Canada: Pressure For Change

Last Updated: August 12 2011
Article by Mario R. Durigon and Ian Shelley

The idea that banks should invest in large-scale replacement of legacy systems has had some traction. Current core banking systems, replacement proponents suggest, are decades old and simply can't serve banks effectively anymore, on a host of levels.

Balancing the pace of core banking system conversion is key to long-term sustainable advantage.

Certainly, a perfect systems turnover would yield operational improvements and eventual cost reductions—but is that a realistic prospect? Is it even realistic for the majority of banks to implement wholesale retooling projects on systems that, in many cases, remain highly stable and reliable?

While the replacement case has been strongly made, there is growing resistance to the idea that it's an imminent industry necessity. Banks are asking whether the advantages, at this point, outweigh the risks. Even if legacy systems have obvious limitations, it may be better to manage current needs with modular sub-systems; develop a strategic long-term plan for the changeover eventuality; and allow conversion technologies, expertise, processes, and success rates to continue improving.

To make a decision that balances current system requirements and cost management with the eventual necessity of change, banks should consider the pressures driving change, key reasons to carefully evaluate the process, and steps to take to prepare for the future.

The Drivers of Change

The push to replace legacy systems is based on several arguments, including:

  • Aging workforce—Core technologies date back to the 80s, even the 70s. There are numerous inefficiencies, and as the current IT workforce retires, companies may be challenged to find staff that understands these systems enough to maintain and run them.
  • Technology/scalability—Legacy systems have difficulty handling the sheer volume and complexity of today's data streams, applications, and network demands. It is also difficult to incorporate new industry-standard technologies and customer-centric applications into these often customized systems.
  • Regulatory issues—As regulatory changes demand access to more and different kinds of information, legacy systems may not be designed to analyze the data as requested, requiring expensive workarounds and potentially risking non-compliance.

It's also possible that catastrophic events relating to system failure, such as fraud or personal data breaches, could affect ongoing operations, damage share price, or cause loss of consumer confidence.

Total Overhaul is Not Totally Realistic

The push for immediate change has waned, though, as a host of reasons to proceed warily have come to the fore:

  • Legacy systems are simply too pervasive and cross too many different lines of business and geographies to be changed all at once.
  • They are actually quite stable and reliable, supporting the major transactional operations for most banks.
  • In the current climate, the enormous cost of replacement would expose banks to risks they cannot afford, and that their stakeholders will not accept.

For these reasons and more, many financial institutions are discovering the wisdom of applying a multi-phased approach to systems replacement, taking careful steps to plan each small transition.

Consider the real-world example of a large Canadian bank trying to merge customer activity to provide customer service representatives with an at-a-glance view of each customer's deposit, investment, and loan activity. To achieve this objective, the bank needed to consolidate information from various legacy source systems, driving it to replace one of its core lending systems to ensure all new loans would contain the information required for proper consolidation. However, given the massive amounts of customer loan data being managed and manipulated, this changeover presented the potential of serious loss of profit, reputation, and customer confidence. To mitigate these risks, the bank chose to simultaneously run its legacy and replacement systems during a transition period—allowing existing lending products to run out before decommissioning the legacy system.

What Should Banks Be Doing Now?

What are the practical steps banks should take to prepare strategically for a system conversion process that will eventually become inevitable?

  • Carefully assess the full range of complexities and challenges involved in moving to new technologies. For instance:
    • If you cannot switch over to the new system in a single procedure, the organization may have to support legacy as well as new applications for a multi-year period.
    • Traditional retail product lines are usually supported by legacy systems which have been modified over time to fit ongoing business needs. Numerous custom code changes, patches, and "bolt-on" modules are now very difficult to separate—and equally as difficult to replace.
    • Instead of wholesale replacement, consider replacing as required on an application-by-application basis.
  • Analyze the impact of conversion on costing and budget processes.
  • Develop and implement more effective workforce strategies, such as:
    • Training new staff to understand, operate, and maintain legacy systems.
    • Encouraging a culture of acceptance around new systems technology for senior staff.

In general, rather than planning a massive overhaul, banks should undertake an ongoing risk assessment program, regularly discussing conversion timelines at staff and strategy meetings.

With many core systems interlinked across the industry, banks need to mutually engage in change initiatives. The payment system, for instance, cannot be changed by one bank. It requires industry-wide cooperation and coordination.

Build Consumer Confidence

If your underlying platforms are stable and reliable, it may be wiser to spend current resources in other places, such as building consumer confidence. That process begins with security. Certainly, many of the Canadian banks have to some extent ventured beyond the Canadian borders exploring growth opportunities. If your ultimate conversion plans will coincide with a global growth initiative, it's absolutely critical to demonstrate to customers that global systems will be reliable and secure. Otherwise they will turn to more regional and local banking relationships where they feel their money and information are safe from cross-border compromise. The same holds true for the increasing popularity of mobile banking. Customer loyalty will follow security.

It's a Decision, Not an Imperative

The decision will be different for every bank. You must self-assess, but accurately, taking a range of factors into account. For most banks, immediate wholesale change is unrealistic. For many, particularly smaller businesses, moving too quickly may raise unwarranted risks and exposures. Some banks are ready and have a comprehensive plan, but hesitancy is a legitimate response.

There is a clear case to be made for legacy system replacement, but it's far from a case closed. With customer confidence still strained by recent economic events, banks need to carefully balance the pressures and risks of fast change with the advantages of an evolving process, then take the steps that are right for their situation.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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