Spending on the Core Increases, But Not as Much as it Could

There's no shortage of changes that have IT departments at banks hopping — payments and risk alone stand to take a big chunk out of development resources. But what about the foundation underneath such projects? When it comes to core systems, banks are spending more on upgrades and modernization projects, but the largest banks are still trying to avoid massive, multi-year, nine-figure core overhauls, opting instead to incrementally modernize core systems to enable new digital delivery innovation and complex governance, risk, and compliance (GRC) initiatives.

"Clients want to interact with banks in a way that they haven't in the past. The game changer for banks is to offer personalized products via digital interactions," says Fiaz Sindhu, an executive with Accenture (ACN) Core Banking Services.

That's leading to an increase in large scale IT projects at banks that aim to make core systems work more efficiently across departments, provision tech resources more accurately, and modernize data management to accommodate added analytics to drive expanded compliance reporting and CRM to enable digital transactions and marketing.

"When a bank needs to deliver a personalized experience to clients or to create a bundled offer, modernizing the core can enable that," Sindhu says. "One of the constraints that banks have is their core platforms are siloed by product. By linking these systems together, you can get a closer view of what the client has."

While full core replacements, or "rip and replace" in industryspeak, are underway at a number of community banks, larger banks are stopping short of projects that large. But they are prepping core systems to handle financial service delivery that's more digital and mobile. "Banks are adding modules to increase functionality, but the transformations in North America and Western Europe aren't happening on the scale of other markets," says Stephen Greer, an analyst for Celent.

Among the major core projects underway at larger banks are Bank of America's migration of disparate core systems at regional markets to a centralized "model bank" and ING Direct's migration of its Australian unit's core banking applications onto the x86 platform to enable a "bank in a box" that gives the bank's developers the ability to replicate a virtual banking platform to patch, modify or extend to enable new functions.

Celent this week released new research that predicts the market for global core banking technology is expected to grow to $5.1 billion by the end of 2013, up from around $4.8 billion at the end of 2011. But most of that growth is coming from outside of North America and Western Europe. Asia Pacific alone accounted for $2 billion of the $4.8 billion spent globally in 2011 — more than double that spent in Western Europe and North America.

"In the emerging markets, where the bigger tech players are moving in, there's more activity than in the mature markets," Greer says.

He says that in North America and Western Europe, where most core systems are 20 years old or older, the prevailing projects are upgrades by the large core vendors such as Fiserv or FIS that allow banks to deploy mobile banking or risk management systems from those vendors, which have acquired the point solutions through a series of acquisitions of smaller tech firms. Other banks are engaging in projects driven by the vendors that reduce siloed systems by combining underlying platforms though middleware deployments.

"The large issue for banks is compliance. Analytics is starting to play a larger role in 'know your customer' regs, which also affects customized marketing. So you want to be able to get the information out of the core and be able to do analytics on that information," says Karen Massey, a senior research analyst at IDC Financial Insights.

Most legacy core systems have to be updated via patches to accommodate web-driven data analytics. "Some of these core platforms are 50 years old," Massey says. "Anytime you do something it impacts the core. Especially with the largest banks, they have to decide how to make changes to the core by using different middleware and wrappers to integrate with the core without having to change it."

Celent says Fiserv (FISV) and FIS (FIS) dominate the North American core banking market, along with small bank specialist Jack Henry (HKHY), which has picked up business from growth in core transformations at community banks. Outside of the U.S., the provider landscape is more diverse with Misys (MSY), FIS and ERI tackling projects at large banks that are trying to rationalize the disparate systems that often drive the main bank and subsidiaries in other countries. In Asia Pacific and Latin America, the market is wide open, with firms such as Temenos (TEMN), Oracle (ORCL), and Infosys (INFY) joining the aforementioned firms. Temenos and Misys are particularly strong in the Middle East, Eastern Europe and Africa — though a firm called Path Solutions has made inroads in the Middle East.