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Management Report:
Roadmap to Successful
Core Banking System Replacement
Critical Success Factors and Best Practices
Neeti Aggarwal, CFA
Published September 2006
2006 The Asian Banker
Management Report:
Roadmap to Successful
Core Banking System Replacement
Critical Success Factors and Best Practices
IMPORTANT NOTICE
Although the author and publisher have tried to provide information
as accurately as possible, they accept no responsibility for any loss,
injury or inconveniences suffered by any person using this document.
The author and publisher have taken all reasonable care to ensure
the data and information in this report is accurate and presents a fair
representation of the subject matter.
First Publication: 15 September 2006
ISBN: 981-05-6643-3
2006 The Asian Banker. All rights reserved
The Asian Banker, incorporated in Singapore as T.A.B. International Pte Ltd, claims all rights as owner of
intellectual property in this report. No part of this document may be reproduced, stored in a retrieval system or
transmitted in any form by any means, electronic, mechanical, photocopying, recording or otherwise, without
the written permission of the publisher and the copyright owner.
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Market Trends
12 Asian Banker Research Report
Core banking Trends in Asia Pacific
No vendor dominates the country but Infosys and TCS have taken a fair
share of the pie. There has been a distinct preference for local vendors
as they offer international-quality products and yet understand the unique
Indian requirements.
Leading Vendors in Asian Countries in Last two Years
In China, SAP clinched the core banking systems deal awarded by China
Minsheng Bank, marking the entry of this global vendor in the region.
Chinese banks are increasingly considering replacement; however
following implementation problems in a few Chinese banks, they are
now more cautious about taking the plunge. Taiwan banks did not enter
into a single deal in 2004 but showed sudden activity in 2005. I-ex has
emerged as the top vendor in this country.
The Philippines was rather subdued with just two deals in 2005 (as
compared with ve deals in 2004) both came from smaller banks and
were won by Nucleus Software. The last major deal in the Philippines
was that of Union Bank of Philippines which replaced its system with
Finacle of Infosys. Malaysia, on the other hand, continued to witness a
urry of activity with many small banks upgrading their ageing systems
primarily through local vendors.
Internationally, one of the biggest deals in the past year was for HSBCs
global operations, which was won by Temenos. The bank is understood
to be improving further on the present solution. Within the region, DBS
Banks core banking deal was another feather in the cap of Infosys, a
Market Trends
Indian market is fast reaching
saturation; China and Taiwan
are opening up
Asian Banker Research Report 15
Core banking Trends in Asia Pacific
private banks in the country has forced most state-owned banks to
substitute (and in most cases acquire for the rst time) a centralised core
banking system to improve their competitiveness and retain their market
share. However we expect the trend to slow down in the next couple of
years as most leading banks have already entered into core banking
deals. A few banks that have not yet upgraded their systems are nding
it increasingly difcult to compete and are currently evaluating available
products and vendors.
Taiwan witnessed a recent surge in core banking deals, though mostly
from smaller banks. In China, the number of deals has been rising slowly
but steadily as more and more banks evaluate the need for replacement;
however most of these deals have been from smaller banks. We expect
the current trend in both Taiwan and China to continue this year.
Malaysia has also been active with four deals in 2005, though most of
these were again from smaller banks. However we believe some big
banks like Maybank are actively considering core banking replacement.
We expect to see more core banking deals in Malaysia with Islamic banks
favouring local vendors who can meet Islamic banking requirements.
Most other countries saw just a few small deals with the exception of
Singapore, where DBS has entered into a core banking deal for its retail
business. Thailand and Korea were noticeably absent from the scene in
2005, but we expect activity in both countries to pick up over the next
couple of years.
Market Trends
Indian banks have favoured
technical advancement through
local vendors
Other Asian countries expected
to continue to show demand for
core banking transformation
Asian Banker Research Report 17
Core banking Trends in Asia Pacific
Most Chinese banks have shown a strong preference for systems
that are designed to suit their specic and unique requirements. For
this reason, smaller Chinese banks have preferred domestic vendors
while larger banks have preferred international vendors that can meet
their local needs. Similarly, many Malaysian banks have preferred local
vendors that can meet their Islamic banking requirements.
Banks from developed markets like Singapore and Hong Kong have
rst-generation technical sophistication and are undertaking a cyclical
replacement of their ageing systems. In contrast, banks in countries like
India, Pakistan and Vietnam are purchasing core banking systems for
the rst time now. For obvious reasons, activity among the banks that
lack technical sophistication will increase.
We believe that most Asian banks prefer to select vendors that either
involve local people through a setup in their country or partner local
vendors. This is because there is a perception among the bankers that
a local is more likely to understand and adapt to the unique local needs
of a particular country. However in many countries, the availability of
international-quality products from local vendors is a limiting factor which
has forced banks to look for alternatives.
Market Trends
Steady increase in spending
likely to continue; no signicant
jump expected in near future
Deal sizes have varied from
about $5 million for small banks
to more than $50 million for
large wholesale banks
Asian Banker Research Report 19
Core banking Trends in Asia Pacific
A critical cost item is system software cost; this includes the cost of
software licences, which varies depending on project. For example, for
FNS customers, software licence cost has varied from $1 million to over
$7 million, with an average of $1.8 million in 2005.
Overall, we have seen a steady rise in investment made by banks in
Asia over recent years. We expect the trend to continue. However, as
a percentage of total revenue, we believe the investments are likely to
show a declining trend as the banks have witnessed even higher growth
in revenue. We also believe that there is stiff price competition among
vendors and that this will keep the costs in core banking replacement
under control.
Technical Trends
Evolution of core banking
industry in Asia shows
increasing convergence of
technologies and focus on
architecture of systems
Asian Banker Research Report 21
Core banking Trends in Asia Pacific
and scalability remain unbeaten today. In the next stage of evolution came
parameterisation of processing rules and enhancement in automation
from back- to front-ofces. Here, the UNIX platform solutions have
shown high functionality, with some of them using relational database
technology to maintain accounting and administrative data.
