Ryan Buckley is heading into 2012 with an opportunity that doesn't come along every day for a bank CIO. "Our bank is undergoing a transformation of how we do business. We're migrating from largely a consumer-based bank to one that's now very heavy in complex commercial banking," says Buckley.
To manage the transformation, UniBank, a $1.2 billion-asset bank that serves central Massachusetts, will outsource its core to SilverLake and a series of additional Jack Henry products, such as ArgoKeys branch sales automation, Synapsys sales, marketing and customer service; Opening Act online deposit and loan-account opening system, and ATM/debit card and fraud protection products. The project is just underway and is expected to be complete by the spring of 2013.
It's a classic rip-and-replace core upgrade, the sort of major IT surgery that banks have been aching to avoid for the past several years, instead relying on piecemeal and multiple vendor deployments to adopt new digital banking, customer service, security and compliance updates.
But for many financial institutions, particularly those in the community, credit union and mid-tier range, the core-upgrade avoidance is over, as a growing number of financial institutions take on costly, year-long tech projects. A polling of tech firms, analysts and institutions says there are more core banking upgrades underway or planned for the next year than during the past decade. The goal is to reduce vendor relationships and acquire the agility to tackle digital banking, adopt mobility, achieve cross-department collaboration, execute marketing driven by social networking and new data intelligence, meet unprecedented compliance mandates, and manage customer and business relationships across multiple channels. Furthering the trend toward simplifying IT management is a greater move toward outsourcing rather than in-house solutions, with sources at the tech firms reporting that nearly 75 percent of new deals are outsourced, a vast increase over past years when core banking platforms were commonly managed internally.
A Collision of Needs
The growth of mobile banking, emerging mandates from the Dodd-Frank law and other new regulations, the expansion of cloud-delivered services, and the arrival of location-based marketing are all arriving at the bank IT doorstep at once — and for institutions in the middle- and lower-sized categories, it's simply too much to tackle each issue individually via internal deployment or point solution, then worry about how to integrate the new tech solutions into pre-existing legacy systems.
"Mobility, new online capabilities, the cloud, collaborative computing ...these are all hot things, and to enable them, one of the dependencies you have is a system that can mesh with this innovation. A new core can be an enabler," says Fiaz Sindhu, an executive with Accenture's core banking services group.
Sindhu says that with up-to-date infrastructure supporting the banks' business lines and departments, it's much easier to deploy new mobile products, or customer relationship analysis that's reliant on the storage of a larger amount of more detailed customer and transaction data. "With a new core, banks can then move away from batch updates to accomplish these things," Sindhu says.
The new move toward core overhauls among smaller banks also has a change in vendor-management philosophy to thank. Banks in the sector feel they are managing too many tech relationships and want to downsize the number of service providers. Every bank and credit union BTN has spoken with about core upgrades in the past month — more than a half dozen in all — gave vendor consolidation as the primary reason for the core project, a change from the "best of breed" approach of the past.
"We've simplified our lives here," says Kyle Campbell, president and CFO of Astra Bank, a $180-million-asset bank based in Chapman, Kan., which just finished a project in which the bank outsourced its core platform to Fiserv. "Our platforms and channels can now all talk to each other and give customers the same information, and we can get it in real time. We had separate debit card and ATM vendors, for example, and we weren't able to get information updated in a timely fashion. In some cases, if you withdrew funds from an ATM, it may have been almost a day before it showed up in the internet banking site."
Banks that are undergoing these large projects are now willing to forgo specialized solutions for a turnkey approach. This has been a boon for the larger vendors, which offer core technology that easily integrates with their own solutions for online, remote deposit capture (RDC), customer-relationship management (CRM), and mobile banking, for example, giving providers like FIS, Fiserv and Jack Henry a decided edge in the new environment. (Even in a tough economy, FIS, Fiserv and Jack Henry all excelled in the most recent FinTech 100, a joint ranking of the largest financial tech firms produced by American Banker, BTN and IDC Financial Insights.)
