Core bank redemption in Corona times

For decades, banking has been processed in the back office on digital computers at banks, ie processing runs on their computers. Due to their historical development, retail banks regularly use a heterogeneous IT landscape and sometimes manual processes.

Entry into digital banking

Due to the corona crisis, the banks had to switch their operations to remote working, where their employees work in the home office. In order to enable customers to interact comfortably with the bank during this time, the importance of end-to-end digital business transactions has increased. This means that entry into end-to-end digital banking is necessary.

Core banking systems

The implementation of an end-to-end digital bank requires regular modernization of the bank’s backend and IT landscape. An important part of the IT modernization is an update of the core banking system (KBS for short) of the retail bank.
A KBS enables the bank to store customer data, post business cases on the accounts in the area of giro, savings and credit transactions and carry out investment transactions on securities accounts.

Complex IT landscape

Since the IT landscape of a retail bank has generally grown historically, it consists of a high level of complexity with a large number of different modules and systems which are connected to electronic interfaces. In this situation, the bank is faced with high costs and long implementation times in adapting the existing system landscape. In doing so, it can regularly be ascertained that the life cycle of the bank’s core system has exceeded its lifespan, which means that the CAB needs to be modernized or updated.

Overall transformation of the bank

The exchange of the KBS and the IT landscape is one of the most extensive projects in the bank. This change does not only include technical issues, but also requires the creation of a valid business case and the consideration of the business processes. This systematically necessary change ultimately leads to an overall transformation of the bank in which technical, professional and strategic facts must be taken into account.

Exchange of a core banking system

For a well-founded selection of a core banking system and the conception of a future operating model, all relevant factors must therefore be taken into account on a regular basis: the banking, IT, economic and ultimately the strategic dimension.

Banking factor

With the introduction of a new KBS, new standard processes are included. By mapping the existing business processes, the bank has to decide whether it wants to use the standard processes of the new core banking system or whether it would like to continue using its individual processes. In the banking landscape, it can regularly be seen that the continued use of individual processes leads to higher implementation and maintenance costs. Special attention is therefore necessary for the analysis and assessment of the use of standard processes or individual processes.

IT technical factor

In the core of the banking system, this takes over the booking of all business transactions and supplies the necessary peripheral systems with data through defined interfaces. The exchange of a CAB not only leads to a change in the CAB, but also to the need to adapt the peripheral systems and the necessary interfaces. With this complex transformation, further IT topics have to be considered: the cleansing of the data in the old system, the migration of the data to the new system, the archiving of data that is not required for day-to-day business and the management of the effective changeover.

Economic factor

Due to the size of the project and the high complexity of this migration project, the creation of a solid business case is essential. It is useful not only to consider the selection of the CAB and the supplier, but also to evaluate the bank’s future operating model in more detail. It is therefore necessary to design a sourcing strategy for the bank in the calculation work for the business case.

Strategic factor

When replacing the KBS and the new operating model, strategic options must also be considered at retail banks due to the great importance of IT. Above all, the bank has to evaluate its product portfolio, its range of services and its vertical range of manufacture and thus put its business model to the test. In this assessment of the vertical range of manufacture, multiple “make-or-buy” decisions are of particular importance, ie the implementation of a fundamental assessment of how the bank plans to produce parts of the bank itself in the future with the introduction of a KBS and or to outsource them in the future.

What ultimately counts in successful KBS projects ?

  • The recognition of the central importance of a CAB as the backbone of the bank
  • The unconditional involvement of top management on the IT side and the bank’s department
  • The conclusion of clearly structured and defined contracts, especially the transparent presentation of the project content and the delimitations
  • The systematic finding of the technical, economic and strategic fit of the solution and the supplier: does the KBS and the service provider fit the business model of the bank
  • The establishment of a uniform project understanding that not only affects the exchange of the CAB, but also aims to transform the bank into a target model
  • The necessary deployment of the relevant specialists and the provision of sufficient resources by the bank
  • The unconditional implementation of tight project and change management in accordance with the motto: “less is more, ie the bank should not add too many new topics to the migration project, which can ultimately lead to a delay in the project
  • Avoiding a “big bang” when switching in the bank to take the risk out of the project.

Market overview

For the selection of their CAB and its operating model, the banks can find a suitable supplier on the market, depending on the degree of outsourcing (the software production of the CAB, IT operation or processing):

  • Outsourcing of software development:

-> E.g. regional KBS manufacturers: Bancos, BestVision, CPB, FinTechGroup, OBS, Kordoba, Pass Consult>
-> E.g. Global KBS manufacturers: Alnova, Avaloq, Finastra / Misys, FIS / Sungard, Infosys, Oracle, SAP, TCS Tata, Temenos
-> Cloud based KBS manufacturers: FinReach, Mambu, ThoughMachine / Vault

  • E.g. Outsourcing of IT operations: ARZ, Fiducia / GAD
  • E.g. Outsourcing to the cloud: Amazon, Google, IBM, Microsoft
  • E.g. Outsourcing of processing: DWP, Trinkhaus ITS, Xchanging.

Conclusion

In an increasingly digitized world after the end of the corona crisis, it is essential for banks to digitize their core processes and adapt their IT landscape and thus modernize their core banking system (KBS).
The modern KBS is the most important building block for maintaining the competitiveness of the bank.

Here you can find out more about a project on the topic of core bank replacement

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