The German software vendor SAP AG is working with several major European banking companies to develop standardized specifications for a new generation of core processing systems that would use interoperable modules and could be easily installed.
SAP discussed the Industry Value Network for Banks initiative last week at an analyst meeting in Las Vegas.
Thomas Balgheim, SAP's global head of financial services, said in an interview Thursday that he expects the first version of the specifications be complete by the third quarter. SAP and some of the participating banking companies could have software ready by December of next year, he said.
Many banks are using aging core processing systems that will eventually need to be replaced, but the banks are reluctant to replace them, because it is a massive undertaking, Mr. Balgheim said.
The new core systems would use service oriented architecture, he said. Instead of using one huge system to handle every aspect of a bank's transaction and accounts processing, SOA systems use interoperable modules. For example, one module would handle payments, while another would keep track of customer accounts.
Banks that replace their core systems with SOA modules could then update their software one piece at time, instead of doing the entire project at once, he said. "Until now the decision was to do all or nothing. Banks had to replace their total core package in one go."
However, Mr. Balgheim said that banks must develop some guidelines for SOA software.
For example, processing a payment requires the payments module and the deposit account module to communicate with each other, he said. One bank's system might include the communication commands in the payments module, while another bank's system might include them in the account module. Though each approach can work equally well, the two systems would be incompatible, and the banks would have a problem if one outsourced work to the other, or if one acquired the other.
Deciding how to standardize such processes "are the questions the industry is focusing on now," Mr. Balgheim said.
Several major banking companies are participating in the initiative, including ABN Amro Holding NV, Credit Suisse Group Inc., Deutsche Postbank, and ING Group NV. No U.S. banking companies are participating now, but Mr. Balgheim said that SAP is talking with several, and that he expects some to sign on soon.
Robert Hunt, a senior analyst at TowerGroup, a Needham, Mass., market research unit of MasterCard International, said that U.S. banking companies have lagged behind those elsewhere when it comes to modernizing their core systems. He expects several U.S. companies to participate in SAP's initiative, because using standardized SOA systems "is an easy way to modernize their technology."
Banks may not need to replace older core systems now, but supporting outdated systems can become costly, and the banks will need to replace them eventually, he said.
"The large U.S. banks have not replaced their core systems in forever, and it is not something they want to do," Mr. Hunt said. Using a common set of SOA modules would "build a foundation for this transition."
