American Banker  |  Thursday, November 8, 2007

By Chris Costanzo

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Who could blame the developers of advanced core banking products abroad for drooling over the possibility that big U.S. banks might be ready to chuck their inflexible, 30-year-old mainframe banking systems?

Though the need for change could seem obvious, it takes an insightful eye to understand the many reasons that domestic institutions are so tied to their albeit flawed legacy systems.

Alex Groenendyk, the U.S. face of the Swiss core banking provider Temenos, says he understands where U.S. banks are coming from. So he has opted to gently push them into the next generation of core banking systems rather than trying to force them to face the unwelcome prospect of cutting all ties to their aging but stable ones. This approach of easing banks into updated technology involves a partnership with Metavante Corp., the Milwaukee banking technology provider.

"Joining them is a far better strategy than fighting them," said Mr. Groenendyk, the president of Orlando-based Temenos Americas, a unit of Geneva-based Temenos created to break into the U.S. market.

Temenos and Metavante announced an alliance in March under which Metavante would license advanced core banking technology from Temenos. The plan is to make Temenos' technology available through regular upgrades of Metavante's service bureau clients, as well as to large banks running in-house systems and seeking a phased approach to more advanced functionality.

"It will be an evolutionary process," said Mike Hayford, Metavante's chief operating officer. "Temenos technology will be put into our systems as part of normal releases. It won't be a big bang."

That sounds easy on the ears of chief information officers who tend to associate core system replacement projects with costs in the hundreds of millions of dollars, timelines in years, and processes fraught with risk. "Really, the thought of converting your core systems is rather daunting," said Jeff Kennedy, the senior director of technology at Synovus Financial Corp. "It's a little scary."

The $33 billion-asset Synovus in Columbus, Ga., has been a Metavante service bureau customer for 10 years and is eager to take advantage of some of the functionality the relationship with Temenos will offer. "We can take it one step at a time and provide some level of relief without swallowing the whole elephant in one sitting," Mr. Kennedy said.

U.S. banks have good reason to be leery of the whole-hog approach to systems replacement, Mr. Groenendyk said. The vast maturity of the market means that vendors supply not only core systems but also front-end interfaces for everything from branch banking to item processing, plus middleware to connect it all.

The idea of a bank swapping out its core system and making it work with all the other attached systems is far-fetched, Mr. Groenendyk said. "It's not going to happen on a large scale right away," he said. "Swapping out an entire core is still perceived by many as too risky in the very large institutions, but there are leaders actively considering it today."

Analysts say Temenos' partnership approach has merit. Metavante's network of bank relationships gives the Swiss company access to a market it has been trying to crack for years, said Don Free, a research director at Gartner Inc. in Stamford, Conn. And Temenos' advanced technology gives Metavante the edge it needs to achieve its goal of penetrating the largest banks, he said.

Temenos will gain "instant credibility" as Metavante clients start using its technology, Mr. Free said. And Metavante will be able to "prove the technology in its service bureau to sell to large banks in-house," he said.

The phased approach the two companies are taking may be the push some banks need to make the core system changes that experts say are inevitable. The biggest driver of core system change, in the view of Metavante's Mr. Hayford, is the rising volume of check images, which is creating a need for 24/7 processing versus the nightly processing supported by today's batch-oriented systems. The rise of self-service banking, meanwhile, is heightening requirements for real-time processing for customers who want up-to-the-minute balances.

Another factor, particularly for banks on either coast or near Mexico, is the increasing need to cater to customers who speak a language other than English or deal in currencies other than dollars. "Years ago, we had very few banks ask about multicurrency," Mr. Hayford noted.

Lastly, he said, the widespread struggle to bring new products to market, which has been greatly hampered by today's change-resistant systems, is driving core system evolution.

Next-generation core banking systems generally are characterized by their ability to process transactions in real time, 24 hours a day; provide single views of customers that reflect all their relationships with the bank; incorporate reusable components to make it easy to develop products; and offer multilingual and multicurrency capabilities.

Synovus is especially eager to take advantage of the Metavante-Temenos alliance to let it view full customer relationships from different perspectives, present consistent account-balance information no matter the channel used and improve its processing times. "Not all these gaps can be closed with our current system today," Mr. Kennedy said.

International providers of advanced core systems, who include i-flex solutions ltd. and Infosys Technologies Ltd., both of India, are slowly making headway into mid-tier North American banks. i-flex, which is majority-owned by Oracle Corp., announced in January that it had closed a deal with the $11 billion-asset People's Bank in Bridgeport, Conn., to replace its core system. Gartner's Mr. Free said that, within the past six months, at least three mid-tier banks had put nothing but international providers on their short lists of core replacement vendors. "The tide is changing," he said.

Analysts agree, however, that first-tier U.S. banks are resisting the change, at least for now. These large banks are content to surround their core systems with service-oriented architecture and other technologies designed to extend the flexibility and usefulness of their mainframes, rather than attempt a replacement.

"IBM is doing a good job of making the IBM mainframe more versatile," noted Raymond Dury, the chief information officer at Fifth Third Bancorp, a $101 billion-asset Cincinnati company.

