Core Banking Transformation

Kristiane Koontz, EVP and Director of Banking, Zions; Neal Shah, EVP and Head of Enterprise Operations and IT Strategy, Regions Bank

Transcription:

Announcer: (00:06)

Please welcome to the stage. Penny Crossman, Executive Editor, Technology at American Banker.

Penny Crossman: (00:22)

Thank you everyone. Great to see everybody back again. I would like to welcome my two panelists to the stage. We have Christion Koons, who is Executive Vice President and director of banking transformation at Zions and we have Neil Shaw, who's Executive Vice President and Head of Enterprise Operations and it strategy at Regions Bank.

Penny Crossman: (00:51)

We have a great topic. I know a lot of people are thinking about this, they would like to modernize their core, but it's so hard. There's so many things that get in the way. We have two experts here, Christian at Zion's bank. Am I allowed to say you've been doing a core transformation since 2013? I remember reporting on that at the time, and it was big news with TC. They chose TCS banks, but you did it in a modular way, like piece by piece, so we're gonna drill into all of that. Neil at Regions, is in the earlier stages of vendor selection. So we're gonna talk to him about all the things, he's thinking about in his decision making process. Hopefully it will give everybody here things to think about as you guys work through some of the same things.

Penny Crossman: (01:43)

So I feel like the challenge, the classic description of a core conversion is doing open heart surgery while driving 60 miles per hour down a highway, because it's just so hard. You have to keep a big organization operating on this one system while you're trying to replace it. There's so many things that a core system does that, it's extremely difficult. One thing I recall from writing about this years ago is that someone once told me that the average CIO of a bank lasts like two to three years, but a core conversion can take five years or longer. So who wants to take on the risk and the headache of that and all the challenges of that, and then not get the credit when it's completed. Let me just ask you, is that still true?

Christion Koons: (02:33)

We are fortunate in that we've got really long tenured leadership. Our CEO has been in place for, for decades and my boss, our CIO has been there for about seven years. So we've got that, but I read research recently that the average core is in place once it's implemented, after you go through that five or in our case 10 year journey, it's in place for 17 years. That's a really long lifespan that you're making these decisions for the next generation.

Penny Crossman: (03:05)

I think there are cores that are 40 and 50 years old a4nd they're written in DOS, COBAL, things of that nature. That's one of the many challenges that the people who wrote those programs have retired or expired. It's very hard to interest young programmers in the older languages. Yeah and there are actually companies here that will help with that, had dinner with one of them last night. There are various ways, sort of meeting that halfway, but, let's start with you, Neil, coz you've recently been through the decision process. Tell us about some of the risks that you thought through and how you got past the risk to make this commitment to actually do the changeover.

Neil Shaw: (03:57)

Great question. I think most banks when they think of a core conversion, there's a common joke, career is over for CIO, if you go down the core conversion because it is so complex and it is high risk. These systems have been in place for, in our case since 1988, in for a deposit system, heavily customized. The documentation around these is sometimes, maybe lacking a lot of institutional knowledge. Like you mentioned, those folks maybe retiring at retirement age or already have, so you've a limited pool of resources, that really have that knowledge. So, when we thought about this in terms of risk, it was really about, what is the business opportunity that moving to a more modern core is gonna provide and what is the risk of not doing that or doing something maybe like a half, something where you can just modernize what you have today and when we thought about it, with everything going on in the economy, customer expectations, changing through the pandemic.

Neil Shaw: (05:08)

We saw that we have to have a very agile, not only technology architecture, but a business architecture, we saw this as the risk of not doing it was higher than the risk of going through something like this. So, we said, listen, we want to set the new trajectory for this bank. We're gonna have to really modernize a lot of the core and it's not just around the core systems, but it's the processes that surround it as well and this is an opportunity to do so.

Penny Crossman: (05:34)

So Christian, you've been through this for a while. Can you tell us sort of your journey so far?

Christion Koons: (05:41)

Absolutely, similar to some of the comments now made, we had this moment where we realized we couldn't tackle this problem, that it was gonna become existential for us. We didn't wanna be so far behind that. It would be a rush decision, a rush process that we would feel like we had a gun to our head. So we wanted to preserve some of that leverage and that timing. So we started the process, Joe Riley, our chief technology officer at the time in 2012 and selected, TCS banks in 2013. I wasn't even with the company at that point, so I can't take credit, for that foresight, but when we looked across the market at the time, none of the US based cores really had anything that was modern enough for us. And, coupled with, the sort of maturity of product that we were looking for in the risk tolerance that we had, so we embarked on that journey.