UNIX systems have borrowed ideas freely from mainframes such
as logical partitioning, the ability for isolation, the ability to share
across partitions, and common interfaces. Integration tools and other
technological advancements have brought about a certain level of
standardisation and convergence of technologies today at the platform,
application and architectural layers.
Banks are increasingly looking for solutions that have the technical
capability to meet their unique functional requirements while improving
their competitiveness. There is also increasing demand for component-
based modular systems that do not have integration issues.
Trends in Requirements
Architecture that supports flexibility, growth and services such as
Service Oriented Architecture (SOA)
Systems capable of global deployment multi-channel, multilingual
with high connectivity
Customer centric focus with increased connectivity across
processes and functions. Integrated solution increasingly available
Convergence of old and new technology with increased scalability
and flexibility
Source: Asian Banker Research
Service Oriented Architecture (SOA) is a relatively new concept that
has gained popularity quickly. Herein, business applications are
constructed from independent reusable interoperable services that can
be recongured without a vast amount of technical labour. The concept
is based on web services and components that are brought together to
perform specic business tasks. It essentially means reducing barriers in
antiquated infrastructure and creating a real-time integration of disparate
systems and a sharing of databases on a exible and easily upgradeable
infrastructure. We discuss this in more detail in section 5.
On the architectural front, J 2EE and .NET are two architectural frameworks
that have evolved in the last few years. These are new-generation exible
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Source: Asian Banker Research
We tracked the technical advancement of banking sectors and
architectures in several Asian countries. We discovered that the
integration of technology and the movement from account centricity to
customer centricity have varied signicantly among Asian countries.
Developed countries such as J apan, Singapore, Hong Kong and Australia
have shown distinct technical advancement not only on the core banking
front but also in their banking systems architecture, achieving customer
centricity through integration.
On the other hand, developing countries like China, Thailand, Philippines,
Indonesia and Malaysia are far behind. These countries are now moving
towards data centralisation (having advanced from branch automation),
but many of the banks have yet to achieve core banking sophistication.
Architectural integration is still at the initiation stage in these countries.
However we believe that competitive pressures are forcing banks to
expedite this process.
In India, relatively new private banks have given a new direction and a
signicant boost to core banking integration in the banking sector of this
country. State-owned banks are already beginning to arm themselves
with more integrated systems to face this competition.
Technical Trends
Developed countries have
shown distinct technical
advancement
24 Asian Banker Research Report
Core banking Trends in Asia Pacific
1.7 Trends in Platform Usage
Among Asian Countries
Recent Core Banking Acquisition Trends Among Asian Banks
South Korea
China
Pakistan
Taiwan
India
Vietnam
Singapore
Primarily UNIX-based
System Users
Japan
Hong Kong
Philippines
Thailand
Malaysia
Indonesia
Primarily Mainframe-
based System Users
Likely to shift to UNIX
Source: Asian Banker Research
Traditionally, Asian banks particularly those in Korea, J apan and China
use mainframe-based proprietary systems. The robustness, stability
and scalability of these systems have been proven over the years and
continue to attract these banks. But in the last ve years, market dynamics
have changed considerably and banks are increasingly considering the
UNIX-based systems.
The shift in preference has been brought about by competitive pressures
in the market which have forced banks to look for systems that can meet
their functional requirements with exibility and agility. Accelerating
the trend is the fact that most Asian banks are smaller compared with
many European and multinational banks and hence UNIX systems are
considered adequate for their scalability requirements. Another major
factor that draws many bankers to UNIX is the cost savings. Changes in
regulatory requirements (under Basel II) have also forced banks to look
for an integrated and exible system.
For these reasons, we have seen an increasing shift among Korean
and Chinese banks towards UNIX-based systems. However J apan and
many South East Asian countries still seem to be adopting a wait and
Technical Trends
Many countries continue to be
primarily mainframe users but
there is a strong shift in favour
of UNIX systems
Competitive pressures and cost
effectiveness of UNIX-based
systems are driving the shift
Asian Banker Research Report 25
Core banking Trends in Asia Pacific
see approach. In mature countries like Singapore, there are very few
deals as well; but in the countrys most recent deal, DBS opted in favour
of a UNIX platform.
In the Indian subcontinent, most commercial banks are adopting
core banking systems for the rst time. Thus most banks have taken
advantage of this new-generation technology. As there is no problem
of integrating with the existing system, implementation is cheaper and
less complex. Moreover, the traditional preference of Indian banks (and
Indian vendors) is for a UNIX environment.
While smaller Asian banks have favoured UNIX-based systems owing
to their cost effectiveness, we believe that mainframe has proved to be
more reliable and scalable for a larger size of operations. As transaction
volumes increase, the total cost per user in mainframe decreases,
making it more competitive.
Technical Trends
Bigger banks continue to prefer
gradual deployment while some
smaller banks choose big
bang approach
Asian Banker Research Report 27
Core banking Trends in Asia Pacific
ve years. For State Bank of India and Central Bank of India, it is likely to
be around four years. We believe that it is critical to keep the rollout time
and the period that two systems coexist as short as possible.
On the other hand, a few smaller banks have taken the quicker approach
of big bang. These include: Union Bank of Philippines whose system
by Infosys was implemented in just one year; Industrial Bank of Korea by
Temenos; and Cathay United Bank, Taiwan by TCS-FNS.
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
Replacing the Front End is a
separate systemand a separate
project
Replacing the General Ledger is a
separate systemand a separate
project
Core Banking replacement does not provide
you with an industrial-strength customer
information repository which allows ease of
integration of disparate core systems
Core Banking replacement gives you raw
power. It provides you with a highly efficient
engine for all your transaction processing
needs
General Ledger
System
Front-end
System
Core Banking System
Customer Information Repository
Source: Asian Banker Research
accounting entries which are posted into the banks GL system
according to its chart of accounts structure for the daily trial balance
sheet preparation. The chart below illustrates the scope of a core banking
replacement project.