"In the mid-2000's, it was common for high vendor headcounts based on best-of-breed strategy," says Buckley. "But the suite providers like FIS, Fiserv and Jack Henry have really matured the quality of their endpoint products."
Fishing for Efficiency
The banks that have already completed portions of their projects say they've noticed a drop-off in deployment time and work when replacing multiple vendors with a centralized, broader suite of software. "The new core system has definitely provided a positive impact on our ability to implement new services," says Will Sampson, CIO of East Carolina Bank.
The $975 million-asset bank is in the midst of a core overhaul that includes migrating almost all of the institution's systems — except for an internal budgeting engine that's used only once per year — to an outsourced FIS Horizon core platform, with loan systems, mobile and CRM upgrades scheduled for the next few months and an Ironkey security deployment just finished. Sampson says ensuring easy integration is an important part of the project.
"Our core provider publishes the details about the connection so that anyone can write an interface to access the core database," he says. "During my tenure in IT I have been burned a few times by vendors stating that integration takes a manual step on the part of an employee. And, it being the weak link in the entire process and human nature, the step is skipped, which will cause the data migrating between systems to fail. My stance on integration is that it needs to be a fully automated schedule or system-started process with no manual intervention other than the past transaction data verification for expected results."
UniBank's previous mix of dozens of endpoint systems lacked the ability to automate processes; some important procedures remained manual and the bank was bogged down by a number of point solutions for various functions. "We could not execute on our business plan the way we wanted to," Buckley says. That left UniBank unable to meet its requirements in a number of areas.
Its manual processes for loan accounting and reporting were not as rich as they needed to be. "For example, if you are going to do complex asset-based commercial lending, a line of credit may change periodically based on the financial complexities of the underlying business," Buckley says. "All of that was manual under our old system, and will be largely automated through the core conversion."
Stan Viner, a general manager at Jack Henry, says some of the attraction to the broad core systems is their ability to leverage service-oriented architecture to quickly deploy new software, and the ability to easily integrate between various silos. Both of these capabilities, if deployed properly, can improve a bank's efficiency ratio, which is a measurement of non-interest expense divided by revenue, with a score of 100-1 — lower numbers are better. The tech improvements that these core projects are designed to bring about, such as faster time to market and simplified lines of communication for maintenance, positively impact efficiency ratios. "Because of the cost of funds today and the relative lack of demand, it's harder for banks to judge how they are doing" based on return on assets, or ROA, he says.
Cost Still a Hurdle
There are challenges to core upgrades. While the institutions BTN spoke with didn't reveal the budgets for their upgrades, and costs can vary widely, sources say upfront initial deployment costs for a one-year core replacement project at a mid-tier bank of about $10 billion in assets is about $30 million.
But there is an argument for taking on the upfront costs and time, since the alternatives (the large core vendors also offer middleware layers to aid in integration with point solutions) are also costly and can add complexity that challenges efficiency.
Bart Narter, an svp at Celent, says older systems can accommodate mobile banking and other new services, but it's more difficult. "Older systems weren't built in a 'service-oriented' way. Many banks build [middleware] on top, but that might involve extra costs or extra work."
Banks are also challenged to develop new testing to ensure the project actually works as planned.
For example, the 43,000-member, Memphis-based Orion Federal Credit Union is in the middle of a project that will replace a 20-year-old legacy system and a number of point solutions with Corelation's KeyStone core processing system, which Orion will operate in-house with the tech firm providing external maintenance and compliance updates. A large part of the project, which is designed to reduce approval times and time to complete customer-facing transactions, includes testing connections to its business partners to make sure those continue in a seamless fashion.
"Changing your core system is like someone going through a major organ transplant. You will come out of the operation a stronger person or get dirt thrown on you" says Daniel Weickenand, CEO of Orion Federal Credit Union.