Christion Koons: (06:37)

I'm happy to share in 2012, excuse me, in 2017, we launched our consumer loans on the platform. That was about 90,000 loans moved over one week, but a much more simple set of products. Then in 2019, we completed the conversion of all of our consumer construction and commercial loans. So we now have substantially all of our loans on this single core platform and it's been working well for us in production, and we're very close. I'm happy to share on completing our deposits conversion, so we expect to finish that next year.

Penny Crossman: (07:10)

So you definitely didn't do a rip and replace.

Penny Crossman: (07:13)

Do you know what the, like what sort of the strategy you're obviously doing piece by piece, what's the strategy around what to do first, the order to do the makeover?

Christion Koons: (07:24)

It's such a great question because we've actually changed our strategy on that as we've learned more. I came from a consulting background and I can tell you as a consultant, I probably would've advised due deposits first because that's where the value is. That's really what you can unlock. What I learned is that as a company, we didn't have the maturity that we needed in terms of delivery capabilities and understanding how our technology ecosystem operated to pull off something as complex as deposits. On the loan side, customers aren't checking their loan every single day in their online banking. They expect to get statements and bills and they might check it, one or two points in the middle of the month, but it's not the same sort of real time, need on the deposit side.

Christion Koons: (08:12)

If we take it the ability of people to get cash, pay their bills, you name it get paid, that's really problematic. And so we really had to spend some time. I joined the company in 2015, from PWC to help turn around our delivery capabilities and really mature those to the point that we could feel confident. Everything from program management, vendor management, testing. Testing Is such a big one for deposits will run over a hundred thousand test cases to make sure that that deposit's functionality is really gonna work across our 1.5 million customers. We just needed to spend more time building those muscles before we could take on something as gnarly as deposits.

Penny Crossman: (08:55)

Have you also taken sort of that parallel approach where you keep the existing system going while you test the new system and then you gradually do the changeover?

Christion Koons: (09:04)

That's right. So, we developed a coexistence framework is what we call it, so it allows our old core and our new core to coexist and do that migration in little chunks. So for loans, it made sense for us to take all of the loans across our brands. For those that aren't familiar with Zions, we have seven distinct banking brands across 11 states and so we've actually chunked up our migration where we'll migrate one brand at a time. Energy bank here in Texas for example, will go on a particular weekend, but the national bank of Arizona, might go on a different weekend. This coexistence fabric that we've built allows us to go, sort of territory by territory. As we do that migration, we could have done it by product. We could have chunked it up differently for our business model. It made sense to do it on sort of a regional basis. That really will allow us to spread out the risk. We've already put all of the code in production. There's a few final things that we're doing and testing and so it's all there. We keep sort of biting off little bits of the elephant instead of trying to eat the elephant in one bite.

Penny Crossman: (10:14)

Taking the bandaid off really, really slowly, and when will this all be completed?

Christion Koons: (10:20)

By the end of next year is our hope. Then we'll obviously continue to modernize the core. I think that's one of the things that's really gotten the industry where it's at, is that people sort of, they let the core die? They didn't continuously modernize it. So then all of a sudden you look back and you say, "Hey, I've got this thing that I implemented in the eighties, and I haven't really spent a lot developing that, and technology is totally leapfrogged." So we'll continue to invest meaningfully in the core in the years ahead so that we hopefully don't have to do this again. We'll just continue to modernize it over time bit by bit and never have to swap out engine, engine parts, while the plane is in the air.

Penny Crossman: (11:02)

So what are the biggest benefits you've seen so far?

Christion Koons: (11:07)

A really meaningful thing that we did was simplifying our operations and our product set, and you don't have to do a core conversion, but for some reason it's really the only way that you can get all of these distinct business stakeholders to agree on things and actually simplify. We were able to take our product offerings on the deposit side from over 500 products to just over a hundred that meaningfully simplified our operations. We consolidated back office groups, we streamlined quite a bit on the loan side, that's allowed us to build quite a bit more automation. Our insight into the data is so much better and people trust the data because it's a single process. It really means the same thing in every group. If I look at a particular field, and so we're able to automate reconciliation much better research outages, and just sort of build more on top of that.