What Core Banking Systems Do Not Do
Core banking systems do not deal with the customer-facing front end
of the bank. Core banking systems also do not deal with the analytics
embedded in an industrial-strength data warehouse design.
Core banking systems do not include a comprehensive CIR (Customer
Information Repository) though they do include a CIF (Customer
Information File) or CIS (Customer Information System) focused on their
own processing and reporting needs. These components have only the
necessary customer information or capabilities embedded.
In a Service Oriented Architecture solution, the CIR will sit on top of
the core banking systems, as it is assumed that a bank will always
have multiple core systems which need to interact and share customer
information. The chart below illustrates a typical banking architecture
and shows where the key components reside.
-
-
-
Ownership of hardware
System integrator hired for
software
Vendor customises, integrates
and implements solution
according to the banks
requirements
Critical to select the right
software and vendor with
domain knowledge
Approach adopted by many
medium and small banks
Key Concept 3:
Go / No Go Milestones
PutA Stake in the Ground
Before Proceeding
Source: Immacon SOBIT Methodology
In summary, successful core banking replacement projects we have seen
are driven by clear business objectives, a strong business justication,
Asian Banker Research Report 57
The Phases Of Core Banking Replacement
a blueprint for the future and a roadmap on how to reach the target
all developed in the rst phase of the project. This is followed by an
initial delta analysis in the selection and implementation phases of the
project and the conscious sign-off of project-embedded milestones in
each phase. If one of these milestones is not signed off, the project
stops. This disciplined approach can save the bank a lot of money and
agony.
Key activities to consider for the business justication stage of the project
are:
Dene the business objectives and desired outcome of the project
Assess the current operations and existing IT infrastructure against the
business objectives
Develop and visualise the blueprint of the future state of operations
and the enabling technology
Dene the implementation approach and timeline to achieve the future
state
Formalise the business justication for the future state
-
-
-
-
-
Delta methodology would
facilitate business justication
58 Asian Banker Research Report
The Phases Of Core Banking Replacement
4.4 Phase 2 Selection
Critical Considerations in the Selection Process
Consider
long-term strategic
goals of the bank
Develop a
rating system
detailed to
provide
objective &
subjective
assessment
Invite bids from
vendors that
have strong
experience in
similar projects,
reputation and
track record
Eliminate the
products and
vendors that do
not meet the
essential
criteria
Final selection
should
comprise
detailed
analysis of
vendor and its
partners in the
project
Financial
assessment is
important but
decision should
be based on
product and
vendor
capability
Project Stages
Identify key
deliverables to
meet long-term
needs
Develop
selection
matrix. Identify
Go / No Go
criteria
Develop
Request for
Proposal and
invite bids
Initial filter to
eliminate
unsuitable
vendors
Invite
presentation
from
short-listed
vendors
Financial
assessment
and final
selection
Source: Asian Banker Research
4.4.1 Reasons for replacement
Key Demands from New Systems
Problems with legacy system Demands for new system
Flexible, scalable
Component-based architecture
Competitive edge
Customer-centric with single
view of customer
Easy information access
Higher eciency
STP ability
Product dierentiation easy
Lower operational and
maintenance cost
Lower TCO
Outdated architecture
Lack of exibility
Lack of scalability
Long product rollout time
Slow response time
Product innovation dicult
High operating cost
High maintenance cost
Scarce trained manpower
Product-centric
Disparate systems lacking
information accessibility
Source: Asian Banker Research
The Phases Of Core Banking Replacement
Identifying the critical current
and future needs to be met by
new system
Asian Banker Research Report 59
The bank needs to consider its objectives and conduct a delta analysis
to guide its development of selection criteria for the new system.
Widespread dissatisfaction with ageing, expensive and inexible
technology is one of the prime reasons for change. In countries like India
where private sector banks boast technically advanced systems, it has
become imperative for public sector banks to replace their systems as well
to lower the attrition rate and survive in this competitive environment.
Many banks have decades-old legacy systems that either fail to support
the latest products or do so with complex and time-consuming effort. The
operational and maintenance costs are steep and available manpower
for maintaining them is dwindling. According to one vendor, J ust keeping
these systems running can often consume more than 70% of the IT
budget, leaving little money to gain advantage over competitors.
While these systems have been stable, they are highly inexible and
hence largely unsuitable in todays competitive environment. Many of
these systems were implemented at a time when banks did not engage
in fee-based transactions. Rather than being customer centric, they are
largely account centric.
Branches need excess staff to maintain systems and back-ofce functions,
thus adding to cost. The time required to bring a product to the market,
the speed of transactions and end-of-day processing requirements have
also forced banks to look for alternatives to legacy systems.
Information in many of the legacy systems is stored in independent
silos. This makes gaining insight into customer needs and integrating
customer information across functions extremely difcult, as these involve
the collation of a large amount of data from disparate systems held in
different formats. For example, in legacy systems, a credit card division
may not know about the customers savings account. The banks that still
have no centralised customer-centric system are realising it is essential
to acquire one as this would provide them with a single customer view
and easily accessible and deployable real-time information, thereby
improving the banks efciency across functions.
The aim is now to eliminate duplicate systems, integrate legacy and
sub- systems with middleware, install and integrate databases and add
applications. The banks need to adopt scalable and exible systems
which can meet multi-channel delivery requirements, can integrate
information and processes across the organisation, are easy to upgrade
and can adapt to changes. This is essential to meet consumer demands
and maintain competitiveness in the sector. Absence of an adequate
system could even hamper the viability of an organisation.
Critical considerations in
assessing IT service providers
Evaluating vendor track record
and nancial viability is a must,
but equally important is for the
bank to assess its comfort level
with the vendors ability
62 Asian Banker Research Report
The Phases Of Core Banking Replacement
Banks need partners that have the proven track record to provide them
with the right product and service mix. There are relatively few vendors
that have successfully completed core banking projects of the size and
complexity of tier 1 banks. But for tier 2 and tier 3 markets, there is
more competition. The IT partners track record and reputation should be
evaluated in the context of the banks unique requirements. For example,
banks in China look for customisation and localisation capability. Similarly,
Indian banks have shown a preference for local vendors.
