Silverlake Axis - Part 2 (Understanding the Core Banking System Industry)

Fig 1 Silverlake Axis Integrated Banking Solution

The most important question that will come to everyone's mind when we talk about Silverlake Axis will naturally be what is a Core Banking System (CBS), is it just a software like your Adobe or Office? This will be what this whole post will be about.

The "Core" in the CBS refers to Centralized Online Real-Time Exchange, something like your trading platform where information is updated Real-Time. Gartner defines CBS as "those applications responsible for processing and posting transactions in the domains of payments, current and saving accounts, loans and securities (such as performing current and deposit accounting, maintaining loan accounts, holding securities positions, clearing payments)." Basically, as seen from fig 1, it is a centralized system that handles every aspect of the bank's business. When you deposit your money into the bank, CBS will update your main account and distribute the information to your ATM, credit card, credit risk, customer information and e.t.c. I will treat it as the human brain that's in charge of processing of all information received from the five senses and that exert a centralized control over the body.

Changing a core banking system has been treated as a high risk, high cost and high reward project. Cost saving is often not a sufficient reason for bank to change them. The risk and cost comes from the fact that an error can damage the reputation of a bank as seen from the numerous debacles that DBS has got itself into. Changing the system also requires the old system to be put down before the new system is being put up, and this will create downtime for the bank. All the employees in the bank will also need to be re-trained and it will be sometime before they can get used to it. Cost of the project is often high and project overrun is normal due to the numerous constrain involved and that it will often has to be done only in the weekend.

Kevin Lomax, the erstwhile chairman of Misys – one of the largest independent software vendors (ISVs) focusing on the financial services industry – was once quoted as having said: “Changing a core banking system is like replacing the engine of a Boeing aircraft mid-flight.”

“The challenge of replacing a bank’s core IT systems has been equated with everything from open-heart surgery to replacing the engine in a moving car. It is without a doubt one of the most difficult and complex challenges a bank will ever face, with implications that cut across functions, products and geographies.”

http://www.deloitte.com/assets/Dcom-Shared%20Assets/Documents/08-1266%20CoreBanking%20preflight%20final%20web%20version.pdf

http://www.cimbbank.com.sg/index.php?rp=core+banking+faqs&tpt=cimb_sg

The above is an example of the impact of changing the CBS for CIMB Singapore, which only has 2 branches here.

Given the high risk high cost proposition, it is expected that many banks will not undertake such a project unless it is no longer a choice of theirs. As such, an adoption of a new CBS in a bank is likely to last them for at least the next 15 years and more. Please take note of this point as this is going to be the important for Part 3 later.

"While other system replacements tend to cycle every 5 to 10 years, a core banking system is expected to deliver capabilities and value for at least 15 to 20 years. Core systems are often viewed as a “once-in-a-lifetime” investment akin to a major factory replacement."

h20195.www2.hp.com/V2/GetPDF.aspx/4AA2-7566ENW.pdf

If that's the case, why are the banks starting to change their core banking system given the extreme high ROI needed to convince them? The answer is simple - survival of the fittest. There is no doubt as to the stickiness of CBS in a bank given that many banks are still using the old legacy system that date back to the 1970s and 1980s. Thus, these old systems are increasingly unable to meet the demand in today's world.

The ineffectiveness of the old legacy system is expected to cost banks in mature markets approximately US$200 billion annually according to the IBM Institute for Business Value Analysis. Up to 79% of a bank's IT spending are sometimes being used to maintain the old legacy system. This is just part of the reasons.

Increased regulation in the form of Basel III and other standards require a higher standard of information reporting as well as integration of the system. The wave of consolidation and M&A has also resulted in banks having multiple core banking systems that just add to the cost and the complexity of the demand today. So have most of the engineers that have been maintaining the old legacy system retired and it is harder to find people to fix the old system. Competitors that have done so have also proven to be leaner, faster and more efficient, and have managed to cut down on their IT spending. Thus, the time has come such that many of the old systems are to be overhauled since 2005.

Despite the current economic turmoil, Ovum's "Retail Banking Technology Spending Model through 2016" has predicted that global spending on retail banking technology will increase by $3.6bn (3.2%) in 2012 and will hit $135bn over the next five years. Banks in emerging economies in the Asia-Pacific region will grow the fastest at a rate of 8.3% in 2012. Therefore, room for growth in the banking technology market is still plentiful especially in Asia.

Part 3 will be on Silverlake's core revenue generation - Software implementation and Maintenance and Enhancement Service as well as its competitive advantage.