Christion Koons: (12:05)

The last thing, that I'd highlight is it just simply allows us to go faster. So we believe that we, once we complete this core conversion, we'll be able to do any new technology integration project or product development work 20 to 25% faster and cheaper. We're already seeing that when we did PPP loans, for example, we completely stood up and tested the PPP product, including all of the automated boarding from our origination system to the core in three days. So we were ready to go when the product opened in the market and despite being the 40th largest bank in the country, we were a top 10 PPP lender in terms of the number of loans that we did, in that first phase.

Penny Crossman: (12:56)

So Neil, tell us about some of the things you're thinking about in your vendor selection. I think there'll be people here interested in hearing about that. What are some of your criteria, your wishlist items?

Neil Shaw: (13:07)

Yeah, so we've been looking at the vendor landscape for the past, couple years, started engaging in RFIs, RFPs. My advice would be before you kind of go down that path is really, think about that landscape in a couple different ways. I think there's a lot of options today. You've got your sort of big players, that have feature rich core systems that come, they're modular in architecture, but they're usually some legacy version being modernized, so they still may have some legacy components, but they come with everything you need. You have your customer information file, your pricing engine, compliance modules, and they're really, one stop shop for whatever you need from a core perspective. But then now there's a whole set of like emerging, core technologies, like we've, seen with, chase and thought machine that's they're lightweight, they're born in the cloud, they're highly flexible, but they also, require a lot of development around them and expertise and you have to build in a partner ecosystem. You have to almost align your business strategy, your risk appetite, your talent, and really think about, what's gonna help you achieve your business goals for the future, which partner within that ecosystem will help do that? Once you kind of narrow that down. We spent a lot of time in our RFP and RFI, but I'd say the most valuable part of that whole thing was getting hands on, really have to do a proof of concept, make sure that, the folks who are going to be managing those systems, configuring products, setting pricing strategies.

Neil Shaw: (14:49)

They have a chance to use these tools, because they're gonna be the ones who will give you the buy in and really are gonna adopt this in the future. In addition, one other thing, Christion's been a great partner is talking to your peer banks and customers of the vendors that you're looking at. It is highly important that you get, an objective perspective from an existing customer. It's even better if they're already live in production. Sometimes that's a little bit tough, because there's not many that are live across the board. They might be just for one segment, or, a specific product set but, that's what ultimately we did and we're continuing to do, we're very close to, kind of making our selection there.

Penny Crossman: (15:36)

So I've written a lot about the oligopoly. You have FIS, Fiserv, Jack Henry and Finesser, no criticism of any of them, but they have the market. They own the market pretty much. Partly because they're tried and tested and because you're not gonna get regulatory issues because everyone uses them so, they sort of have an unofficial blessing in a way. But actually the regulators have been starting recently to talk about, that this is an issue. So you actually didn't choose one of those four. So how do you look at that and is it feasible to go outside of the oligopoly ?

Christion Koons: (16:25)

Well, clearly it is cause we've done it. We're paving the way I think for others to do something similar. Our regulators were quite pleased that we were addressing the issue of our core. I think you're right, we've seen a lot of commentary about if I had a dollar for every time someone said legacy systems, at this conference this week. I think it's broadly recognized as a real risk. I think there's appreciation for the fact that those legacy vendors have just sort of underinvested historically in those cores. So it's really inhibited innovation in our industry. It is a significant industry problem. I wanna give a shout out for the American Bankers association, they've tackled this as sort of their number one issue.

Christion Koons: (17:12)

That's not a policy issue. If you go to aba.com/cores, they've created some resources there, particularly around, institutions that . With those big four, as well as those that are looking at. Who else is an option? Some of them actually do have footprint outside those big fours, particularly for smaller banks and then they've profiled some of the bigger, the Temenos, the thought machines, the TCS's that maybe don't have as much of a US market presence, but are certainly emerging and bringing a lot of investment into this space that I think is highly credible and they've gone out and hired US based heads of compliance. I think that's part of how they're addressing the risk. There is making sure that they've got the right governance, they're getting big four firms to sort of sign off that they've met those requirements. So, I certainly hope we see, no disrespect to the existing order, but I certainly hope that we see that, oligopoly, break apart of it.

Penny Crossman: (18:13)

What's your perspective on that?

