Beyond Core Banking

Indian Banks are evaluating analytical technologies to deal with the data flood being generated by their core banking systems. Integration glitches are slackening the pace of implementation. By Mehak Chawla

A decade back, almost every bank in the country, irrespective of its size, was busy structuring the skeleton of its Core Banking System. Today, core banking is a fully evolved and mature entity for the banking industry. However, one thing has not gone as planned. When core banking came into being, banks expected it to be a panacea for all of their ills. This expectation soon proved to be overtly ambitious. Although core banking did sort out a lot of issues for banks, it didn’t cover all aspects and left some corners unlit.

As a result, what we have today is a core banking system that is a backbone of sorts for banks. Core Banking Systems are spewing data in massive quantities and no one is sure where this data should reside or what can be done with it. Therefore, there are a host of technologies that are coming up around the Core Banking Systems (CBS) of banks.

It is estimated that Indian banks have collectively spent around Rs. 10,000 crores on the road to CBS. Back then, there was no attempt to quantify returns. Today, in stark contrast, banks are prudently evaluating the next stage of investment in IT. RoI isn’t being thrown out of the window and lowering CAPEX has become a prime concern.

Technology is no longer a matter of choice for the banking industry. With CBS forming the technological spinal cord of most banks, the focus today is on technologies that aid in customer retention and result in tangible benefits in an era of stiff competition. What we are seeing is the entry of business analytics and other integrated systems into the banking arena. Since some of these technologies require sophisticated environments to operate in, they are forcing banks to modernize their CBS.

According to IDC Financial Insights, the banking industry in the Asia-Pacific is poised to implement major core banking system projects in the next three years, ushering in a new wave of significant spending on technology especially among the top tier institutions. The report highlights that at least 32 of the top 120 APAC banks would undertake significant changes to their current CBS from now to 2015. A good number of these changes could be triggered by the regulatory environment that the banks find themselves in.

Leveraging CBS

G Ramachandran, DGM-IT, BPR and MIS, Bank of Maharashtra, remarked that CBS was now a hygiene factor for Indian banks. “What we need to do now is to leverage the CBS and create differentiation,” he remarked.

Banks are busy building systems that will complement the CBS. There are lots of gaps that core banking left and banks are gearing up to bridge these. Rakesh Sinha, Director – Banking & Capital Markets, Microsoft, said, “A CBS is ubiquitous nowadays. Every bank has one. The focus has shifted to bridging the gaps that CBS left behind. For instance, a lot of these systems don’t come with lending suites, so these are being implemented separately.”

Repco bank implemented an in-house CBS and is now implementing various applications atop it. Elaborated R Rajagopal, GM-IT, Repco Bank, “We have implemented a Loan Origination System (LOS) to enable a paperless loan sanction process. The entire loan sanction process is now online and travels from the branch to the head office. After the loan is disbursed, all data related to it is automatically transferred to the CBS for further maintenance of accounts.”

Other such modules are being built on top of the CBS and, since prepackaged solutions don’t fit the bill for most banks, there is also a lot of code being written in the Indian banking industry.

According to Ajoy Chourasia, Business Unit Head, BFSI, Logica India, core systems such as Treasury, Cash Management System, Branch Management System etc. are now interfacing with the CBS. However, he was of the view that these attachments were also increasing the burden on core systems and pressurizing banks to evaluate ways to streamline the traffic between these supplementary systems and the CBS.

Data trigger

While the CBS has evolved into an innovation platform for some banks, questions around data remain. CBS generates a humongous amount of data and banking IT heads are finally reflecting upon how to best utilize these huge data clusters.

SBI is in the process of building a state-of-the-art Data Warehouse, which will provide analytical management information to Business Units—how to best manage our NPAs, cross-selling & up-selling trends, campaign management etc. “The implementation of a data warehouse and BI are the top most business driven IT priorities of the bank today,” commented P Pradeep Kumar, Deputy Managing Director & CIO, SBI.

“In the movement from branch-based computing to CBS, a lot of data is being generated. Banks need to automate, harness and analyze this data,” opined Ramachandran of Bank of Maharashtra. Moreover, in order to innovate over their core systems, banks need to constantly invest in modernizing and upgrading their systems, which is an uphill task.

Suprakash Chaudhuri, Vice President, Business Solutions, Database & Technology, SAP India, said, “The primary challenges that the banks are facing today with respect to core banking are that the solution does not scale well and has outgrown the capabilities or that there has been a lack of sufficient support from the vendor with an inadequate road map for the growth of the CBS.”

These factors have forced banks to look at technologies like data warehousing and BI.

