Microsoft and Core System Vendors Position Windows for Large Banks: If You Build It, Will They Come?

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1 Microsoft and Core System Vendors Position Windows for Large Banks: If You Build It, Will They Come? Analyst Author: Robert Hunt Senior Research Director, Retail Banking Sep 2008 Reference # V56:21R TowerGroup Take-Aways Although large banks worldwide use Microsoft Windows-based systems for critical services such as ATMs, Internet banking, branch automation, and call center operations, only a few of these banks rely on Windows-based platforms for core processing. Large banks using Microsoft Windows-based platforms for their core system processing include Banca Azteca in Mexico, Jih Sun Bank in Taiwan, Kaupthing Bank in the Nordic region, and Mashreq Bank in the UAE. Leading global core vendors such as Oracle Financial Services Software, SAP, Tata Consultancy Services, and Temenos have created Microsoft Windows platform versions of their core banking systems. Banks using Microsoft Windows platforms for core processing realize 99.99% availability, similar to that of core systems using mainframe or UNIX-based platforms. The introduction of Microsoft SQL Server 2000 Enterprise Edition and.net Framework provided the operating software components that large banks need to process their core systems on a Windows platform. Microsoft, a founding member of the Banking Industry Architecture Network, has added banking industry experts to assist its vendor partners in developing and enhancing core systems targeted at large banks. Report Coverage Microsoft Windows-based platforms have become ubiquitous at banks globally. Introduced in the 1980s for office processing functions, Windows is increasingly used by large banks to support critcal banking services including Internet banking, ATM, branch, and call center operations. Only a small number of mid-tier and larger banks, however, are processing their core banking systems on a Windows-based platform. This TowerGroup Research Note provides an overview of the penetration of Windows-based core systems at mid-tier and larger banks (those with more than $5 billion (USD) in assets) and provides examples of banks using Windows platforms for their core processing. The Note also discusses the issues and perceptions that inhibit banks' migration to Windows-based core systems. Because this Research Note focuses on core processing for mid-tier and larger banks, it does not include information on Windows-based core banking systems targeted at smaller financial services institutions. General information on this topic can be found in TowerGroup Research Note V53:25R, Update: Core Processing for Community Banks and Thrifts, Outsourcing Is In! Background The banking industry first implemented computer processing for core deposit and loan account processing in the late 1950s as banks took advantage of mainframe computers from vendors such as IBM, NCR, and Burroughs (now Unisys). The power of these computer systems grew TowerGroup is a wholly owned subsidiary of MasterCard Worldwide and operates as a separate business entity with complete editorial independence. MasterCard Worldwide is not responsible for and does not necessarily endorse any opinions, statements, or other content presented by TowerGroup. 1

2 exponentially in the 1960s and 1970s, when IBM's S360 and S370 mainframes (and their foreign mainframe competitors) dominated the market for large banks. These systems operated on a variety of operating software platforms (e.g., IBM's OS/MVT) that could support thousands of remote terminals and run hundreds of programs concurrently. These powerful operating platforms allowed banks to automate their branches and back-office operations and to implement ATM networks. Although Microsoft platforms were introduced in banking in the early 1980s, the use of Windows was limited to stand-alone or networked PCs used for office automation. The roots of core banking on Windows can be traced to 1988, when Microsoft formed the development team for what would become Windows NT Advanced Server 3.1 (released in 1993). This software provided a dedicated server for a client-server environment. Its main features were scalability for high-volume transaction processing, fault tolerance, and standards-based interoperability to support enterprise computing. It was followed by the release of Windows NT Server 4.0 in 1996, which provided enhancements such as improved scalability, an integrated Web server, and a toolset for developing and managing Intranets. In 1997, Microsoft added an Enterprise Edition version targeted at larger corporate clients adding enhanced scalability and reliability and expanded capabilities for clients developing enterprise applications. Advances in the processing capabilities of Microsoft Windows and PC-based technology were not lost on banks, which began taking increased advantage of Windows technology in the mid-1990s. Large banks used Windows-based PCs and servers for mission-critical functions like Internet banking, branch automation, and ATMs. Windows also became a popular platform for distributed departmental systems, typically being installed for corporate banking functions such as trade finance and treasury operations. Core vendors for credit unions and community banks and thrifts also introduced new core systems operating on Windows-based technology. These new core systems became popular as smaller financial services institutions (FSIs) took advantage of the lower total cost of ownership and ease of operation provided by Windows. Mid-tier and larger banks could not move their core banking systems to a Windows-based platform without additional operating software to provide a higher level of scalability, reliability, and recovery services. These needs were met with Microsoft SQL Server 2000 Enterprise Edition, which provided for workloads to be distributed across multiple servers and indexed views of databases. Additionally, SQL Server 2000 included Copy Database and Log Shipping software, automating the copying of databases and enabling the use of standby databases. Microsoft further advanced its technology with the first release of.net Framework in The.NET Framework Technology is incorporated in Windows operating systems and consists of a number of components that facilitate software development and systems processing functionality commonly found in centralized computer applications at large firms. Recognizing that Windows-based technology can now achieve the processing scalability and reliability required by large banks for their core account processing, a number of core systems vendors have developed Windows-based versions of their systems targeted at large banks. Several large banks using in-house-developed systems also have used migration tools to move their existing core processing systems to Windows. Exhibit 1 presents a time line of core processing with the use of Microsoft Windows-based processing at large banks. 2

