Before elucidating what drives banks to modernize their core banking systems and how to start a major project like this it is important to understand what the term core banking refers to and how a core banking system is defined. The answer to the question “what is a core banking system?” varies by whom you ask. However, the answer is significant for the scope of a core banking modernization initiative and the expectations stakeholders hold. What is core banking? The term core banking describes the business conducted by a banking institution with its retail and small business customers. Core Banking comprises the fundamental functions of a bank. The banking business known today emerged from the very basic functions ‘accepting deposits’ and ‘lending money’. Today’s banks offer a wide range of products and services that go far beyond these two functions and require a combination of a bank’s core banking functions and other elements of a bank’s operation. This often leads to different perceptions and interpretations when referring to core banking. On a very basic level core banking is understood as the management of customer’s financial transactions and their impact on accounts. 1 What is a core banking system? Correspondingly Core banking systems are the IT systems and applications that manage a bank’s most fundamental activities and are thus the heart of a bank’s IT infrastructure. While historically core banking systems only had basic account management features and information about customers and account holdings (Customer information file), core banking systems nowadays can be defined as back-end system that allows banks to effectively develop, process and manage basic financial products and services, including data on clients, clients, deposit accounts, loans, mortgages, payment transactions and credit cards. Also included may be complementary products and services (also from external providers), securities and workflow and business enablement systems. Another essential function is to maintain the bank’s own books (general ledger) that provide information about normal 2
Cf. IBS Intelligence (2011) Cf. Balgheim, T./ Ollagnier, J. (2005), p.5
business activities (e.g. staff costs) along with the balances of customer accounts, interest, charges, other assets, liabilities, income and expense items. 3
Fig. 1 illustrates how Core Banking systems are in fact the core of a bank’s IT infrastructure and shows all surrounding applications, networks and systems interacting with it.
Fig. 1: Core of the matter
Shift in importance The importance of core banking systems as well as their functionality has changed over the past decade. 20 years ago customers only expected to deposit or withdraw cash at a branch during business hours, today Core banking is about knowing customer’s needs, providing them with the right products at the right time through the right channel 24 hours a day, 7 days a week. Core Banking Systems are no longer only of interest to IT and demand far greater involvement of business. An industrialized bank requires a robust system that provides an insight into the customer’s relationship with the bank for those who are servicing them.5 Core banking systems will be increasingly important not only regarding costs but also regarding overall competitiveness and profitability in the future.
Cf. IBS Intelligence (2011) Contained in: Deloitte Touche Tohmatsu (2008), p.9 5 Cf. The Banker (2005), p.7
There are a number of external drivers that force a bank to act and modernize their core banking systems. To answer the question why banks are replacing their core banking systems, this point focuses on three major external forces as well as one internal force, which is overhauled legacy applications which directly affect the flexibility to react to the remaining three, shown...