In addition, the IT partners nancial strength (to ensure long-term
viability), ability to continually upgrade products and track record in post-
implementation services are critical factors for lasting success. Investing
a huge amount of resources on a product is useless if the vendor who
provided it is no longer around to service it a few years later.
The alliances and relationships between the IT partners are other
factors that need to be considered. For example, State Bank of India
and Central Bank of India who both hired TCS as their system integrator
were provided with a system from FNS, now owned by TCS, and
hardware from another vendor. The standing relationship between these
two companies was a denite plus in their favour.
4.4.4 The right architecture and platform
Critical Requirements from System Architecture
Flexible,
Scalable,
Stable
Modular,
Integration
Customer-
centric,
Single View
of Customer
Straight
Through
Processing
Service
Oriented
Architecture
Critical Requirements From System Architecture
Ability to meet the long-term growth and ambitions of the bank
Component-based structure that can be modified and developed with ease
Integrated customer information to facilitate better customer relationship across functions
System functionality to support global deployment
Source: Asian Banker Research
Banks have to select the right architecture for the banking system in
general and the core banking system specically to suit their unique
-
-
-
66 Asian Banker Research Report
The Phases Of Core Banking Replacement
Platform cost Typically, platform cost is calculated as either total cost
of ownership or total cost per user. However, measuring total cost is not
straightforward and often results in an underestimation of UNIX costs
due to lower overall availability and the greater number of unplanned
outages. We have, for example, found that the average expected
revenue loss per hour of system downtime could amount to well over
$1 million. Considering that unplanned outages can occur as often as
once or twice a month, the costs can climb quickly.
In summary, we believe that the total cost should not be the driving
factor in platform selection for a retail bank. For a mission critical system,
considerations such as availability, scalability, reliability and security are
of far higher priority. Cost should only be a barrier for banks that cannot
afford the most suitable platform and are willing to compromise on the
service level of a mission critical system.
On the other hand, for small wholesale banks and banks that do not
have large transaction volumes, the UNIX platform could prove to be
effective. Given the technical advancement in UNIX systems in recent
years and the increased availability of UNIX hardware, software and
technical skills, UNIX is rapidly becoming a preferred choice for smaller
banks and new banks. As these banks have only a handful of branches,
limited multi-channel requirements, lower security requirements and
tolerance for unplanned system downtimes once or twice a month, the
price-performance equation here makes the non-mainframe solutions a
viable option.
However, for those banks that intend to shift from mainframe to UNIX, or
vice versa, the switching cost and the cost of coexistence of two systems
need to be added to the total replacement cost.
4.4.5 The selection process
Objective: Select and acquire the enabling technology and service
provider.
-
Implementation process
involves delta analysis,
detailed designs and product
modication to meet the banks
requirements
Asian Banker Research Report 73
The Phases Of Core Banking Replacement
a. No change / Out-of-the-box ts your needs
b. Rationalise process
c. Rationalise product
d. Customise and modify package
The chart below illustrates this approach in more detail:
Requirements Analysis Chart
Delta Analysis & Resolution
Core Package
Regulatory
Customisation
Core Package
Regulatory
Customisation
Core Package
Regulatory
Customisation
Core Package
Regulatory
Customisation
Core Package
Regulatory
Customisation
Core Package
Start :
Process / Appraisal
Identify Regulatory
Requirements
Identify Delta Delta Resolution
Option I:
No change /
Out of the box ts
Option II:
Rationalise
Process / Product
Option III:
Modify package
Customisation
Input on Package
Cost Impact
No (should be included
in base price)
No No
Yes (Time & Material
Cost for Modication)
New Core Banking
Solution Procured
Regulatory
Modication
New Core Bank
Capabilities
New World
Operations
Delta
+
Delta
Resolution
Accept Package
Change Bank
Product / Process
to Match Package
Modify Package
Delta
Regulatory
Modications
Immacon SOBIT Methodology
Source: Immacon SOBIT Methdology
Some of the recommended activities to consider for this stage of the
project are:
Conduct a delta analysis to identify the differences (the delta) between
the required future state and the selected solution
Conduct a solutioning to determine the appropriate customisation or
renements to suit the future state
Dene and estimate interface, data conversion and coexistence
efforts
Typical deliverables of this task include: Delta Denition and Resolutions,
Conguration Denition, Interface Denition, Data Conversion Denition
and Coexistence Denition
-
-
-
74 Asian Banker Research Report
The Phases Of Core Banking Replacement
Detailed Design A detailed design of the future solution is needed for
the subsequent Build & Test stage of the project. A detailed design done
right can save a bank a lot of time and money by avoiding unnecessary
rework and change requests. Many projects run into difculties because
the design is never stable. In those projects, coding starts even before
the detailed design is approved. In our analysis, this is one of the major
causes of project failure, i.e. the inability to complete and sign off detailed
design documentation. The detailed design documentation should
include the following, among other things: business design, systems
design, interface design, data conversion design and coexistence design
(assuming no big bang deployment).
For this stage of the project, the initial project blueprint needs to be
expanded and some of the recommended activities to consider are:
Prepare a detailed business design, including rationalised product and
process designs.
Prepare a detailed system design for customisation and conguration
of the selected solution.
Prepare a detailed integration design for the interfaces, data conversion
and coexistence components.
Build & Test The customisation and conguration of the selected
solution begins here. At this stage, it is important to freeze the design
and to apply a rigorous change management process to any unavoidable
changes. Hence, the sign-off of the detailed design documents of the
previous stage is compulsory before this stage begins.