According to Chourasia of Logica India, “CRM, data warehousing, BI, integrated payment hub, risk management (credit, market and operational risks) and regulatory reporting are the key focus areas for many Indian banks today.”

Though these data intensive technologies have not yet been implemented in banks, there are a lot of tenders floating around for data warehousing and experts believed that high end analytics would follow. There are an array of approaches that banks are following with respect to expanding their gamut of technology. While some are customizing CBS in order to absorb their growing automation levels, others are building atop vanilla systems or buying packaged software for other needs and linking back them to the CBS.

Anuj Vaid, GM and BFSI Vertical Head, Wipro Infotech, commented, “We see some banks have customized their CBS for meeting their additional business needs while we have also seen banks that want to keep CBS as a core transactional system while moving onto more specialized systems in areas where they want to differentiate from their competitors.”

Core banking managed to achieve one crowning glory for the data intensive Indian banking industry. It has tamed the reams of papers and put them into digitized form while also automating the basic banking back-end. It is this automated data monster, growing more ferocious with the aid of humongous unstructured data, that banks are up against now. It is only a matter of time before banks would be cornered into a situation where a host of data solutions would become imperative.

Sinha of Microsoft suggested, “What we have is a huge amount of data and we have to see how to use it. As a result BI, DW and CRM are going to be the next technological waves in banking. Most large banks have huge repositories of data but they are not utilizing the same.”

Added Vaid of Wipro, “We are witnessing a shift in fabric of technology with information changing from structured to unstructured such as data on e-mail or mobile phones. Soon IT decisions and the impact of IT will not be as predictable as it is today and benefits will only accrue to banks that invest in the right technologies ahead of others.”

What is happening then is that CBS is becoming a ladder to more customer facing applications such as CRM, business analytics and data warehousing. Although many banks do have what one can loosely define as a data warehouse, they aren’t able to harness the data. For this reason, banks are looking to other technologies to sit on top of their CBS and harvest analytical data for predictive analysis, post-facto detailed reports and mobile applications.

Haragopal Mangipudi, Global Head, Finacle, Infosys, said, “CBS is becoming a stepping stone for a bank that wants to optimize its core banking further in order to better leverage the data.” With mobility and data analytics predicted to be investment magnets for the banking industry in the coming year, application vendors and system integrators are rolling up their sleeves. The implementation cycle, however, is more complex than it sounds.

Unlike American banks that had to phase out mainframes, Indian banks don’t face the problem of legacy infrastructure. Nevertheless, the integration of various technologies into the CBS remains challenging.

Integration pains

If there’s a single word to describe what is happening beyond core banking, it is integration. There are newer systems springing up for all banks but eventually they have to merge into a CBS. This integration is easier said than done as, in order to talk to the systems, the foundation that is the core banking system, needs to be robust and scalable. These characteristics are not easily found since a lot of banks deployed their core systems almost a decade back.

Aubrey Corda, Director, Financial Services Sector, IBM India and South Asia, detailed some integration pain points. “When CBS was implemented the integration between applications was either file-based or application-to-application (or point-to-point), resulting in a complex maze that multiplied efforts, had single points of failure with duplication of data. All of these had an adverse impact on the bank’s agility, systems availability and responsiveness to the business. In order to overcome these issues, banks are increasingly looking at transformation through rationalization of their application portfolio (APM), adopting an enterprise architecture and leveraging SOA.”

With a lot of effort and investment going into integration, popular systems like new treasury management systems, risk management systems and some ancillary systems such as card management or loan origin system are increasingly being linked back to the CBS. The IT heads of banks are grappling with integration challenges. Rakesh Sethi, Executive Director – IT, Punjab National Bank, felt that linking systems like card management to CBS was a big challenge because all the systems had different orientations.

Vendors and system integrators are also facing similar issues. Chourasia of Logica said, “In the last decade or so, the infrastructure within banks has become heterogeneous. Interoperability is now a big issue. Measures such as the implementation of an Enterprise Service Bus (ESB) are being considered to ensure centralized communication with a single point in order to manage all message protocol and format conversions.”

With mobile and Internet banking entering the banking arena from the sidelines, the consolidation of these has become a challenge for banks, especially given the security angle. Kartik Jain, EVP and Head, Marketing, HDFC Bank, remarked, “Keeping up with rapidly changing technology is a key imperative for a bank especially since security cannot be compromised upon at any point.”

Chet Kamat, CEO & Managing Director, Oracle Financial Services Software Limited, concurred that security was a key concern. “Security being the most crucial concern for the adoption of virtual banking, the presence of more sophisticated and secured IT systems is becoming a necessity for banks.”

