The world awaits the birth of a new banking platform
It shouldn’t be underestimated just how significant the decision and, even more importantly, the delivery of a new core banking platform is. Commonwealth Bank of Australia made a Stock Exchange Announcement, not to say that they had finally delivered their banking platform, but simply to update on progress. That is how seriously it is taken; enough to move the share price of a bank.
Replacing the core banking system is the equivalent of a full heart, lungs and brain transplant, with all the risks inherent with that, and this is why no major bank has actually done this since the 1970s. Sure, there have been cases of banks being migrated from one legacy system to another , examples being NatWest’s systems onto RBS’s banking platform , Lloyds’ systems being migrated onto TSB’s, but migration onto a modern, new, agile system for core retail banking just hasn’t happened.
If it hasn’t happened is that because there is no good reason to make the move? It is certainly true that most established banks of scale across the world are working on systems that were initially developed in the 1960s and 1970s, when the use of punch cards and batch processing was state of the art. Many of these systems were never architected or designed with the future in mind, have little documentation and most of the original developers have either retired or gone to that great punchroom in the sky. This has left a legacy of systems which are creaky, unflexible and often have a DND (Do Not Disturb) sign above them because no one is quite sure what happens when you make a change to them. You only have to look at the week plus outage that National Australia suffered last year to see how challenging these old systems are to maintain and keep running. So when new products, channels or technologies come along it takes a lot of money, time and effort to force these creaking platforms to adapt. The business gets desperately frustrated with the CIO and complains that IT is holding back the business. You only have to look at how slow the banks have been to respond to social media and the overall digitial agenda to see how the systems are holding them back.
The challenge for every CIO facing the problem of moving to a new core banking platform is how to make the business case. Using CBA as an example, the original budget for the core banking replacement progamme was AUD$580m ($580m, £355m), which no small amount. This has now soared to AUD$1.1bn (£675m) and late last year it was announced that it was going to be another year late. They’re not alone with having these challenges, Nationwide in Swindon, UK are having similar problems (though being a mutual they don’t have to announce their numbers to the Stock Exchange) with the programme running far behind schedule and multiple changes of integration partners. In Frankfurt, where the programme was originally designed for Deutsche Postbank, its scope has beenextended to Deutsche Bank’s retail bank following the latter acquiring the former. And still no one has the full solution out there.
The challenge with spending such astronomical numbers (particularly at a time when capital is increasingly important to the banks) is what the payback period is. Based on the numbers Commonwealth Bank quoted this week, which was that the new system would repay AUD$300m (£184m) over three years, then that suggests that the payback period is at least 11 years. If you’re sitting there as the CEO or the COO of a bank and comparing an investment that pays back in 1 to 2 years versus one that no one else has succeeded in delivering and pays back in 11 years, you can see why not many banks have embarked on this journey. Brave man Mr Ralph Norris, CEO of CBA. When the average tenure of a CIO has fallen to a mere two and a half years, then it is no wonder that there aren’t many CIOs brave enough to bring forth the case for replacing their core systems.
Since 2008 National Australia has been working on installing Oracle’s i-Flex core banking solution. Whilst they have a live greenfield implementation in their UBank operation they will only have a foundation release implemented in 2012 – four years after making the decision. Costs continue to soar with infrastructure costs up a whacking 56% YOY 2010/2011 to AUD 719m (£465m), with most of that increase being attributed to the Next Generation Banking Platform.
Which brings us back to why the world looks on as the brave CIOs of NAB, CBA, Nationwide and Deutsche Bank pace nervously back and forth in the delivery rooms waiting for their new arrival. Stock up well because, even now, it could still be a long time coming!