At this point, we would like to caution that the term user acceptance test
should not be taken literally. The real end-user should not be responsible
for acceptance. What the bank needs is a trained test team of, perhaps,
former users who understand and appreciate the need for thorough
testing and know how to conduct systems testing. Generally the real
end-user does not have these skills. Hence, we prefer to use the term
business acceptance testing or business solution testing over user
acceptance testing to avoid confusion.
Some of the recommended activities to consider for this stage of the
project are:
Customise and congure the selected solution
Prepare operational manuals, training materials and train-the-trainer
programmes
-
-
-
-
-
A detailed design done right
can save the bank substantial
time
Asian Banker Research Report 75
The Phases Of Core Banking Replacement
Customise and congure the interface, data conversion and coexistence
integration components
Prepare and conduct system, operations and business solution
testing
Pilot A live pilot is the nal acceptance test. No matter how hard
we try, we will never be able to fully recreate and test a system in a
lab environment. But during a live pilot, the system can truly be tested
for real-life usability. Of course, the pilot should be representative of
the banks core operations. We have seen projects with well-executed
testing run into trouble as the test and production environments were
different, and even in cases where the production environment itself
was used for bank-wide testing by the actual end-users reposting real
business transactions prior to a big bang deployment. The lesson learnt:
the nal test is the live environment.
Our recommendation is to use a manageable mid-size branch for the
pilot. The pilot should always include a month end, as most banks have
special month-end processing which can cause a lot of disruption in
a real-life operation if not managed appropriately. The pilot should be
used to assess the effectiveness and completeness of the end-user
training and the new business processes and procedures, as well as the
customers acceptance of the new products and new operation. It should
also be used to identify bugs and bottlenecks and ultimately to ne-tune
the applications before deployment on an enterprise-wide scale. This
stage of the project will deliver a future state new world operation in a
live environment. Recommended activities to consider for this stage of
the project are:
Plan and prepare for the pilot deployment, including training of the pilot
users and dress rehearsals of the pilot cutover and operations
Deploy, support and rene the pilot operation
-
-
-
-
76 Asian Banker Research Report
The Phases Of Core Banking Replacement
Reference Implementation Methodology
A comprehensive implementation method may be the one that follows:
Comprehensive Implementation Chart
Conguration Denition
Interfaces
Data Conversion
Coexistence
Product
Rationalisation
System Change
System
Customisation
System
Conguration
Conduct
Gap
Analysis
Resolution
Business Change
Delta Analysis
Conguration Analysis
Integration
Process
Rationalisation
Pilot
Planning
Train Pilot Users
& IT Ops
Pilot Site
Preparation
Dress Rehearsal
Convert
Pilot Data
Pilot End-user
Support
Application
Support & Fixes
Pilot
3
Pilot
Go/No Go
Update Procedure
Manual
Prepare User
Guides
Local
Customisation
Core
Customisation
System
Conguration
Interfaces
Data Conversion
Coexistence
Prepare
Training Plan
Prepare
Training
Materials
Train-the-
Trainers
System
Integration
Testing
Operations
Testing
Business
Solution
Testing
Business Build
System Build
Integration Build
Training
Preparation
Testing
Product Designs
Process Designs
Local Customisation
Designs
Core Customisation
Designs
Conguration Designs
Interfaces Designs
Data Conversion Designs
Coexistence Designs
Business Design
System Design
Integration Design
2 Sign O Design 1 Sign O Delta
Phase 1:
Delta Denition
Phase 4: Pilot
Implementation
Phase 3:
Build & Test
Phase 2:
Design
Source: Immacon SOBIT Methodology
Asian Banker Research Report 77
The Phases Of Core Banking Replacement
4.6 Phase 4 Deployment
4.6.1 Deployment process
Objective: Enterprise-wide rollout of the rened future state operation.
Core Banking Deployment
Sign Off
Business
J ustification &
Blueprint
Selection
Delta Driven
Implementation
Deployment
Project Stages
Training
Change
Mgmt &
Comm
Go Live Fine Tune Logistics
Source: Immacon Research
After the successful completion of the pilot, the bank is ready to execute
the roadmap for deployment of the pilot operation to the whole enterprise.
To do this, a number of important planning tasks need to be updated and
nalised:
Logistics Managing logistics is critical for the rollout of a new core
banking solution to the branch network. The logistics include rollout
sequence (where, when, how many), possible changes to branch
layout and bank image, and update and/or replacement of hardware
and infrastructure software. It also includes the planning and execution
of training logistics for the enterprise-wide deployment. The bank may
need the hardware to rapidly build and dismantle mobile training branch
environments for hands-on systems training.
Training We have discovered that once the new core banking system is
ready for rollout, training is one of the most important activities required
to successfully deploy the new world on an enterprise-wide scale. To
do this, the banks project team must ne-tune and update the training
plans and materials taking into account the lessons learnt from the pilot
deployment.
Change management & communication We have found in our
assessment of successful re-engineering and transformation projects
that effective change management is essential to obtain buy-in and
Enterprise-wide rollout of
the system poses critical
challenges, demanding careful
planning and caution at each
stage
78 Asian Banker Research Report
The Phases Of Core Banking Replacement
acceptance of the new operation throughout the enterprise.
Change management done right is a very involved programme touching
every level of the organisation, from the CEO to the end-user in the
branch. Successful change management for a project as complex,
high risk and high prole as a core banking enabled transformation can
ultimately only be led by one person: the CEO. The chief executive is
supported in this task by the entire senior management team of the bank.
It is critical here that management not only walks the talk but also leads
by example.
Communication of the change is divided into two parts: internal and
external. Our analysis shows that the effectiveness of the communication
can be signicantly enhanced through the use of multimedia technology.
Usage of these tools ensures consistency in the message and rapid
deployment to the enterprise and public alike. The bank will need
different communication programmes depending on the audience they
want to address.
