An Oracle White Paper July The Impact of the Financial Crisis on Core Systems Replacement

Transcription

1 An Oracle White Paper July 2010 The Impact of the Financial Crisis on Core Systems Replacement

2 Contents Expected Increase in Core Replacement Volumes... 3 New Technology Demands... 4 Final Thoughts

3 The last two years have been extremely challenging ones for the financial services industry. The United States saw the failure of more than 200 banks, and the impact of the U.S. credit crisis was felt by banks around the globe. The credit crisis and resulting recession have forced a paradigm shift within the financial services industry, resulting in new expectations for information transparency and the ways in which institutions interact with their customers. On a positive note, change often brings with it new opportunities. Many healthy institutions have begun to re-evaluate their internal processes and implement new, forward-looking strategies which address some of the lessons learned over the last several months. The core systems they have in place will play a critical role in enabling them to correct past mistakes and capitalize on new market opportunities. These core systems must enable them to operate more efficiently, better access customer information, implement enterprise fraud strategies, quickly launch new products, and operate in a real-time environment. Unfortunately, most of the core systems currently live at banks are inefficient, antiquated, and unable to produce the results banks are looking for. In fact, Aite Group estimates that approximately 20% of U.S. financial institutions have reached a high level of urgency for a core system replacement, while an additional 56% would benefit from one. The need for a core system transformation within the financial services industry is not new. In Many institutions have known for several years that a replacement is necessary. Unfortunately, the costs and time associated with taking on such a project have forced many institutions to fail to move forward with these projects, or if doing so to proceed with caution. The financial crisis brought to light the more urgent need for institutions to replace their cores. In fact, recent Aite Group research has found that the key difference between those institutions that considered the financial crisis to be a true crisis compared to those better able to weather the storm was ease of access to data being requested by regulators and customers. Those institutions with outdated, siloed systems were not able to access the necessary information requested by regulators, and as a result were forced to re-adjust their IT priorities, absorb additional costs due to additional man hours and manual entry of data often at the expense of customer service. These banks were feeling the repercussions of past decisions to implement quick fixes to overcome technology challenges which only masked underlying problems that only grew worse in time. Additionally, several of them saw their corporate customers grow increasingly frustrated, and in some cases form new banking relationships with competitors that were better able to provide information on exposures and real-time cash positions. Expected Increase in Core Replacement Volumes While the number of core system replacements decreased during the height of the crisis, Aite Group expects to see replacement volumes increase over the next few years due to pent-up demand, new market opportunities for healthy banks, and pressure from regulators. Approximately 420 U.S. banks will replace their core systems during Annual volumes will increase slowly, reaching approximately 575 during Another shift will be core replacement activities that cut across all financial institution segments to include not only small community banks and credit unions, but also large and midsize banks. A summer 2009 Aite Group survey of CIOs of the top 120 North American banks found that approximately 20% of these institutions considered a core system replacement a high priority for their institution over the following 24 months (see Figure 1). 3

4 Increased activity among the largest banks will also create new opportunities for many of the non-u.s. vendors that have been eyeing the North American market for some time with little success. As the need for replacement grows in the current competitive environment, many banks are likely to find that most of the U.S.-based vendors, unlike many of the non-u.s. ones, lack the modern architectures and proven scalability they require. Figure 1: Upcoming Core System Replacements Percentage of U.S. Banks and Credit Unions Considering a Core System Replacement to Be a High Priority Over the Next 24 Months Large and midsize banks (top 120 by assets) 20% Community banks 14% Credit unions 22% Source: Aite Group New Technology Demands New market expectations are also creating new technology demands. Those institutions replacing these systems have very specific requirements in place due to new market, regulator, and customer demands for greater efficiency, lower costs, more open architectures, and tighter integration. More modern architectures provide easier access to data that has become critical to bank success. They also enable a more customized user experience, real-time information, and greater flexibility to better meet customer needs and remain competitive. Further, they have longer staying power because they are newer and will not have to be replaced in the near future. Real-time information is growing in importance, but is not available in most older legacy systems. More than 50% of large U.S. banks continue to operate in a batch environment today. Consumers expect realtime information, and businesses increasingly require it to make informed decisions and optimally manage their cash. It allows for continuous transaction processing on a 24/7 basis, 365 days a year. There is therefore never a batch update cycle in which the system of record is at a different transactional state than the authorization system. Operating in such an environment enables everything associated with a transaction to be done at the point of transaction, reducing the need for reconciliation between systems. It also maintains a balanced system, ensuring that all transactions are double-sided and that sufficient funds exist. A real-time environment also reduces losses associated with fraud and helps cut costs and increase efficiencies. Agile and componentized architectures have also become a must-have in today s competitive 4

5 marketplace. Institutions need to be able to react quickly and easily launch new products and services. Some core systems can take weeks and even months for their bank and credit union users to create and configure new products, often resulting in these institutions trying to create more generic products to meet the needs of a large number of customers, and ultimately in lower customer satisfaction rates. In an environment where customer loyalty is low and a customized experience is expected, financial institutions need to launch new products in a matter of days not months. Dynamic pricing capabilities and a customer-centric approach lead to higher satisfaction rates, greater cross-selling success, and ultimately to greater customer wallet share. Institutions moving away from transaction-based pricing and toward relationship-based models need to be able to create individual product bundles and different pricing models. In order to achieve this, however, they must have a complete view of their customers across the organization. This 360-degree view requires a centralized customer information file as well as analytical tools to help institutions recommend products and predict future needs. Final Thoughts The financial crisis not only brought to light the need for many financial institutions to replace their core solutions, but also new requirements for what these solutions can deliver. Core system transformation is not an easy process to go through, nor is it an inexpensive one. The costs associated with continuing to run an antiquated system can be far greater, however, due to a decline in competitiveness and a potential loss of customers and business. 5

6 The Impact of the Financial Crisis on Core Systems Replacement July 2010 Oracle Corporation World Headquarters 500 Oracle Parkway Redwood Shores, CA U.S.A. Copyright 2010, Oracle and/or its affiliates. All rights reserved. This document is provided for information purposes only and the contents hereof are subject to change without notice. This document is not warranted to be error-free, nor subject to any other warranties or conditions, whether expressed orally or implied in law, including implied warranties and conditions of merchantability or fitness for a particular purpose. We specifically disclaim any liability with respect to this document and no contractual obligations are formed either directly or indirectly by this document. This document may not be reproduced or transmitted in any form or by any means, electronic or mechanical, for any purpose, without our prior written permission. Oracle and Java are registered trademarks of Oracle and/or its affiliates. Other names may be trademarks of their respective owners. Worldwide Inquiries: Phone: Fax: oracle.com AMD, Opteron, the AMD logo, and the AMD Opteron logo are trademarks or registered trademarks of Advanced Micro Devices. Intel and Intel Xeon are trademarks or registered trademarks of Intel Corporation. All SPARC trademarks are used under license and are trademarks or registered trademarks of SPARC International, Inc. UNIX is a registered trademark licensed through X/Open Company, Ltd. 0710