It’s a well acknowledged fact that the heart of banking today
lies in the sophistication of its technology and its application.
Having to adapt to the rate of change in technology world is
critical – not just to succeed, but even to survive in the
competitive landscape of globalized banking. The same has reflected
in the growth of IT investments: Banks have spent USD 750 million
in the last three years, notwithstanding the economic slowdown.
Core banking systems are the backbone of a bank, but they now
have to support a wider range of systems, applications and
databases as banks wrestle with business, customer and regulatory
demands. The expenditure needed to maintain increasingly aging
systems is steadily rising to a level whereby core system costs
account for 70 percent of a maintenance budget and well over 50
percent of all IT spending. The rush to have the systems changed to
more contemporary platforms, therefore, is not surprising.
While it is evident that IT investments of banks have grown in
general, we share here on how Cedar finds these to be different
now, and what are the emerging trends in the application
architecture, their associated technical platforms and the
supporting IT organization and practices that leading banks are
beginning to adopt.
Let’s first look at the winds of change sweeping the banking
industry which have impacted its technology backbone.
Changing paradigm – the new demands
on technology
In essence, there are four primary demands which the banking
industry has faced in the last decade that has had a major
influence on the core applications and their architecture:
- The 365-degree view of customer: Banks
have increasingly invested in understanding the customer and his
relationship holistically - across products, lines of business,
geographies and touch-points. Leave alone the regulatory angle to
knowing your customer and his transactions. This is far more
strategic. Establishing a single customer identity that helps map
his overall relationship value across all systems on a
‘real-time’ basis is a pre-requisite to drive service
levels, differentiated pricing structure and bank-wide loyalty
programs which are new mantras of retail banking. These have also
influenced the ‘service oriented architecture’ (SOA) of
banking solutions, which we will talk about later in this
article. Solutions have very visibly moved from being
‘product centric’ to ‘customer
centric’.
- Centralization of Operations: The more banks
expand their footprint, the more is the demand to have operations
centralized. This has emerged to be the favored answer for
controlling costs, maintaining quality and service levels, and
still sustaining the appetite for growth. This has also shifted the
focus from branch automation to centralized core banking
applications that have a high degree of parameterization and
scalability. Hence also the need for ‘universal banking
systems’ that addresses the need of front and back office of
the bank across all its verticals – corporate, commercial and
retail. Core banking applications have also begun to develop
further in the private banking space.
- New age products and services: From
segmentation based pricing structures, hybrid products, loyalty
schemes, pan-geography and multi-currency products, dynamic
interest rate schemes to raffle based deposit schemes, product
innovation has grown by leaps and bounds over the last decade and
expected to continue in future. What is important here is not
just the innovation of the product in itself, but the speed of its
implementation that has differentiated men from boys in the world
of banking technology.
- Advent of electronic channels: In a mature
market such as the US, more than 80 percent of the transactions are
being executed through non-branch channels across ATM, kiosk, IVR,
Call Center and Internet banking. The ATM per branch ratio is five
in the US, as compared to three in UAE or Qatar, and 0.6 in India
– which also indicates the growth that this area is likely to
see in the Asia/ME region over the next few years. Proliferation of
emerging channels and their increased sophistication has had a
significant impact on solution architecture and technology
platforms, the definitive demand for 24X7 services and the need for
Message oriented Middleware (MoM)