements of re-engineering into the change management process. This approach implies a longer journey with an average programme lasting between four and seven years.

Business-aligned approach: The detailed definition of the transformation approach and initiatives are the result of very close collaboration between business and technology strategists.

Avoidance of technology-led projects: Few bank leaders plan technology-led projects such as cloud or SOA enablement, although these were key elements of business-aligned programmes for which improved agility is the goal.

Investment agendaFor this survey, the views of the participants on the adequacy of budget provision for transformation were polled.

A third of the participants believe that the budget for transformation is adequate after mandatory support and development changes are paid for. Half of them found the transformation budget to be less than adequate. The rest claimed that there was no remaining budget.

Incremental, 71%

Transformational, 29%

From 24 responses

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Figure 13. The participants’ response to the adequacy of their budget

This scenario contrasts with the views of the participants on the outlook over the next three to five years in which just over a third of the participants expect to increase budgets. Less than 20 percent expect to budgets to fall. These findings are consistent across all types of banks.

Figure 14. The participants’ response to the outlook for changes to core banking transformation budgets

Based on 28 responses

Decrease, 21%

Stable, 43%

Increase, 36%

Focus of investmentOf the bank leaders who expect core banking budgets to increase, the focus of the investments is to deliver functional enhancements in support of mandatory and regulatory change. The focus is also on architectural enhancements to enable operational cost-saving initiatives such as business process management and master data management.

Irrespective of whether budgets are expected to go up or down, most investments focus on in-year business cases which can provide immediate cost benefits.

In only a few cases do bank leaders plan core banking transformation through a multi-year programme and these programmes are driven by the need to continue to enable front office transformation programmes.

Business benefits This section reviews the business benefits that the participants seek to achieve through core banking transformation and how these benefits apply to the business case.

Expected business benefitsThere is a high degree of consistency between the business goals that bank leaders report as the most significant drivers for change. Regulatory compliance, time to market and operational efficiency are important to more than two thirds of the participants in the survey. Improved delivery channel support is just behind these goals.

“We would like to achieve cost reduction, better data quality and leverage data for analytics.” - CEO of a domestic retail bank

From 24 responses

No budget, 17%

Limited 50%

Adequate, 33%


Figure 15. The business drivers for change

Time to market was expressed as a business driver across different goals:

• Better support for customers: More flexibility for customer support such as the capability to offer an easier to approach, round-the-clock and customised service

• Flexibility: Internal flexibility of the system to support of time to market for products and to make cost more variable

• Business growth: Support growth into new markets or segments, particularly into wealth management

• Operational efficiency: Reduce most operational inefficiency in the back office through economies of scale and straight-through processing. In this case, an overlap is observed with a minority who cite centralisation

Improved delivery channel support scores lower in the ranking of expected business benefits. The lower ranking might suggest that bank leaders have made more progress with digital front office development than expected. A large majority, however, emphasise the importance of mobile and internet channels. A more detailed examination of the data shows that all retail bank leaders regard mobile banking and internet channels as important.

Figure 16. The importance of different channels

“Revenue streams are coming from other places; 30 to 40 percent of revenue growth will come from digital channels.” - Director of a domestic retail bank

Business cases for core banking transformationThrough this survey, it is clear that the level of maturity and sophistication of business cases for core banking transformation is generally low.

“There is a business case. Figures exist at a gross level.” - CTO of a core banking solution provider

At those banks in which a transformation has happened, the business case is usually developed at a high level. A small number of exceptions exist in which a series of smaller, delimited business cases have been developed. A significant minority of bank leaders put a lot of effort into the business case.

Regulation / Compliance

Time to market fornew products and services

Operational efficiency

Improveddelivery channel support

Risk management

Centralisation

72%

72%

69%

62%

55%

24%

0 10 20 30 40 50 60 70 80

From 29 responses

86%

86%

62%

59%

34%

17%

0 20 40 60 80 100

Mobile banking

Internet

Call centres

Branch networks

Social media

Third party / Agencies

From 29 responses

19

“Business case is very detailed and separated for the main countries…” - Head of department of a regional commercial bank

Two reasons why the quality of business cases is quite low are clear from the responses to related questions.