3 Exhibit 1 Time Line of Microsoft Windows Technology and Implementation at Large Banks ( ) Source: Microsoft, TowerGroup Large Banks Using Microsoft Windows for Core Processing A number of mid-tier and large banks have migrated their core systems to a Windows environment by using transformation software or developing a new system in conjunction with a local partner. These banks specifically sought to reduce costs and modernize their core systems by moving to a Windows operating platform. Mashreq Bank Mashreq Bank, which has approximately $14 billion (USD) in assets, is the largest private-sector bank in the United Arab Emirates (UAE). The bank provides its services through 60 branches in the UAE and Qatar. Prior to its migration to a Windows-based core platform, the bank had been struggling to meet service levels on its Unisys mainframe processor. Batch processing took six hours daily and nine hours at month end. Further, use of a central processing unit (CPU) was typically 90%, resulting in processing backlogs and diminished ability to meet new processing and product demands. The bank studied both upgrading its mainframe environment and migrating to an open systems environment. The bank's IT subsidiary, Mindscape, was then charged with developing a plan to implement an open architecture environment. Mindscape used ASYSCO'S LION technology for translating the mainframe software for use on a Microsoft Windows platform. Mashreq Bank implemented the new core system in 2006 using Windows Server 2003, Microsoft Sequel Server 2000, and Microsoft Operations Manager The system processes on HP 3

4 ProLiant blade servers and AMD 64-bit dual-core Opteron processors. Using this configuration, the bank reduced its daily batch processing time from six to three hours and end-of-month processing time from nine to five hours. Banca Azteca Banca Azteca has become a large retail bank since beginning operations in The bank is a subsidiary of Grupo Electra, a major retailer in Latin America. Banca Azteca has more than 2,000 branches located in stores throughout Mexico and Panama and targets previously unbanked and middle-class customers. In only five years of operation, the bank has gained more than 8 million accounts. As a start-up, the bank had no existing core system or processing environment. After researching available systems, Banca Azteca selected the Alnova Banking core processing system from Madrid-based Alnova Technologies, a subsidiary of Accenture. Although not typically installed on a Windows platform, the Alnova system has been implemented at more than 100 banks worldwide and at several large Mexican banks. Using integration support from Accenture, Banca Azteca installed the Alnova Banking system on a Microsoft Windows platform. The system uses Microsoft Windows Server 2003 Datacenter Edition running on HP superdome servers with Intel Itanium2 processors. The bank is currently migrating to Windows Server Jih Sun Bank Jih Sun Bank, a large Taiwanese retail bank, had been processing its core applications on an IBM S390 mainframe platform using the IBM VSE operating platform. The core processing software was developed by local vendors and implemented at Jih Sun in The software had become unreliable, maintenance costs were rising, and end-of-day processing could not meet the bank's requirements. The bank began a core modernization project in 2002 with the stated goals of "reducing operating costs, enhancing operating efficiency, and improving service quality." Jih Sun selected Temenos T24 core banking system and decided to operate the vendor's open platform system on a Microsoft Windows-based platform. The bank now processes more than 2.5 million accounts on the T24 system operating on Microsoft Windows Server 2003 Datacenter Edition and utilizing a Unisys ES7000 dual core system with 64 CPUs. Kaupthing Bank Kaupthing Bank, headquartered in Reykjavík, Iceland, operates in 10 Northern European countries and has more than $100 billion in assets. In 2004, the bank undertook a project to centralize its computer processing in the Nordic region, standardize products and processes, and reduce the number of legacy systems. Moreover, the bank needed a core system to support an aggressive growth strategy that included expansion into additional countries. The bank chose the SAP for Banking core solution operating on a Microsoft Windows platform and using a SQL Server Database, and it selected HP as the hardware vendor. Utilizing a single data center in Stockholm, Kaupthing has converted its branches in Sweden, Finland, Iceland, Norway, and the United Kingdom to the SAP for Banking system. US Banks No US banks with more than $5 billion in assets have implemented a Microsoft Windows-based core banking system. In fact, the majority of large US banks rely on systems developed in the 1980s that use a memo post, batch update architecture. Conversely, newer Windows-based systems use a real-time processing architecture. TowerGroup attributes the lack of Windows-based core processing at large US banks to several factors: The long-standing success of mainframe-based vendor packages such as Fidelity's IMPACS, 4

