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Asian Bank Modernizations Continue to Leapfrog U.S. Counterparts
Now that many top Chinese and Indian banks have successfully migrated their core banking systems from batch to real-time processing, will North American banks follow suit?
Don't look for large-scale adoptions for another couple of years, although change is definitely in the air, according to Robert Hunt, research director in the retail banking practice of the TowerGroup, a financial industry research and advisory firm.
North American banks, many of which completed their last core systems upgrades in the 1980s, have resisted replacing these legacy, batch-oriented applications with modern alternatives capable of real-time processing.
The architectures for the batch systems were designed for handling paper transactions by back-office personnel. But electronic payments, spurred by debit cards, electronic bill payments, and automated clearing house electronic funds transfers, now outnumber paper payments, which peaked earlier this decade at more than 40 billion transactions.
"With paper checks on the decline, the arguments against real-time processing are starting to go away," Hunt says. "Nevertheless, large North American banks have been reluctant to take on the risk and cost associated with core systems replacements."
In response, vendors of core systems, including i-flex and Oracle, are using technology to reduce the stumbling blocks. Sophisticated middleware helps reduce risk by automatically routing transactions to either the legacy system or a new core application, which takes the burden off bank personnel to know the proper workflow. In addition, middleware will let banks gradually replace banking subsystems while continuing to run other legacy components, which avoids complex "Big Bang" transformations.
North American banks have another prize to eye: Case studies have shown post-modernization reductions of from 30 to 50 percent in core banking IT costs. "A compelling business case is starting to emerge for U.S. banks to replace their core banking systems," Hunt says.
Nevertheless, he cautions banks to choose systems carefully, taking into account factors such as scalability, architectural road maps, and vendor reliability. "A core banking system lasts longer than many marriages in this country," he quips. "Make sure you're going to be comfortable doing business with the new vendor for the next 15 years."
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