It is precisely the security aspect that is stopping banks from hopping onto the Cloud. Banks are still averse to the idea of hosting any of their systems outside of their environments. The public Cloud comes with security concerns and the private Cloud is an expensive proposition. Banks are, however, taking baby steps towards the Cloud. There is a drive to work in consortia to either jointly host a service or to take a white labeled service from a larger bank. For instance, Rural Regional Banks are integrating with larger banks in order to process their domestic payments.

Despite the security issues, there is substantial optimism around the Cloud becoming the mainstay of the banking industry, sooner rather than later. As per Sumanth Tarigopula, Director, Application Services Global Delivery India, Enterprise Services, HP, “The next big technology wave in banking is arriving in the form of Cloud computing. Although reducing cost is a goal, the primary goal is to improve agility and flexibility in the business. There is now a wide and growing set of sourcing options for Cloud computing in the financial services sector, most of which are determined by service level agreement requirements and by the need to secure and protect customer data.”

Besides efficiency and security, there is another big element that is driving technology investments in banking and that’s compliance.

Regulatory landscape

Regulations have been the spur for the adoption of technology in this industry. It started with core banking and now RBI is mandating Automated Data Flow (ADF) and is pushing for data warehousing systems. Consequently, many banks such as UBI, Canara Bank, Bank of India etc. are in various stages of initiating tenders for data warehousing and business intelligence.

The regulator expects banks to have proper systems for “credit, market and operational risk management.” The reporting is being standardized in XBRL format using taxonomies. The mandate from the RBI is to have the regulatory reporting and ADF as part of the overall data warehousing system that the banks need to have in place. These mandates are leaving banks with little choice except to refine their data warehousing systems and introduce supporting analytics.

Observed Kamat of OFSS, “Banks need an integrated approach that combines a diverse set of compliance and risk solutions to help them address not only present regulatory needs but also emerging risk and regulatory requirements and those that are likely to be framed in the future.”

Rajagopal of Repco voiced the view of banking CIOs, “The RBI is going to introduce a lot of new policies and banks can face some problems in linking these systems to the CBS server. For instance, a recent mandate requires banks to change customer accounts from one bank’s branch to another bank’s branch without a change of account number and without applying KYC norms (much like MNP in the telco universe). In order to implement this, banks need provisions in their CBS software to accept or transfer customer accounts.”

These regulatory requirements are forcing banks to stretch their CBS further and injecting them with additional technology seems to be the only option. Chaudhuri of SAP India commented, “More than ever, banks would like to see their CBS help them cope with the onslaught of new regulations and the new reporting requirements that come along with the new rules. This requires better information management, common data models and integration with core analytics and reporting systems.”

The next wave

It is apparent that the next rush of tech investments in banking will go into technologies around big data, be it data warehousing, advanced predictive analysis or Cloud computing. The vanilla deployments will no longer suffice and banks would need to reengineer their central systems like core banking and CRM. Sinha of Microsoft opined, “There are two parts to CRM. One is the operational CRM, which most banks are already running. The other is analytical CRM that comes out of your DW and does post-facto campaign analysis. That is where the focus is going to shift now because a rudimentary CRM will not work any longer.”

With ADF coming into action, data analytics are expected to be right at the top of banks’ priority lists. The other technologies that will attract money are mobility and risk mitigation. Some initial investments are also being seen in machine-to-machine and Cloud computing.

Meanwhile, banks will continue to grow and deploy applications for additional processes like trading systems, loan and mortgage processing systems, risk management systems, general ledger, budgeting & planning systems, channel management systems etc.

Customer facing technologies, like applications for mobiles and tablets are also going to get some prominence on the IT budgets of banks. Quite a few banks have already started their mobility journey. Repco Bank is one such example. They are utilizing handheld devices to collect the loan deposit amount from the customers’ doorstep and are leveraging wireless technology to update the collection data instantly in the CBS.

For any customer-oriented organization, technology’s maturity curve should not and does not dictate the technology strategy. Technology has transited from being an enabler of business to being its strategic partner. As a corollary, all technological initiatives or strategies are intertwined with business strategies and organizations are focusing on greater alignment of IT and business.

“In this backdrop, the next technological wave will be driven by the enormous business demands raised to meet the customers’ expectations through financial inclusion, value added services for greater customer convenience through rich Internet applications, CRM, effective decision making through predictive analytics and robust information security and risk management through technology enabled models,” concluded Kumar of SBI.

While these other technologies enjoy their honeymoon phase with banking, their father figure, the CBS is also due for a revamp. One couldn’t expect any less for core banking, with all the burden of integration and innovation resting upon its shoulders.

mehak.chawla@expressindia.com