5 Metavante's IBS, and CSC's Hogan system among the top 100 banks. The successful introduction in the late 1980s and 1990s of IBM i-series and UNIX-based core banking systems such as Fiserv's CBS, Fidelity's Horizon, and Open Solutions' The Complete Banking Solution (TCBS) system. These systems were embraced by rapidly growing community banks that sought a nonmainframe solution for core processing. The reliance of the US banking system, until recently, on paper-based payments. As paper-based payments decline, the business case for implementing new, real-time core banking systems improves. The largest US bank by assets using a Microsoft Windows-based operating platform is Georgian Bank, a $2 billion asset bank headquartered in Atlanta, Georgia, that focuses on business and high-net-worth individual banking. The bank uses Harland Financial Solutions' Phoenix System and integrates Microsoft Office tools with the system to manage customer contacts, sales calls, and scheduling. The bank also uses SQL Server 2005 and SQL Server Report Services. Vendor Systems Targeted at Larger Banks Vendors systems using Microsoft Windows platforms include systems that have an open platform design that allows banks to choose their platform and vendor systems specifically designed and developed to process on a Windows platform. Leading global vendors such as Alnova Technologies, Oracle Financial Services Software, SAP, Tata Consultancy Services, and Temenos have adopted a multiplatform approach that allows banks to choose a Windows-based implementation. All of these vendors originally developed their systems for use on an IBM mainframe or UNIX-based platform, adding the Windows platform option later. The first exclusively Windows-based systems targeted at larger banks were developed by regional vendors such as Financial Objects (Europe), Harland Financial Solutions (United States), Nihon Unisys (Japan), and Pexim Solutions (Adriatic region and Middle East). Recently, SlaterLabs in the United Kingdom has been developing its Microsoft Windows-based Etude system for global use at larger banks. The vendor is seeking development partners in various regions to help define and build the required modules for local implementations. In Eastern Europe, Pexim Solutions is developing a new Windows-based core banking system (currently named Revolution) based on IBM's Information Framework that the vendor will market to larger banks. Open Solutions, a US-based core provider, recently introduced a.net version of its TCBS. The system, known as TCBS: DNA, has been implemented at a number of US banks and credit unions with assets up to $800 million. The vendors of Windows-based systems targeted at larger banks are shown in Exhibit 2. 5

6 Exhibit 2 Leading Vendors with Microsoft Windows-Based Core Banking Systems Targeted at Large Banks (2008) Source: Microsoft, vendors' information, TowerGroup Why More Large Banks Don't Move to Windows Most large banks process their core systems using mainframe-based, in-house, or vendor systems developed more than 20 years ago. These systems have proven capable of processing the high transaction volumes and number of accounts held at large banks. However, they typically are a mixture of structured and nonstructured COBOL software and have become increasingly difficult to maintain. Further, many lack the real-time, straight-through processing capability inherent in newer core systems. Although banks have modernized most of their IT applications over the last decade, the majority of large banks have not modernized their core systems. Despite the availability of modern, proven core systems and migration tools, banks are reluctant to undertake the effort required to replace their core systems. Exhibit 3 shows the factors that drive and inhibit banks in replacing their core banking systems. 6

7 Exhibit 3 Drivers and Inhibitors of Core Systems Replacement in Global Banks (2008) Source: TowerGroup Dispelling the Perceptions Notwithstanding the costs and risks associated with replacing core systems, a number of large banks announce core systems replacement projects each year. Although a few of these banks do decide to implement a Microsoft Windows-based system, TowerGroup believes that this number should be higher. Specifically, we believe banks aren't fully considering Windows-based core processing because they perceive a lack of reliability and scalability in the Windows operating platform. Reliability. Banks derive their negative perception of Windows' reliability from home computing usage, which does not represent the reliability of the more robust business operating systems such as Windows Datacenter Edition. In fact, banks operating their core system on Windows typically report availability of 99.99%, which is similar to the availability of UNIX or IBM mainframe operating systems environments. Scalability. In late 2005, the SAP for Banking system was benchmarked on a Windows platform. Specifically, the operating systems database server used Microsoft Windows Server 2003 Datacenter Edition, the application servers used Windows Server 2003 Enterprise Edition (32-bit), and the database server used SQL Server The processing hardware consisted of a HP Integrity (16 processors) for the database server and 33 applications servers using HP ProLiant computer systems. 7

