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Why All Banks Will Change Core Systems


There’s a theme that keeps cropping up at most conferences I attend around the remodeling of banks. It came up again today in a discussion about data leverage at the Asian Banker Summit, and it occurred to me again recently, when I chaired the future-focused day at IPS 2013.

The theme is how do you turn a vertically integrated business that owns the customer process end-to-end and organizes itself around products and channels into a horizontally-structured business that wants to provide functionality to the customer at their point of need and organizes themselves around the customer’s data? That’s a long sentence and, for those who get this, it will make perfect sense.

This is why I wouldn’t bother writing anything further, except that this is so fundamental to the dialogue we’re having that I feel the need to break it down step-by-step.

First, banks were created to look after all the financial needs of people and businesses. They were licensed to live in their own segregated world of operation and completely owned that piece of turf. Everything from taking deposits to giving loans was the banks’ domain and they were organized to do just that.

As a result, most banks created operations based around products: money transmissions, mortgages, cards, loans, insurances, etc. These were delivered through one channel, the branch.

Over time, another channel appeared, the direct sales representative. These sales folk resided in branches and were served by the branch system. Then, a new channel popped up, the call center.

The call center was like one massive remote branch and required a new structure to operate. But the underlying data could be delivered through the branch-based systems, so the new structure was primarily designed to sit on top of those systems, offering scripts into the various products the bank offered. The call center people struggled with this – sometimes operating six or more windows of screens at any one time to get a competitive picture of the customer’s needs – but they lived with it.

Then, another channel popped up: the Internet. At first, banks thought this could lead to branch closures and started to invest heavily in moving from branch to Internet services. However, the underlying data was still held in product silos and the Internet was not responsive to customer’s views of the world. Broadband had yet to appear and customers were reluctant to lose their branch connection.

So, the banks left the Internet as another layer on top of the branch-based systems, alongside the call center spaghetti. Banks had become locked into vertically-integrated processes, structured around product silos that were ill-suited to the multichannel world they now served. But it was ok. Using middleware, fudge, smoke and mirrors, it did the job.

Then this perfect storm of mobile, cloud and big data appeared, augmented by customers tweeting and socialising 24/7 and most bankers went, “what the hell?”

Now here’s the challenge. The bank cannot leverage data; it’s locked in product silos. It cannot serve the customer’s needs. Banks layered channels over products. Now, they need to leverage data over mobile. And banks lost the end-to-end process as customers moved to apps and pieces of process and functionality as needed. Now there’s a need to organize the bank around the customer’s data and then leverage that data through the cloud to mobile devices as apps.

No way. Way … There is a way.

The way is to completely rip out the old systems and replace them with new core banking that can service the bank, and therefore the customers, in the way that is appropriate for the 21st century. How do you do that?

Changing core systems is like changing the engines on an aircraft at 9 miles high … you just don’t do it. Well, more and more banks are doing just that. Some are having problems, but this is why banks are changing core systems. You cannot restructure a bank around customer data if you have that data locked into legacy systems that are product siloed and channel handcuffed.

Mr. Skinner is chairman of the Financial Services Club, CEO of Balatro Ltd. and comments on the financial markets through his blog the Finanser. He can be reached at [email protected].