Go live We have seen that successful deployment is normally conducted
through a carefully prepared rollout plan which clearly identies the timing
and sequence of each task. The rollout is undertaken by specially trained
rollout teams which, among other things, conduct a train the trainer
programme in their respective rollout clusters. A best practice analysis has
shown that it is more effective to train key branch employees as trainers
for their respective units, than make external trainers responsible for
the training deployment. This approach is an integral part of the change
management programme and fosters ownership and accountability.
The employees are likely to pay more attention to the tasks if they know
that they will have to train their peers and be accountable for all of the
predened deployment activities.
The implementation teams are usually supported by a 24/7 central
command centre, which coordinates and directs all implementation
activities and has one or two rapid deployment teams available to be
dispatched to support trouble spots. The drawback of this approach is
that banks will be required to do a lot of methodical planning, conduct
massive training of key and branch employees and be held accountable
for the results.
Fine tune The nal activity in the deployment stage is the ne-tuning
of the operation based on feedback received during deployment.
Successful organisations have gradually turned this ne-tuning activity
into a continuous improvement programme managed and led by former
members of the rollout team.
Coexistence poses
considerable challenges
demanding complex and
strategic planning
98 Asian Banker Research Report
Core Banking Replacement Building Blocks
Coexistence Implications
Coexistence Implications
how does the bank operate
while accounts are
progressively converted to the
new core banking system?
how will inter-branch
transactions be handled
during coexistence?
how will the call centre
service requests during
coexistence?
how will ATM transactions
be processed during
coexistence?
how will other online
interfaces be processed
during coexistence?
how will incoming batch
interfaces be processed
during coexistence?
how will outgoing batch
interfaces be processed
during coexistence?
how will sweeping and
other features be
processed during
coexistence?
Branches Call Centres
Batch Interfaces
(Outward Clearing)
Other Implications
ATM Transactions
Other Online
Interfaces
Batch Interfaces
(Inward Clearing)
What is Coexistence
Source: Immacon Research
Asian Banker Research Report 99
Core Banking Replacement Building Blocks
5.4.1 Branches
In most banks, the branches account for the bulk of customer-facing
transactions. A key question to be answered here is how the bank wants
to treat the different types of possible intra-branch transactions. As most
affect the customer and the banks relationship with him, we believe
that it is important to have business involved in all of these discussions
and let business make the nal decision on how to proceed. After all,
business will know its customer better than IT does. There are a number
of options:
Branches During Coexistence
Old branches can access new accounts Yes No No
New branches can access old accounts Yes Yes No
ATMs can access all accounts Yes Yes Yes
Development eort / risk High Low None
Feature
Option 1
2-way Support
Option 2
1-way Support
Option 3
No Support
Coexistence Options
Old Branch New Branch
Customer has account in a
new branch and wants to
transact at an old branch
Customer has account in an
old branch and wants to
transact at a new branch
Source: Immacon Research
At rst glance, the two-way option may look like the best choice. However
we understand that it comes with a high cost for building the coexistence
interfaces. After analysing transaction volumes, banks may nd it
worthwhile to consider option 3, No Support, as a feasible alternative.
In our review, we learnt that business usually understands and supports
this approach for standard branch services (e.g. deposits, withdrawals
and transfers). The business rationale is that the potential inconvenience
is only for a limited time and can be managed through good customer
communication, especially where there is low to moderate transaction
volume. Our research indicates that if the bank is replacing its front-end
system and core banking system at the same time, option 3 is preferable
because it reduces the need for temporary integration between the old
front end and the new core banking system and between the new front
end and the old core banking system.
Competitiveness through
exibility and cost effectiveness
are considered essential for
growth
Small banks can take
aggressive approach by
adopting new-generation
technology and big bang
deployment
Asian Banker Research Report 129
Unique Considerations
integration through a single product and vendor (which may be difcult
for the scale of operations of a large tier 1 bank). Outsourcing is another
viable and practical alternative for many, if they can overcome the
security constraints.
We recommend that banks look for packaged solutions that have the
capability to meet their future needs. The customisation requirements
for small banks are generally less complex and hence customisation of
the front end may sufce. The focus of these banks is likely to be the
completion of the replacement project not only in minimum time but also
at a low cost.
Implementation is less challenging than for a large retail bank. While
we recommend the phased approach due to lower risk, the big bang
approach may also be feasible in the case of a small bank. This is
largely because the level of complexity in its processes and the scale
of its operations permit the bank to adopt new technology aggressively.
However rationalisation of processes and products is necessary for
optimum returns from the project.
Japan
Banks in Japan are struggling
with rising maintenance
cost and scarcity of trained
manpower
142 Asian Banker Research Report
Country Trend Analyses
systems that typically would need upgrading or replacement to reduce
complexity and improve efciency. Ageing systems and competitive
pressures are likely to bring about increased activity on the core banking
front over the next few years. Interestingly, a notable trend has been the
formation of smaller new-generation banks in J apan which tend to look
at new-generation technology.
Indications are there but a substantial shift towards undertaking this
risky venture is yet to be seen in this country. According to one leading
vendor in the region, J apan market will move in 2-3 years. They have
not reformed their nancial services sector yet. It is coming very slowly.
Once it is done, then we will see a change in reforms, change in attitude
in both public and semi-public sectors. Nothing in J apan happens
quickly.
We believe that technical advancement among banks in Korea has
reached integrated core banking and robust middleware. Till a few years
back, most banks in Korea used mainframe-based legacy systems. But
in the last few years, there has been an increasing shift towards UNIX-
based systems. The new regulatory environment requires banks to have
stringent capital coverage and risk management policies. These new
rules, high cost of maintenance and ageing technology are believed to
be the critical factors driving the shift.
Competition in the market is intense and banks need to be efcient and
cost effective in order to gain an edge. For this reason, most banks
are looking for architecture that not only meets their current business
requirements but is also scalable to cater to future growth. Nonetheless,
the complexity of tasks involved in replacement and integration is a key
deterrent for most banks. Historically banks have preferred to build their
systems in-house, but we are seeing an increasing shift in favour of IT
companies.
