Core-banking systems, between paradox and sophism

A well-known bank chairman stated a few weeks ago that banking systems are like wine – the older the better. Those who heard this statement were probably stuck in the paradigm for a few seconds. Are we dealing with a paradox or a sophism?

One thing at a time. What we know for sure is that there are no perfect banking systems. Banks are complex organizations, of several types, aiming at different client categories. Banking systems are the same as in life: if one dissipates one’s efforts in all directions, one risks doing nothing well.

If one wishes the computer system to cover both the retail and the need-customization functions of corporations, to support private banking and also ensure treasury operations, to be both ERP (Enterprise Resource Planning) and CRM (Customer Relationship Management), to be both a reporting system and to ensure the BI (Business Intelligence) of the bank, to cover risk management and the collecting functions, even to already have integrated alternative distribution channels (Internet banking, Call Center, Mobile Banking, etc.) besides the front-end function, all in one application, then one can be sure: one can never have all of them or can have a little of each, but badly structured. Therefore, from this perspective, the quoted banker was totally right if by old he had meant simplicity, structuring. Old systems may seem better because they are simple (like some people are simple), however they cannot do much. One should not assign a bridge-design job to a ditch-digger.

The specialization of computer systems is very important, as their philosophies are different. Modern systems try to do it all, under the generous concept of integration. Actually, behind marketing presentations one can find functions whose integration may suffer, as system logic is different. A retail application requires defining one product for a million clients, similar for all of them. A corporate system requires defining one product for each client, individually. The two situations are too extreme to coexist.

Computer systems cannot be better than the people who use them. Old systems do not allow too many configurations. If they have been implemented based on the international practices of many clients, their suppliers have incorporated the expertise of tens of banks, one can probably find the best products in them. However, when one implements them, each bank employee brings his/her own expertise, many times from a past which does not mean the best practice. In this case, the adaptation of the experimented system to a certain work manner is initiated, many times without a modern perspective horizon. And thus, a good system may become difficult to manage. Old systems, resulted from international expertise, cannot be easily configured and thus are more difficult to break down. A modern, modular application may be easily adapted to each idea. Many times not all ideas are good and a dead end is reached. So, without cause analysis one may draw the conclusion that modern systems are weaker. Their flexibility, the trust invested in the persons who configure them may create that impression. But, all in all, old systems, which do not allow too much freedom, and in which there is no room for error, help you obtain results faster, and this is what matters. Paradox or sophism?

Technically, modern systems consume a lot of technological resources. Old systems, written in programming languages closer to the machine code (Cobol, RPG, etc.) are the fastest. The more one wants to work in visual programming, on objects, Java- developed or web-based, the more the processing cost increases, more memory is needed, etc. We are not talking about thousands of Euros, but about millions of Euros for a large bank with millions of customers. Therefore, one may draw the conclusion that the TCO (Total Cost of Ownership) increases. From another perspective, applications in old languages do not require first-rate specialists in order to be maintained and developed. One needs internal developers, who many times are rare and therefore expensive, which determines considerable human resource costs. So, what to choose? Easily developable systems, which can be configured even by business specialists? Or old systems, in which internal IT specialists are indispensable, more and more deficient and which businesses may become dependent on. So, old or new from the TCO perspective… medium to long term, do human resource costs, created dependencies and limiting business developments compensate infrastructure costs? If one thinks that competitive advantages are obtained only from fast innovation capabilities, the ability to launch new banking products, it would seem that these aspects are not compensated. Other elements, specific to corporate and IT governance, are also involved: the manner in which projects are implemented, the way in which business cases are calculated based on TCO. Without proper IT governance, costs can go through the roof and one may draw the conclusion that old systems are better. But the root, the cause of such a conclusion is not rendered by the computer system, but by the corporate governance manner, project and cost management, and the capacity to know unit costs per product, customer, etc. Paradox or sophism?

To know one’s customer is important. To develop the relationship with one’s customer is crucial. Old core-banking systems are structured more on accounting criteria, and not necessarily on the customer. However, the customer is the one that generates profit or loss. Many times old systems do not even have reliable data structures. There can be no interfaces with other applications. However, they can be very fast. Therefore, old systems, for the essence of banking activities, are very good. If one wants to develop into the world of alternative channels, to have modern reporting systems, to be able to perform data mining or analyze customer behavior, these are completely inefficient. That is why three-tier, middleware and integration concepts have emerged. That is why data warehouses, data marts, operational and CRM databases are outside core-banking systems. Alternative distribution channels are weakly coupled, generally by middleware, based on services according to SOA (Service Oriented Architecture). Why all this? Because old core-banking systems are the best and we do not really want to change them. But they are limited. Without architecture and complementing systems, old core-banking systems are totally inefficient for modern banking.