By simplifying the process, International Business Machines Corp. is hoping to motivate the world’s banks to take on one of the industry’s most challenging tasks: upgrading their aging core processing systems.
This week the Armonk, N.Y., computer giant plans to start promoting its Core-Systems Transformation consulting service, which uses IBM hardware and software to help banks migrate their business applications, including core processing, to modern, Internet-based platforms.
IBM said the service uses a step-by-step approach that should provide banks with a rapid financial return for more manageable conversion projects, such as account opening systems or product development. Completing these initial efforts will pave the way for the transfer of mission-critical deposit and loan processing tasks from legacy systems, many of which date to the 1970s and 1980s, IBM said.
However, an analyst at TowerGroup, a Needham, Mass., market research unit of MasterCard International, says that even though the service will probably reduce the risks involved in core conversion, especially for the biggest banks, it could also extend the life of some older core applications.
Mark Greene, the general manager for global business at IBM, said it invested $140 million on developing the service.
“For many years now the world has been waiting for a resurgence of interest by banks in investment in their back office,” Mr. Greene said in an interview last week. “We’re hopeful this will begin to crack open some of the latent spending for their back offices.”
IBM’s consulting strategy encourages banks to convert their systems one component at a time, so they can attack “hot spots in their core systems that really need renovation” without having to overhaul the entire system at once, he said.
The service is built on IBM’s Web services architecture, which enables modern front-end applications to draw data from older core systems.
Some large banking companies are already modernizing their systems in this manner. For example, Wells Fargo & Co. has rewritten the systems for its retail Web site and its corporate cash management portal to use Web services and the Interactive Financial eXchange standard for tagging data elements to give different financial applications access to information.
Mr. Greene said IBM does not plan to provide the core processing applications that banks will install; it is focusing instead on providing the services and infrastructure that banks need to install those applications. IBM sold its Corebank application in 2002 to Alltel Information Services Inc., which Fidelity National Financial Inc. of Jacksonville, Fla., bought in 2003.
IBM and Fidelity National worked together to develop some of the Core-Systems Transformation applications, he said. “We’re not getting back into the applications business. We’re taking our partnership with Fidelity to the next level, with some complementary work on both sides.”
The new service supports applications from vendors besides Fidelity, as long as the applications use Web services architecture, he said. According to Mr. Greene, IBM and Fidelity have signed a contract to convert the core deposit system of a Japanese bank, which he would not name, and they have a joint venture to market Corebank in Europe.
John Gordon, an executive vice president at Fidelity, said it is also working with a U.S. bank to deploy Xpress Enterprise Services, a “transaction hub” that uses a standard interface to connect to other systems.
The bank, which Fidelity would not identify, also is integrating Fidelity’s mortgage system and TouchPoint applications for customer contact.
Fidelity has rewritten Corebank in the Java programming language to take advantage of Web services, and executives there say they plan to offer the product in both Cobol and Java versions.
Jim Wilson, the president of Fidelity’s international arm, said his company plans to use Web services in its other banking products.
“Fidelity has embraced the approach of service-oriented architecture,” Mr. Wilson said. “You can use this approach to move quickly into a production environment,” and develop a specific feature or function without having to convert the entire system. “Rather than going through some kind of ‘big bang replacement,’ this is the least risky approach to be able to replace core systems.”
Robert Hunt, a senior analyst at TowerGroup, said in an interview Friday that Web services could ease the integration of core systems — a process that is fraught with operational peril — after a merger or acquisition.
“Banks don’t want to replace their core systems, because it’s a high-risk project, and it’s a huge effort,” Mr. Hunt said.
In a report published in April, he said that only three of the nation’s 100 largest banking companies have switched core systems during the last five years for reasons other than a merger. He also said that modernizing front-end applications and using Web services to connect with older core systems might give banks enough up-to-date technology to delay their need to upgrade core applications in the back office.
Even though he does not expect the entire industry to rush to upgrade their core systems to use Web services, “I do think you will see the largest banks moving that way,” he said in the interview. “I think the concept is extremely strong.”