8 The benchmark utilized an account base of 18 million with 360 million transactions per month. The SAP for Banking system processed more than 8 million real-time posting transactions per hour and processed more than 4 million accounts per hour in batch mode in the Windows operating platform environment. While these results are impressive, new processors such as Intel's Itanium 9000 product line can accommodate 512 dual core processors with a petabyte of RAM, thus meeting the scalability requirements of the largest banks in the world. The benchmark test highlights are listed in Exhibit 4. Exhibit 4 Highlights of SAP Core Systems Benchmark Test on a Microsoft Windows Platform (2005) Source: SAP The scalability of Windows-based platforms is also demonstrated in production at nonbank financial services institutions. The London Stock Exchange (LSE), for instance, migrated from a Tandem computer environment to a Microsoft Windows.NET environment to meet growing demands for real-time transaction processing. The LSE now processes more than 15 million real-time messages per day using 120 HP ProLiant servers operating in multiple data centers. Expected Increase in Use of Windows for Core Processing at Large Banks TowerGroup expects that the use of Windows-based core processing systems at large banks will increase over the next several years. However, we do not believe that the increase will be major among global the top 200 banks in assets. These banks typically have invested heavily in IBM mainframe or UNIX-based technology and are unlikely to abandon their investments in hardware and intellectual capacity. Still, large banks could replace difficult-to-maintain software with Windows-based point solutions. Using service-oriented architecture (SOA), large banks could replace inefficient software with a Windows-based service (e.g., new account openings). However, 8

9 we believe that the major business growth for new core banking systems utilizing Windows will come from tier-2 and rapidly growing tier-3 banks. We also expect that market penetration for core banking on Windows will be strongest in the Asia- Pacific region and parts of Europe rather than in North America. Banks in rapidly growing economies will need to upgrade their core processing systems to meet the increasing demands for products in these regions. Conversely, North America is faced with slower growth, and existing core systems have the scalability and functionality to meet consumers' demands. Microsoft has designated core systems as a focus area for the financial services industry. Therefore, the company developed a strategy to facilitate adoption of Windows-based core banking systems. Its strategy includes selecting multiple partners among the leading core vendors and assisting banks and the vendor partners by supplying subject matter experts, benchmarking, and strategy planning resources. Microsoft recently became a founding member of the Banking Industry Architecture Network (BIAN), an organization comprising leading global banks, key software vendors, and global technology companies. The purpose of this group is to develop SOA standards for the banking industry. If it succeeds, the group will facilitate the migration of banks from a siloed systems environment to an SOA environment. This move would allow banks to gradually replace their core banking systems and facilitate migration to a Windows-based platform. More information on BIAN is in TowerGroup ViewPoint Issue 237, The Banking Industry Architecture Network: A New Path to Core Systems Modernization? Summary Although large banks have embraced computing on Microsoft Windows platforms for missioncritical functions such as ATMs and for branch and call center operations, only a small number of these banks use Windows for their core processing. Reasons for this disparity include large banks' long-standing reliance on mainframes for core processing and their perception that Windows-based core systems cannot meet their reliability and scalability requirements. Microsoft has taken the necessary steps for Windows-based core processing at large banks. Microsoft operating platform software and the.net architecture together provide functionality and scalability comparable to that with mainframe and UNIX-based platforms. Additionally, the vendor's participation in the Banking Industry Architecture Network positions Microsoft to assist large banks seeking a service-oriented architecture (SOA) approach to modernizing core systems. The leading global core vendors now offer Windows-based versions of their core processing systems, and several regional vendors have introduced new core systems based on Microsoft's.NET platform. These offerings should lead more large banks to choose a Windows platform when they implement a new core system. TowerGroup expects that the use of Windows-based core banking systems at large banks will increase at a modest pace. The greatest success will occur at banks in rapidly growing economies that have not already invested heavily in mainframe technology. These banks must implement new core systems to meet a growing demand for financial products and will be able to choose processing platforms based on a total cost of ownership. 9