New legs for legacy systems
Sluggishness, complexity, inefficiency – these are some of the problems that legacy IT systems are posing to banks worldwide. Unlike manufacturing companies, which run their operations on a single predominant ERP system supported by a few auxiliary solutions, banks have added layer upon layer of technology, ending up with an unmanageable snarl of systems and applications. Just to put things in perspective, it is estimated that on average global banks have more than 5,000 applications.
In the past, legacy replacement was synonymous with core banking refreshment, writes Mohit Joshi. is senior vice president and global head of financial services at Infosys. However, the huge cost of implementation, not to mention extended timelines, significant risk of business disruption and unclear ROI, deterred many institutions from biting the bullet. One option was to employ Business Process Management tools to automate as many processes as possible in various applications; but this improved cost efficiencies only to a limited extent.
The arrival of internal utilities enabled banking institutions to dismantle product and geographic silos. These cross-product global utilities could be shared by functions with common data requirements, such as pricing & valuation, clearing & settlement, and reporting.
In time, internal utilities gave rise to market utilities, and together they delivered greater value to the enterprise. Today, market utilities – or multi-tenant cloud platforms – have enlarged their scope of application to offer an elegant, highly effective alternative to legacy systems. The multi-tenant platform takes processes and functions out of the banking organisation and on to the cloud where they can be accessed by multiple regions. In doing so, the platform creates a fundamental shift in the banking “production model” by turning banks, which have historically built every product, service and process in-house, into a consumer of those very elements as a third-party service.
The benefits to banks are plain to see, including reduction in IT investments and middle and back office costs, which are now split among user banks; freedom from the drudge of application maintenance; and “pay as you go” or outcome-based pricing. Then there’s collateral advantage in the form of lower systemic risk associated with such utilities, which are built to withstand both huge transaction volume and regulatory scrutiny.
The best candidates for migration to a multi-tenant platform are applications and processes that are standardised across the industry, are of significant importance to banks but not a source of competitive advantage, and are expensive to run in-house. A good example is the maintenance of client reference data. This comprises basic client information needed for identification and Know Your Customer compliance at the time of account opening. If this data could be captured within a centralised repository and hosted on the platform, providing easy access to several banks, it would ease the onboarding process for banks and their customers. It is therefore no surprise that some of the earliest utilities have arisen in this space.
Sanctions screening also makes for a good case for migration. Banks have to routinely screen payments to ensure that they do not originate from countries or entities under sanction; since this is a common requirement, it makes ample sense for banks to share the cost by putting the application on a secure utility.
This leads us to another factor that is critical to the success of a multi-tenant platform: security. Given the highly regulated nature of the banking industry and its focus on compliance, the platform must assure total security to its users. Hence it might be necessary to move certain types of processes, for instance those involving important or high-impact data, to a platform on a private cloud. Other functions, which primarily deal with public information, corporate actions, could possibly reside in a public cloud-based utility subject to a threshold level of protection.
Regulators will no doubt have their say on platform security. But they will also insist on good governance and a clear line of sight for the Boards of participating financial institutions. Towards this end, they are likely to stipulate that a consortium of banks and IT service providers jointly drive and manage such initiatives. Many large banks and market infrastructure entities are collaborating together to build various utility model-based platforms in the areas of middle office, back office, and regulatory compliance. The key goals are to standardise operations, increase efficiency, reduce cost and provide a single source of “golden records” ratified by the combined intelligence and expertise of the industry and the regulators.
Lastly, it is advisable for banks and their technology partners not to get carried away by the alluring possibilities of the platform, which at a conservative estimate could save up to 40% of the cost of running a process in-house. Instead, they should take a step-by-step approach, migrating those functions that are clearly low risk first, and only then moving to more crucial applications. Banks should not see this as a big bang exercise, but rather the progressive migration of an aggregation of several small functions, which in totality can deliver big savings.