Taiwan is one of the few countries where there was a sudden surge
of activity in 2005, with four banks going for core banking deals as
compared with 2004 when there were none. We believe that most banks
still lack the condence to change from legacy systems, but competitive
pressures are forcing them to look for newer-generation technology.
Our research shows that technical advancement in the banking sector
of this country is currently at data centralisation and integrated core
banking. Now the banks are poised to take the leap towards integrated
CRM in order to achieve total customer centricity. As there is already
a level of technological sophistication among these banks, they do not
feel the urgency to take a replacement decision, but competition and
Korea
There is increasing shift
towards new-generation
technology among Korean
banks
Taiwan
Taiwan offers a good
opportunity to IT companies
with its increasing shift towards
open-end technology
Asian Banker Research Report 143
Country Trend Analyses
consumer demand have been driving the shift.
Recent core banking replacement decisions have been in favour of the
UNIX platform. However, in most cases, a critical consideration has been
the ability to suit the unique requirements of language and business
culture in Taiwan. The latest prominent deals include Cathay United
Bank by TCS-FNS and Ta-Chong Bank by I-ex.
Conclusion
Process restructuring and
product rationalisation should
accompany the process
Asian Banker Research Report 155
10.2 Conclusion For Vendors
Summarising Success Factors for Vendors
Reputation, track
record
Partners in projects, not just
vendors
International quality standards
meeting local needs
Technical enhancements
Long term commitment to business
Source: Asian Banker Research
For long-term success, it is essential that service providers see each
project as a long-term relationship. Besides maintaining high technical
standards, they need a track record of successful implementation. Every
project has its unique characteristics and requirements which need to be
addressed with utmost diligence.
Having the right people with domain and business knowledge to suit
the local requirements of individual projects is essential for successful
implementation. An army of men cannot replace a few critical people.
Needless to say, the technical ability and track record of the vendor
are most critical in the selection process. Service providers must invest
continually in technical advancements. Equally important is catering to
the local conditions while providing international quality in the product
and services.
Ensuring that deliverables are in line with the expectations of the bank
requires clear communication at all levels. This would involve user
training and the challenging task of managing process and work-culture
change within the bank.
There should be fool-proof testing at each step in addition to other
strategies for risk minimisation. Successful implementation of each
project is a step in building the market presence and reputation of the
service provider.
Long-term commitment to
enhance product quality and
partnership role in project are
crucial for success of IT service
providers
View project as long-term
relationship
Employ right people with
domain knowledge
Ensure deliverables and
expectations match through
effective communication
156 Asian Banker Research Report
Conclusion
A1
Appendix I
Case Studies
Case Studies
A1.1 State Bank of India
A1.2 Union Bank of Philippines
A1.1 State Bank of India
SWOT Analysis
Strengths
Threats
Weaknesses
Opportunities
In-house IT capability to implement the
project. Strong internal teams
Almost non-existent previous core banking
system, easing integration issues
Vendor has previous experience in country
and strong alliance with system integrator
System Integrator is familiar with unique
business requirements in India
Highly complex task with almost 8,000
branches
Implementation time-consuming due to
wide reach
Large human resource requirement for
in-house implementation
Existing independent branch system
Core banking replacement project
extended to 4 associated banks
Increased competitiveness and improved
efficiency
Centralised system that gives single view
of customer and frees resources for better
service
Difficult to change processes and work
culture in a 200-year-old organisation with
branches extending to remote areas
Lack of ownership of data at the user level
10 million transactions per day. Scale of
data migration huge with zero margin for
error
Source: Asian Banker Research
State Bank of India (SBI) is the largest commercial bank of India with
8,000 branches across India and a global presence in 20 countries. This
two-century-old organisation has not only a wide spread but also a deep
reach into the interiors of the country. Till a few years back, it was working
on basic branch automation and a rudimentary legacy system. However,
competitive pressures from private sector banks and the opening up of
the economy made it necessary for the bank to purchase technically-
advanced and cost-efcient systems that could meet its functional and
technical requirements.
Under the old system, the bank had computerised 2,050 branches on a
standalone basis. Thus each branch had its own independent system,
which it maintained and managed. The system was Bankmaster (now
under Misys) and it was used in 75% of the banks branches. However,
as each branch was independent, consistency and integration of systems
within the bank was not possible and customers could not freely approach
other branches of the bank.
Inherent problems with the existing system and the competitive climate
in the industry thus forced the bank to undertake the massive project of
Customisation and
implementation process
The deployment was phased
The change management
160 Asian Banker Research Report
Case Studies
previously where there was an entrepreneurial feeling as they managed
the system and customised it to meet unique local requirements. This
demanded a strong acceptance of change management within the bank,
with staff roles changing and business processes being restructured
across all users. SBI met this challenge through strong internal teams
and effective communication. The change process is likely to continue
even after the new system has been fully implemented.
By mid-2006, 85% of the banks business would have been transferred
to the new system. By March 2007, SBI expects to have rolled out its
core banking system to almost all of its domestic branches and those of
the four associate banks.
Despite the substantial cost, time and resources employed in the process,
we believe that it was imperative for the bank to shift to a newer system.
Before the change, its attrition rate was high with private banks garnering
huge market shares thanks to their technical advancement. The cost-to-
income ratio of the bank is already showing signicant improvement.
We expect this new system to give a strong boost to the banks future
growth. However the effectiveness of the system for such a large bank
can only be seen after it has been implemented across all branches.
For its international operations, the bank recently chose Infosys to
provide a single integrated solution across all branches as it felt that
TCSs resources were already tied up with its domestic project. It is
also believed to be implementing a new trade solution. In addition, the
bank is undertaking a business process restructuring exercise in order
to improve its efciency. With all these initiatives, SBI should remain a
formidable player and retain its stronghold in the Indian market.