Neil Shaw: (18:15)

We spend a lot of time when we're looking at these vendors on compliance. That's a big question. It's a big concern for the banks, but I think, Christion's right, there's more options now and credible options. I think the regulators from our perspective are open to us taking on, maybe something different. As long as we're doing our due diligence in a meaningful way, I think we are reproving that through our process being very methodical and how we look at, your compliance capabilities, and what does that mean for us at Regions? But it's great to have options because with the more competition in the market, it drives innovation, it drives change. This is an area where there hasn't been a whole lot of it, for many years. Frankly, there probably just hasn't been a need up until the last. Probably several years where we're seeing banking change dramatically and the core systems need to change to meet the new customer customer demands.

Christion Koons: (19:22)

One thing that we've done to address that risk as well for anyone that's considering this is we've actually taken our compliance partners and we've embedded them directly in our agile teams. Every feature that we create has compliance acceptance criteria. It's been this incredible way to show our regulators that we're taking this very seriously and it's obviously we hold the vendor accountable to being compliant with the US market, but we're also showing how we're proving that we've achieved that compliance as well. I'd really think about those compliance partners, whether it's an existing core or a newer core of the market, embedding them directly within the teams, making it a part of the product development instead of a gate that you have to go through after the fact.

Penny Crossman: (20:08)

So Christion, since you're our seasoned veteran, what are some things you've learned through this process? Like, is there anything you might do differently another time or were there any challenges that were maybe unexpected

Christion Koons: (20:23)

We've learned so much, a few things that I'll highlight. One is, when I joined the company, it was a highly technology driven effort. What we saw is that we did not have our business engaged nearly enough. And the risk there it was sort of this traditional waterfall. You build it, the technology team thinks it's fantastic. You hand it to the business, you say, go test it. They're like, this is not gonna work for us. So we really had to think deeply about, how do we embed the business in every everything that we do. We brought on stronger business leadership in that space, we made sure that we were incorporating them into even sort of proof of concepts, demos. How do we embed them more deeply in terms of every single feature that we do? So that was a big one is really making this a business driven call.

Christion Koons: (21:20)

I'll tell you, I just, right before this, came from a call where we were talking about, it's sort of a biweekly huddle that we do on our core president of our bank, head of commercial, head of retail, our CIO, our CTO and I. I mean it really does take a village to do this kind of thing. You've got to really partner with the business. The other thing that we learned is you will make thousands of decisions and sometimes you'll make thousands of decisions every single week and so you got to have a really robust decision making framework to be able to do that. That means empowering your teams in their agile work to make the decisions that they should be able to make within those teams, so that those don't elevate up to you and you don't get overwhelmed with them, but then also having the right framework and criteria decision making process for those bigger questions, these are long lasting, highly strategic questions that will come up day in and day out.

Christion Koons: (22:19)

We make dozens of really strategic decisions a week. Now you've gotta be fast at that. One of the things that we really struggled with, and I think why it's taken us 10 years is we couldn't make the decisions quickly enough at first, we couldn't make the right decisions quickly enough at first. So really getting thoughtful and mature about that decision making.

Penny Crossman: (22:38)

So there's no one decider?

Christion Koons: (22:40)

There's no one decider, there's accountability of course, but you've gotta balance, our decision making framework, for example, balances, business value and need time and cost and then our, technology, architecture alignment. So when you have those three voices at the table, then you can weigh the pros and cons and make a sort of a business decision. That's truly applicable across the board.

Penny Crossman: (23:04)

So, Neil, what are some of your hopes for when you have your new core? Like what are some of the reasons that you really want to do this? and, what do you, when it's, when all is said and done, what are some of the things you hope will be the outcomes?

Neil Shaw: (23:20)

Yeah, I think one of the biggest things is creating the architecture, both technology and business to respond to whatever market conditions there are at the time right now, anyone in banking knows when you have to shift, it's a somewhat of a heavy lift to go do so. It's not the most efficient process and often, banks are running the archaic technology processes, etc., which then eats into how much we can truly innovate and meet our customer expectations. There's so much competition out there with FinTech's that the investment just continues to grow with big tech banks who continue to invest in tech. That my hope is that, we are providing the same experiences, the same digital experiences as some of the best out there, but at the same time have the customer service and the high touch when needed.

Neil Shaw: (24:14)

So a lot of our focus is really on customer service. How can we bring one bank to the customer right now? We've, for the past several years, banks have invested, in digital channels, in new ways of communicating with the customer, but they've been somewhat disparate, right? They're not one big omnichannel way of doing things. Then you take that and then you multiply it by a factor of name and number and then that's the complexity on the back office as well in the middle office. Our associates are having to swivel chair between systems. We want to consolidate a lot of that and whatever we can push the customer to do self-service, that's a benefit, but when they do call us, when they want to contact us, that we've got their information for them, available, it's, contextual and we get their job done the first time. It's a good, retention strategy for us to go down that path. So we wanna be responsive. We wanna be innovative and we just want to double down on customer services and that's where Regions, that's a big focus for us.

