Core system modernization is often a lengthy and costly journey pebbled with unforeseen challenges, but some Asia-Pacific banks that have tread down this path have seen wide-ranging benefits.
A core banking system is the central processing unit that is responsible for the bulk of a bank's operations. This includes the processing of deposits, loans, payments and other daily banking transactions.
A number of APAC banks have sought to modernize their core banking systems by replacing, upgrading or outsourcing the technology to allow for greater business agility. Those efforts were led by the State Bank of India, which began the implementation of the TCS BaNCS core banking system provided by Tata Consultancy Services Ltd. in 2002. Core transformation activities in APAC increased after 2008 as weaker margins stemming from the financial crisis compelled banks to take the plunge in an effort to improve future performance.
Legacy systems were often developed with a product-centric approach, leading to a fragmented architecture consisting of monolithic applications. Customers' data resided in multiple vertical silos that lack interoperability, making data aggregation across business lines difficult. This impeded banks' flexibility and ability to innovate products and keep up to speed with modern developments.
Operational efficiencies and business benefits
A deep dive into selected cost efficiency and performance metrics before and after core modernization reveals mixed results. To minimize effects potentially caused by external events, S&P Global Market Intelligence used country-specific industry medians as points of reference. For each metric, S&P Global Market Intelligence calculated the difference between each bank's ratio and the industry median for both the pre-implementation and post-project completion years.
Of the featured banks, it appears that Industrial & Commercial Bank of China Ltd., China Construction Bank Corp. and China Merchants Bank Co. Ltd. have reported the most improvement in three of the four metrics in the analysis.
Since its inception, ICBC has operated on a proprietary core banking system and consistently upgraded the technology to support its growing business. The bank's first generation core system was built in the 1980s, while the 2008 project marked the construction of its fourth generation system. This latest iteration was credited as a key contributing factor to the success of ICBC's mobile banking.
ICBC was the first Chinese commercial bank to roll out mobile banking services in November 2011, which enabled customers to check their bank balances, transfer money, submit bill payments, trade precious metals and exchange currency via their mobile phones. In 2012, the bank added wealth management products to the suite of financial product offerings available on the mobile platform. The fourth generation system had also facilitated the launch of new products like revolving business loans. After upgrading the core at the end of 2012, the state-owned bank said it had 4,163 financial products, or 28% more than a year earlier.
Though National Australia Bank Ltd. has yet to complete its "NextGen" core banking overhaul that has been in the works since 2008, it has realized business benefits through different phases of implementation. Part of this core transformation involved a new personal banking origination platform, also known as PBOP, which was deployed nationwide in 2016. With this new platform, NAB noted that the median time to fund personal loans dropped 59% to 2.4 days. Likewise for credit card approvals, the median time was reduced to 2.6 days from 5.2 days in 2016.
The core system replacement at State Bank of India was widely regarded as one of the largest successful case studies, involving the migration of 140 million accounts across 14,600 bank branches. Prior to the implementation, SBI operated a decentralized system where activities such as account opening were done at the branch level, limiting customers' interactions with the bank to local branches. Internally, paper reports were generated and compiled at each branch and sent to a centralized office to be keyed into the system. This led to duplication of efforts and intensive manual processes.
The modern core provided SBI with a centralized system that enabled the bank to redesign and streamline business processes to achieve greater efficiency for customers and employees. Over the five years ended 2008, SBI saw its business per employee surge by 250%.
A rocky road
Core transformation is not always a smooth sailing journey. Commonwealth Bank of Australia, for instance, saw the cost of modernizing its 40-year old system skyrocketing to A$1.1 billion midway through the project in 2010, more than twice the initial budget of A$580 million. Additional functionality and complexity were cited as reasons for the cost overrun. The bank eventually completed the project in 2012 with a total cost that S&P Global Market Intelligence estimates at A$1.8 billion.
Delays in project timeline may happen. At NAB, what was initially set out to be a five-year plan due for completion in 2013 may now have an indeterminate deadline. NAB strived for a complete core overhaul, including the decommissioning of the legacy system built in the 1950s. Over time, multiple layers of modern applications had been manually added to the system when new features incompatible with the antiquated core were introduced. This added complexity to the project which partly accounted for the delay in schedule.
The key reason behind the uncertain time frame, however, is likely the multiple leadership changes that occurred, causing project priorities to shift on several occasions. Initially, the company told investors that the new generation core platform would be ready by the end of 2014 and existing customers would have their accounts migrated to the new system by 2015. However, when a new leadership team was introduced in 2014, the IT team was instructed to focus on completing the technical build of the core system and leave the migration of existing customer accounts to a later time.
It was later signaled in 2016 that NAB was nearing the completion of its core upgrade. But things seemed to take another turn when a new chief technology and operations officer came on board in 2017. Priority shifted to innovations around the customer, while upgrades to the legacy back-end system took a backseat.
Further procrastination may hurt
It is imperative for banks to ensure that their core architecture is sufficiently modernized to accommodate new initiatives or changes in regulatory regimes.
In 2019, the major Australian banks came under fire for being too slow in rolling out the New Payments Platform despite the fact that discussions on the NPP had begun in 2012. NPP is the real-time payment system that went live in Australia in February 2018. Westpac Banking Corp., in particular, noted that its legacy system had been operating on a batch processing basis and integrating real-time capabilities proved to be more challenging than expected.
Further tardiness in implementing the NPP, however, may be costly for the banks. In a report released by the Reserve Bank of Australia earlier this year, the central bank had called for penalties to be imposed on participating banks that fail to comply with deadlines mandated by NPP Australia, the company that is responsible for the development of the payments platform. RBA further added that it will consider regulatory intervention if sanctions prove to be insufficient.
The experience that the Australian banks had with the adoption of NPP demonstrates that system integration with legacy architecture can result in unanticipated complexity and delays. An early start is the only way to ensure a timely implementation and to stay ahead of the pack.
Breakdown of ratio analysis pre- and post-core modernization