The outlook
Asian Banker Research Report 161
Case Studies
A1.2 Union Bank of Philippines
SWOT Analysis
Strengths
Threats
Weaknesses
Opportunities
Relatively small bank with 111 branches,
making replacement less complex
Willingness and adaptability to change
from mainframe legacy to new technology
Willingness to take risks to improve
competitiveness
Data migration from multiple existing
systems and integration was complex
Data cleanup was difficult as Finacle
required some parameters which old
system did not have
Lack of in-house IT manpower. Cost also
an issue
Centralised the back-office operations with
the new system
Growing economy. Acquisition of new
customers and markets possible through
differentiation of products and services
Availability of multiple vendors for open
technology made choice easier
Lower TCO in new technology
Shifting from legacy to open system
required change in processes and
business culture
New system required extensive user
training and acceptance at all levels
Big bang approach has higher risks. Tried
for first time in the country
Source: Asian Banker Research
Union Bank of Philippines (UBP) is a relatively small bank with an asset
base of $1.98 billion and 111 branches in the country. However it is among
the top ten banks in the Philippines, with a history of fast growth thanks
to its tech-savvy approach. True to its reputation, UBP has become the
rst bank in the country to shift from mainframe to open platform.
The bank had an existing legacy system (from Systematics, running on
refurbished mainframes) which was ten years old. The key problems
faced by the bank included high operational costs and difculty in building
interfaces. The bank then realised the need for a simpler system where
interfaces are not an issue and total cost of ownership is lower.
The change was also prompted by the need to acquire business agility
coupled with improved efciency and to have the ability to differentiate
its products and services. Being in a competitive environment, the bank
worked on a tight margin hence cost was an essential consideration.
With these issues in mind, the bank started exploring the possibility of
shifting to a newer technology platform in 2002.
Lessons learnt
The outlook
164 Asian Banker Research Report
Case Studies
A2
Appendix II
An Average Request for
Proposal
An average RFP runs into 70-80 pages, with the bank requiring
vendors to submit a whole range of information which would
assist the bank in evaluating the suitability of the system for its
requirements. While some in-depth information is essential to
analyse the product and the vendor, we believe that unnecessary
information simply increases the complexity of the process. Banks
often forget that somebody with the right breath and depth of
knowledge needs to read and analyse all the responses to an RFI
or RFP. For a vendor providing this extent of information, it usually
becomes an unwarranted exercise. For this reason, we believe
that banks should ask for only relevant detailed information. In-
depth critical information gained through a few questions may be
more useful than a laundry list of non-essential information.
What follows is a sample of the table of contents of an average
RFP. Often, the RFP is accompanied by a worksheet that
requires vendors to provide information on 800-900 parameters
which include vendor prole, technology, product, customer
information system, general information, security, and loan and
deposit system information. However, as this worksheet is very
extensive and specic to each banks requirements, we are not
providing a sample of it in our report.
Table of contents
A. Introduction
1 Bank prole
1.1 Vision
1.2 Mission
1.3 History and background
2 Bank products and services
3 Purpose
4 Eligibility requirements
4.1 Eligible vendors
4.2 Eligible products and services
4.3 Cost of this request for proposal
5 Denition of terms
B. Request for Proposal (RFP) Process
1 RFP contact details
2 Overview of the RFPprocess and schedule
2.1 RFP process
2.2 RFP schedule
3 RFP documents
3.1 Clarication of RFP documents
3.2 Pre-submission conference
4 Vendor proposal preparation
4.1 Language
4.2 Statement of compliance
4.3 Vendor proposal conditions
4.4 Vendor proposal validity
4.5 Format, signing and packaging of vendor proposal
4.6 Pricing
4.7 Payment terms and conditions
5 Submission of the vendor proposal
5.1 Sealing of the vendor proposals
5.2 Reserved rights
6 Vendor proposal Evaluation
6.1 Condentiality of the evaluation process
6.2 Clarication of vendor proposal
6.3 Examination of vendor proposal and determination of
responsiveness
166 Asian Banker Research Report
Average Request for Proposal
Average Request for Proposal
6.4 Evaluation methodology
6.5 Banks right to accept or refuse any vendor proposal
7 Award of contract
7.1 Post-qualication
7.2 Award criteria
7.3 Reserved rights
7.4 Notication of award
7.5 Signing of the contract
7.6 Performance security
7.7 Corrupt or fraudulent practices
C. Commercial Terms and Conditions
1 Standard terms and conditions
2 Other terms and conditions
2.1 Responsibility
2.2 Delivery
2.3 Storage
2.4 Transportation, marking, labeling, packing and shipment
2.5 Transfer of risk and title
D Background and Vendor Proposal Requirements
1 Background and vendor proposal requirement
1.1 Background
1.2 Overview and scope
1.3 Architecture
1.4 System demonstration requirements
1.5 Reference site visit requirements
1.6 Pilot testing requirements
2 Implementation plan
3 Maintenance and support
4 Vendors expectations from bank
E. Financial Vendor Proposal Requirements
1 Overview
2 Price
3 Payment terms and conditions
3.1 Payment milestones
Asian Banker Research Report 167
3.2 Payment due dates
3.3 Payment conditions
F. Statement of Compliance (Requirements Matrix)
1 Answering the requirements matrix
2 Requirements matrix
3 Executive summary
3.1 Instructions
3.2 Summary of technical proposal
4 Organization and support
5 Application and support
6 General features
7 Business requirement
7.1 Customer information system
7.2 Savings and time deposits system
7.3 Checking deposits system
7.4 Loans system
7.5 General ledger system
7.6 Branch automation system
8 System demonstration requirements
9 Reference site visit requirements
10 Pilot testing requirements
11 Implementation plan
11.1 Implementation approach and methodology
11.2 Scope of work
11.3 Implementation schedule
11.4 Implementation personnel
12 Maintenance and support
13 Vendors expectations from bank
14 Appendices
G. Attachments
1 Glossary of terms
2 RFP forms
2.1 Performance security
3 Standard terms and conditions
168 Asian Banker Research Report
Average Request for Proposal