Penny Crossman: (25:18)

Just going back to the vendor criteria. So, I mean, regions obviously has implemented some new digital technology in the last few years is one of your vendor criteria. Can this work with all of these additional elements that we've added?

Neil Shaw: (25:34)

Absolutely. API strategy is big for us. So any system that we're gonna look at, has to have a robust set of APIs. If they've done it in the past, if we can, if there's proof of that, then it's fine, but that is becoming very standardized? So, for us, absolutely, we are going to be integrating in a very modern way. We have a pretty significant API strategy underway, but yes, that is absolutely one of the must haves that we are able to connect to our digital experiences because the core is not gonna solve everything. It is gonna solve, pieces of this, but it's what we do around it. It's what we can pull from it and integrate it into different channels, different products, that's where we're gonna see the benefit.

Penny Crossman: (26:25)

Do you see any interest in having less reliance on the core? Like when you think about what chase did with thought machine it's like, they're just gonna put some consumer banking on that core and they're still gonna run other parts of the business in other ways. So it's almost like a breaking up. Is that appealing or is it still good to have everything in one in one place?

Neil Shaw: (26:48)

I think it depends on your business strategy, your technology acumen, what you believe is your support model, right? Something like I mentioned earlier takes like chase is doing probably takes a heavier lift from a development community. Lots of engineers probably working around it and kind of keeping things connected, bringing in new pieces and parts from either the ecosystem, the cloud, or even maybe homegrown to be part of that lightweight, core system. For us, we believe that we want, something that, gives us the full, the rich features that we need across a number of items like the customer information file, pricing compliance, house holding a number of things that we can do from a data perspective, but at the same time, we're fully aware that it's not going, we'll still have an ecosystem of partners that are gonna flow into that. Now, when you're using a, I guess, a more feature rich core, you are probably going to, lean into their functionality first, but it's not uncommon to bring in a partner or something, a new capability where if your core is not providing what you need, you're able to still pull that in.

Penny Crossman: (28:08)

So Christion, you have given some advice already, but do you have any sort of final words of advice for anybody who's kind of thinking about undertaking and core conversion?

Christion Koons: (28:17)

Yeah. I'd amplify some of the things that Neil mentioned around really making sure that you have the right partner and that there's a strong roadmap, an investment in that product. Are they gonna be around in 15 years and importantly, are they gonna continue to invest in that product? I think there's some really big banks that don't mind being in the business, this sort of running core technology, but generally speaking, we wanna be able to rely on our vendor. We want them to be pushing and driving technology modernization of the core and continuing to build value out of it for us, so that we can spend our calories on the things that really matter to us. Which is actually building experiences that take advantage of the core and everything that we get out of that, but to empower our bankers and to better service our customers, and that's the business that we wanna be in and that's where we wanna be spending our technology muscle, not on continuously dealing with the core, which I think with some of these solutions, that's a trade off that companies are gonna have to make .

Christion Koons: (29:24)

I'll offer one, just really specifically on real time course, that this is an area of interest. I think for many, when you move to a real time core, your mistakes are real time . So you have got to be really tight. We learn, we have got to be airtight on some of our processes. We could fudge stuff in the background before, Hey, a teller makes a mistake and he or she corrects it after the customer walks away. I transposed a number or something that doesn't work anymore. The customer sees that. So, real time is means your processes have gotta be able to support that as well.

Penny Crossman: (30:03)

That's an interesting point. Neil, are you thinking about real time?

Christion Koons: (30:06)

Absolutely, that's one of the biggest conversations we're having. What's the impact on, what the customer sees, fraud, if things get posted, instantly or, that the transactions happen instantly in real time, well then your fraud tools and your fraud engines have to be able to compensate some of that. So yes, it's a big discussion. Then on the commercial side of the house, coz we're looking at not only retail, but our wealth and commercial products, there's some complexities there with sweep accounts and things like that. How does that impact, some of what happens on the commercial side. So we're having a lot of discussion around that and seeing what the impact is gonna be and then how we're gonna navigate through that.

Penny Crossman: (30:47)

Makes sense. Well Christion Koons and Neil Shaw, thanks so much for joining us today.