Wanda Guttas, evp at Union Bank, is taking her bank on a journey few in the industry have dared - a four-to-five-year trek to a full-scale core upgrade. As program director for the integrated platform, she and her team of 100-plus people will migrate the $70 billion asset bank from 50 systems that cover checking, customer information, sales and servicing, plus commercial and consumer loans, to Finacle, a single integrated system from India-based tech giant Infosys.

"We wanted to be aggressive with acquisitions and we wanted technology that would enable us to respond to changing market conditions and handle rapid expansion," Guttas explains. The conversion will occur in multiple phases. "The first phase will include the deposit platform, customer information services, retail sales and servicing, and branch operations such as teller functionality." The branch element alone will require the migration of five or six existing platforms to Finacle.

Union Bank is the new name of Union Bank of California, which was purchased in November of 2008 by Bank of Tokyo-Mitsubishi. It is the biggest U.S. bank to announce such a core project; and in so doing Guttas must face down a lot of history. Legacy core systems, often 30-to-40 years old, have long frustrated bankers at big banks. They're inflexible, fewer and fewer people remember how to maintain them, and they can't present comprehensive view of the customer. All these problems have been well aired, as have the barriers to a solution: cost, risk and the time required to undertake an enormous, enterprise-wide technology upgrade.

But change is in the air. Industry analysts and core platform vendors say that the number of bankers engaging them in serious discussions about core platform renewal has picked up significantly during the past year. Besides Union Bank's decision to move forward, sources say that BBVA Compass, the U.S. arm of Spain's BBVA, has chosen a vendor to upgrade its core. BBVA Compass officials did not return several phone calls seeking comment on the decision, but sources say the choice was Accenture's Alnova Financial Solutions platform; that would be something of a surprise since BBVA struck a separate global agreement in 2008 with Infosys. It's also unclear whether BBVA's recent purchase, Texas-based Guaranty Financial Group, will be incorporated into the core upgrade.

Whichever vendor BBVA Compass has chosen, however, the fact that it comes on the heels of Union Bank's decision demonstrates momentum toward core renewal projects. The Union Bank deal in particular is "exciting for two reasons," says Christine Barry, a research director at Aite Group. "First is the fact that a large U.S. bank is replacing its core systems. And, second, it's exciting that Union Bank has chosen a non U.S. vendor. [Non U.S. vendors] have been targeting the U.S. for some time but with little success so far. This changes the landscape completely for core."

Meanwhile, Bart Narter, svp in Celent's banking group, says that the Union Bank deal is "hugely significant. It's a real bank of real size and if they can demonstrate product flexibility and innovation after the new core system is in place, it will put pressure on other banks to follow suit." The market for big bank core renewal has been basically moribund since People's Bank nixed the implementation of Oracle's iFlex in 2008.

 

A Stagnant Tech Market Opens Up

Core vendors both inside and outside the U.S. have had difficulty tapping the U.S. market. But there are signs that's changing. Sanat Rao, vp and head of worldwide business development and alliances for Finacle, says the U.S. market is definitely opening up to non-U.S. vendors. "Banks today are more interested in understanding what it takes to change the back end system and the fact that these discussions are happening is an indication of seriousness." Bankers in the U.S. can see that banks elsewhere in Asia, the Middle East and Eastern Europe have successfully implemented new core systems, and that gives them "some confidence that it can be done." PricewaterhouseCoopers assisted and advised Infosys on how to tailor Finacle for the specific regulatory requirements of banks in the U.S.

Rao noted a couple of recurring themes in his discussions with banks. They're frustrated with the amount of time and money spent on making old systems talk to each other, they want straight through processing, they want a more unified view of the customer, they want to launch new products more quickly, and they want to have certainty of compliance.

Wayne Busch, senior executive and North America core banking lead at Accenture, says that besides big banks' desire to optimize their operations, some are calculating that if they invest in these technologies now they will be poised to reemerge even stronger in a post-crisis environment. Speed to market, customer insight, and an overall ability to grow will benefit competitiveness. "They really need to simplify the environment to drive cost efficiencies and generate insights into the customer. It's about the expense and revenue levers."

Analysts say it's no surprise that Union Bank and BBVA Compass, both wholly owned U.S. subsidiaries of foreign banks, are the first to pull the trigger on core renewal projects. Both Bank of Tokyo-Mitsubishi and BBVA escaped the worst of the global financial meltdown that has hobbled many U.S. and European banks. Besides having the money to spend, decision makers at these banks are familiar with global vendors such as Infosys, Accenture, SAP, and Temenos; these vendors are considered to have more advanced technology than many U.S. vendors but lack the experience with the U.S. regulatory environment.

This perception makes choosing a tech partner tough. Barry says the decision on whether to choose a U.S. or non-U.S. core provider has so far been a Catch-22 for U.S. bankers. "Because of the importance of core, banks have wanted to go with vendors with a proven U.S. track record, but because of the fact that their technology is not as advanced as the global vendors they're reluctant to go with a U.S. vendor."

Fidelity National Information Services is the most established U.S. vendor for big banks, and it consolidated its position further this summer by announcing plans to purchase Metavante. That deal is sure to have ripple effects; it already scuttled Metavante's strategic alliance with Geneva-based Temenos, which is now likely to seek another U.S. partner to bolster its North American presence.

 

A Bellweather Project

Guttas says the differences between vendors can be stark; and to accomplish the bank's strategic goal the most sophisticated technology was essential. "What we liked about Infosys is the truly integrated platform it had; the U.S. players have a large amount of functionality, like the Finacle product, but it's not really as integrated. They like to call it integrated but it's not really, and some are still written in COBOL. That's not leading-edge technology."

Infosys describes Finacle as a comprehensive, integrated, modular business solution. The solution has an integrated CRM module; and the layered service oriented architecture, STP capabilities, Web-enabled technology and 24 X 7 operations ensure multi-channel, multi-country and multi-currency implementations. The functionality-rich modules in the solution allow banks to continuously innovate on their product and service offerings.

As for whether Infosys is ready to tackle the U.S. regulatory environment, given that it has never implemented Finacle in the U.S. market, Guttas points out that Infosys has implemented Finacle in 60-plus countries. "Each of those countries has their own unique regulatory environment," she says. "Having said that, we'll all agree the U.S. is a totally different breed of regulatory environment, and changing by the hour. But through commitments from senior officers, we're very comfortable they can meet those expectations because they know they have to do so to be in the U.S. market." She also takes comfort in Union Bank's ongoing IT consulting relationship with Infosys.

As complicated as the technology switch out is, just as tricky is the business transformation that must take place at the same time. The way that employees interact with each other and customers must change along with the technology, Guttas says, and that takes time. Even if the technology could be magically implemented overnight, the culture of the organization would simply not be ready.

"You can't transform overnight, you have to prepare the organization. I have a whole dedicated team focused on that and working side-by-side the project team to absorb all the changes going on so we can prepare the company for that...You can't just say it one time and teach it one time, you have to teach it multiple times."

If all goes well, Union Bank stands to gain not just in better customer service, but a substantial first-mover advantage. Other banks are watching how this core renewal projects pans out before jumping in. That may be prudent. But as part of the wait-and-see calculus bankers should consider the length of time these core renewal projects take. The so-called fast followers can't be too fast when the project takes four to five years from start-to-finish. That would give Union Bank plenty of time to make hay.

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