Banks around the world are rolling out plans to overhaul their core systems, and many observers are wondering when the big U.S. banking companies will finally replace their own aging cores.
For National City Corp., the answer is: Maybe never.
Conventional wisdom holds that these systems, many of which have been in operation for decades, just cannot keep up with the demands of the modern, real-time financial services industry. But Joseph T. McCartin, National City's chief information officer, says that he has found numerous ways to update his company's core system, including replacing some functions and offloading several others to different systems.
The $150.4 billion-asset Cleveland banking company uses a 30-year-old mainframe-based core, developed in-house using assembler language, and Mr. McCartin said, "Our system posts debits and credits as well as anything in the Western free world. It's cheap, and we own the code."
"I don't see any reason to" replace it, he said.
Instead, Mr. McCartin advocates an approach he calls "core renewal," a process that he compared to urban renewal and which he began promoting after joining National City in late 2003. The basic concept is to leave in place the heart of the core system, the day-to-day processing of account debits and credits, while gradually replacing or upgrading many supporting capabilities. All of this is done while the main core system remains up and running.
"If you don't like the city of Cleveland," he said, "you don't go 15 miles up Lake Erie and build a new city and have everybody move there in five years. You're going to rebuild the city while you live in it."
He acknowledged that this strategy, a multigenerational, stepwise series of upgradings, is time-consuming. National City has been at it for most of the five years since he joined the company. "I haven't found many firms that have tried the renewal approach," he said.
Peter Raskind, National City's president and chief executive, said the core renewal approach is "a far more creative, and economical, and lower-risk solution" than replacing the core. "It's a very low cost posting engine, without any big bangs. Now I'm convinced we shouldn't" replace our core system.
In renewing its core system, National City offloaded to other applications virtually all the functions other than account-level credits and debits. It used Component Business Model software from International Business Machines Corp. to put a service-oriented architecture "wrapper" around the core. "Once you have an SOA wrapper, you have an ability to change without disrupting everything," he said.
The company has replaced other elements of its infrastructure, such as its electronic funds transfer system, he said. And because the new EFT system is also built on SOA, it is a modular component that can be reused for a variety of electronic transfers, whether card-based, Internet-based, or initiated by a teller on the platform, he said.
This is more cost-effective for the bank, Mr. McCartin said. As for the customers, "they wouldn't really notice that."
However, Bart Narter, a senior analyst at Celent, the Boston financial research arm of Marsh & McLennan Cos. Inc.'s Oliver Wyman consulting unit, said that U.S. banks are more likely to install a vendor's system, when they are ready to overhaul their core capabilities, rather than take the time to slowly update their current systems.
A key reason is the cost advantages of using a vendor's core system, he said, mentioning the Hogan Integrated Deposit System from Computer Sciences Corp., which is used by 10 of the 25 largest U.S. banking companies.
"Hogan is old, but Hogan is maintaining it," Mr. Narter said, and the vendor "can spread the cost of maintaining it over many customers."
Mr. McCartin disagreed, however, saying that many banks end up customizing a vendor's code so much that they can no longer take advantage of the vendor's upgrades but still are required to pay licensing fees.
And replacing a bank's core system is a major task, he said. "Core systems are so tightly integrated with so many things," Mr. McCartin said, and installing a completely new one "is fantastically risky."
A core conversion can cost $150 million to $250 million and put other initiatives on hold for three to five years, he said. Also, once a bank has installed a clean new core, it will end up with the very same capabilities as every other financial company running the same software.
"The best you can hope for on a big rip-and-replace project is to be as good as your competitor."
His core renewal approach, he said, "is the least risky and best way to create a platform to compete in the future."
Mr. McCartin said that the renewal project's biggest impact has been enabling National City to develop packages of bundled products, tiered pricing, and relationship pricing. "The interesting pieces that we really wanted didn't require the replacement of something that posts debits and credits."
For these, National City licensed relationship pricing software from an Indian vendor, SunTec Business Solutions Pvt. Ltd., which had its roots in providing "family plan" and other pricing programs for the telecommunications industry.
"We have incredibly robust abilities to tier and bundle," he said; for instance, Nat City can decide whether to increase the interest rate on a certificate of deposit or to waive a fee in order to retain a particular customer, he said. "We have a very differentiated set of capabilities."
National City is nearing the end of its current renewal project but continues to develop SOA capabilities, he said.
For example, the company now has a library of nearly 200 services that on average are reused 3.1 times each, he said. In the early days of the project, the IT unit was able to track the available services using replacing spreadsheets, but as the total grew, he said, "we finally broke down and got a service registry product."
The company estimated that it saved more than $21 million last year, just by reusing these common services, according to Celent.
Robert Hunt, a senior analyst at TowerGroup in Needham, Mass., an independent research group owned by MasterCard Inc., said other financial companies have used a similar strategy but that he thinks they will eventually have to replace aging core systems with real-time processing systems using modern relational databases.
"U.S. banks have done a tremendous job in modernizing the peripheral parts of their systems," Mr. Hunt said, and SOA makes it possible to service-enable the other components of the banking system so that eventually a bank can "slide out the last remaining piece and slide in a new piece."
Modern systems are likely to provide efficiencies that banks will find irresistible, but technology efforts are "always piecemeal," he said. "You always want to have a five-year strategy in place. You can't attack everything at once."