First, the use of incremental approaches with in-year pay back by bank leaders, is the dominant investment choice as suggested in the sections Future plans and Transformation approach on page 15. With this incremental approach, the bank leaders place less emphasis on the long-term business case that requires detail, and emphasise a more credible short-term business case. Second, the ability to set expectations does not inhibit embarking on core banking transformation.

ConclusionsFrom this survey, a clear picture of an industry that is content to adopt an incremental approach to investment in core banking platforms emerges. The strategies of the bank leaders focus on small steps that address the most immediate needs through in-year investment. This approach has been in place for the last three to five years and most bank leaders expect to keep this approach in the immediate future.

The IT leaders are more pessimistic about the state of the industry than they are about their own organisations and they express concern about the sustainability of an incremental approach seen elsewhere.

The concern about sustainability seems to be reasonable. From this survey it can be inferred that that the short-term focus that prevails is more or less a mechanism to cope with immediate concerns and it falls short of a long-term strategy. The pressure for more radical change is expected inevitably to increase because the following fundamental issues are not being addressed through incremental transformation:

Cost: The total cost of operation of core banking applications is increasing, albeit slowly as a proportion of IT spending while the revenue and profitability driven by these systems is decreasing.

Skills: The skills required to maintain the existing core banking platforms are increasingly difficult to find. While access to technical skills can be addressed, the people who built the solutions and understand their complexity are retiring.

Architecture: Recent high-profile systemic failures shift the regulatory pressure from operational compliance to the architecture of the systems itself. Some of the issues that might emerge from the architecture can be very complex to address.

Digitisation: The rush to keep pace with innovation in digital channels adds to the complexity, rather than being a catalyst for simplification.

Operations: Not enough progress is being made to support improvements and cost savings in business operations.


Bank leaders must consider the current holding pattern as an opportunity to take a broader look at the problem. They must develop a long-term strategy that addresses the fundamental issues identified earlier in this report. The dilemma that bank leaders face is understandable. Big replacement programmes are fraught with difficulty and risk while, incremental approaches might not help deliver the level of change that is needed.

With the following practical steps that can help resolve the dilemma, bank leaders can start to adopt new strategies to get the most out of their investment in core banking programmes:

Better business cases: The business cases that underpin the planned transformation must be improved significantly. The business case must extend beyond IT cost savings and focus on business savings and higher revenue.

Virtualisation and utilities: A better understanding of the business case can drive new approaches to transformation. A clearer understanding of the levers the business needs to pull can change the focus of investment. Two new key trends are expected to emerge. First, the current approach of service enablement can evolve into the virtualisation of core banking systems. This evolution can further reduce the dependence of other systems on a specific core banking implementation and it can allow bank leaders to select niche solutions for entry into specific markets. Second, over a longer period, new industry utilities are expected to emerge.

Rebalancing the change portfolio: Bank leaders must change their approach to managing change programmes to deliver more from the same level of investment. The clearer business case and revised approaches to transformation must be complemented with changes to the delivery approach. Portfolio management must be a vehicle for long-term change as well as short-term change. Ideally, bank leaders must be able to manage and measure the big shifts as a series of small increments.

Adoption of industry frameworks: The use of banking industry frameworks is expected to increase. Bank leaders must tackle the skill gap in the knowledge of the current solution to fully benefit from these changes. The use of a standard framework to describe the capability and architecture of existing platforms can significantly increase the portability of core banking skills.

A more comprehensive discussion on the issues discussed so far and specific guidance on core banking transformation will be covered in an IBM white paper, New Approaches to Core Banking Transformation that will be published in the second half of 2014.

For more informationTo learn more about the IBM core banking solutions, please contact your IBM representative or IBM Business Partner, or visit the following website(s): http://www.ibm.com/banking/core_banking.html

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AuthorsMichael DavisonBusiness Development Executive, Banking and Financial [email protected] +44 (0)7715 161 155

Simon GregsonExecutive IT Architect, European Core Banking and Payments [email protected]+44 (0)773 9876210

ContributorsJack HuSenior Managing Consultant, IBM Global Business Services, UK

Pascal Ter HorstSenior Managing Consultant, IBM Global Business Services, Netherlands

Riccardo LaurentiFinancial Services, IBM Global Business Services, Italy

Keith TuttonIBM Banking Transformation Leader, Europe

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Produced in the United KingdomJuly 2014

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