When’s the last time you visited your local bank branch and spoke to a human being? How about talking to your banker over the phone? Can’t remember? Well you’re not alone and don’t worry, it’s not a bad thing.

The days of operating physical branches with multiple staff for customer service are being replaced with more modern and convenient mobile banking applications. These allow consumers to deposit cheques from the phone, apply for a mortgage and sign closing documents electronically, eliminating the need to go to an ATM and get physical cash by using mobile payment solutions like Apple Pay. 

In fact, a new report titled ‘Bricks + Clicks: Building the Digital Branch,’ from Jeanne Capachin and Jim Marous takes an in-depth look at how banks and credit unions are changing their branch and customer channel strategies to meet the demand of today’s digital banking customer. 

These market trends are dominating the CEO and CIO agenda. At the 2015 IDC Asian Financial Congress event in Singapore, the digital journey for the next generation bank was a major agenda item.

According to IDC Financial Insights, global banks will invest $31.5B USD in modernisation of core banking systems to enable these services, improve operational efficiency, and better position these banks to compete. However, core banking modernisation initiatives are complex, costly, and fraught with risks.

Complexity

Legacy core banking platforms are on average 15-20 years old, some even older for those larger firms in more established markets. Many are homegrown and most if not all have had custom features added to them over the years to support new services, products, and deliver a competitive differentiation in the market. These systems are also inter-connected with other front, mid, and back office systems. As a result, replacing them is a huge effort regardless of size of institution.

The effort to remove these systems, leaving the infrastructure in tact, can be likened to surgery. It’s complex and delicate in operation with high stakes. Core banking replacement projects can and often take years to complete and require the ability to gain access to required data locked away in proprietary databases and logic used to process data through custom scripts. Source data can often be cryptic to understand and migrating data that has to live in the new system has to be translated, transformed, and cleansed to ensure it is fit for use by the business. That means getting access to the data, identifying and cleansing bad records, seamlessly transforming data from old to new, and ensuring it is available where you need it during the cut over period. 

Costly

The data migration and conversion processes of any core banking conversion project are also very expensive. Converting legacy formats, mapping code tables from old to new, cleansing data quality errors and consolidating and conforming data values into the new system, is a lengthy process. In many cases, there may be more than one core banking system to migrate for firms who have gone through mergers and acquisitions, where those systems were left alone to run. The migration work required often involves an army of developers, business analysts, and operations teams’ and takes weeks if not months to figure out what data exists and determine where it needs to go from there.  

Unfortunately, most of that work costs, in fact over 30% of the work associated with the $31.5B in legacy modernisation investments will be tied to hand coding these processes using COBOL scripts, PL SQL, and other coding languages. That’s $9.45B in wasted IT spend vs. adopting purpose built tools to help automate the data migration, consolidation, and synchronisation processes.

Risky

The risks associated with large core banking modernisation projects are many, from cost overruns caused by hand coding to delays in launching the new system. One area of risk that is often ignored until the inevitable happens is the need to protect sensitive data during the testing and development process. We are talking about test data from legacy systems used for testing and development purposes and leveraging data that contains personally identifiable information (PII) (e.g. names, addresses, social security, passport numbers) and non-PII (e.g. credit card numbers, account numbers, etc). IT teams and in many cases, system integrators that leverage off shore development teams need access to usable test data from legacy applications to complete their quality control and development processes.

Though many banks do mask sensitive data used for testing, many resort to custom masking processes using scripts to mask sensitive data that often loses the relationships between data that is related or derived from each other. For example, masking a 16-digit credit card number is important, however the bank identification number (BIN) or first 6 digits needs to be masked with the same logic to allow banks to analyse the BIN and product descriptions for the credit card customers they serve.

The new era of digital banking is already here. As banks replace their core banking systems to meet the market needs, they will need to invest in the right data management solutions to avoid the cost of hand coding and protect customer information. In 2015 the cost of hand coding could total $9.45B (30% of $31.5B) in wasted IT spend. Whereas every breached record will cost firms $194 USD per record, according to the 2014 Ponemon Institute.

How “ready” will your core banking systems be?