As one of the largest payment processors in the country, Fifth Third requires the type of power that only a mainframe can supply, Mr. Dury said. "We don't want to limit ourselves in terms of number of transactions," he said. In addition, the company has been able to surround its mainframe with Java-based technology on the front end to achieve greater flexibility. "You don't even realize you're working with a mainframe," he said.

For large banks, replacing a core system "is still seen as too risky," said Jim Eckenrode, global banking research fellow at TowerGroup, an independent research firm in Needham, Mass., owned by MasterCard Inc.

It may not take much, however, to change that attitude. "If one bank decides to do it and is really able to move the needle in terms of new products and responsiveness, then the floodgates will open," Mr. Eckenrode said.

Metavante and Temenos are preparing for that moment. "We want to make sure the product is available when the market is ready for it," Mr. Hayford said. "We're very confident something will happen, it's just a question of when."

The companies also believe that their phased approach to change will make all the difference. "The approach we are offering has a far lower cost of entry and far lower risk," Mr. Groenendyk said. "Banks will be able to solve specific problems and by so doing replace their cores over time. The existing functionality, the architecture, and the data models save an enormous amount of time and ensure an integrated, nonsiloed system when completed."

The centerpiece of the plan is Temenos' Core Banking system, or TCB. Temenos also offers T24, a universal banking system that is aimed at U.S. branches of foreign institutions and private banking operations. With integrated trade finance, treasury, brokerage, and portfolio management capabilities, T24 does not fill the bill at most mainstream community banks, Mr. Groenendyk noted.

Temenos is continuing to prove its TCB product on the world stage. In an analysis of global core banking solutions last year, Celent ranked Temenos, along with i-flex and Infosys, highest in terms of the systems' breadth of functionality and use of advanced technology. But with only seven TCB customers worldwide, Temenos lags far behind the other two in terms of market penetration. The Celent report said i-flex had 230 customers for its comparable system and Infosys, 82.

Temenos said it expects the relationship with Metavante to help improve its penetration. As Metavante licenses Temenos technology and distributes it to U.S. customers, the Swiss company expects to generate revenue of $102 million over five years, Mr. Groenendyk confirmed. It also expects that Metavante, through its service bureau, will eventually let it offer TCB on an outsourced basis to banks worldwide.

Metavante and Temenos officials described their coming together as fortuitous. Metavante had concluded that it would be less risky and less costly to buy technology to upgrade its core banking system than to build new functionality from scratch. It examined three or four mostly global alternatives but preferred Temenos for its IBM-based technology. "The architecture and framework is such that we have the ability to put in these new capabilities on an evolutionary basis," said Paul Danola, a senior executive vice president and group president of Metavante's financial institutions group.

Temenos, meanwhile, had hatched a strategy of teaming up with a U.S. core banking provider as a way of getting into the U.S. market, Mr. Groenendyk said. As a former president of Fiserv's CBS division, he said, he knows the U.S. market well.

Teaming up with Fiserv might have been a natural move, given Mr. Groenendyk's familiarity with the company. But he opted against it because of Fiserv's structure as a collection of acquired companies, each competing with the others. "I prefer the structure of Metavante which operates as a single, integrated organization focused on customer needs versus the multicompany, multiproduct approach of Fiserv," which often sets up internal competition "for customer wallet share," he said.

The key to success for the Metavante-Temenos alliance may well be in banks' belief that a new core system can make a difference in their cost structures and ability to market more effectively and turn out products more quickly. Temenos has cited Industrial Bank of Korea as an example of an institution that made good on the technological possibilities of TCB. The 400-branch institution went live with TCB in September 2004 and within three months had introduced 163 products. Most important, it became the first to start a popular savings account in Korea, known as Dok-do, which gathered $1 billion in deposits within 15 days of its release, according to Temenos.

E-Trade Financial Corp. also vouches for the value that a next-generation core banking system can supply. Last November it completed a conversion from several Unix-based, batch-oriented systems to a single, Linux-based open platform. "Technology can be very enabling," said Greg Framke, the chief information officer. "Where we are today, we have great ability."

E-Trade has begun a global initiative to give U.S. investors direct access to six foreign markets for equity trading. Soon it will offer U.S. customers savings, cash management, and other products in foreign currencies. Being able to extend its technology globally "is a critical component of our success," Mr. Framke said.

The system also supports product innovation and the ability to scale quickly, he said. "If we had a legacy system, one or more of those key components would have to be sacrificed," he said.

Mr. Framke conceded that the move away from E-Trade's previous platform was no picnic. "The easiest decision in the world is to not change out your legacy platform," he said. "It really is ugly." Echoed Mr. Kennedy of Synovus, "It's like jumping out of a perfectly operated airplane."

But the drivers behind core system replacement, such as global expansion, are not going away — particularly as some banks begin to gain these capabilities and operate more efficiently.

"It's going to happen," said Mr. Hayford of Metavante. "Over time, every bank is going to have to move to a new architecture."

Ms. Costanzo, American Banker's technology editor from 1998 to 2002, is a freelance writer in Maplewood, N.J.

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