Core banking system transformation: The business case

Bank CXO’s are facing a dilemma. They have to meet revenue targets, improve customer experience, satisfy regulatory requirements, increase operational efficiency, and manage legacy Core Banking Systems (CBS) while keeping a tight leash on costs. While CBS transformation has a long term impact on the banks’ business, measuring Return on Investment (ROI) on major core system investments and justifying / reassuring stakeholders is a huge challenge.

A three pronged strategy built across business, operations, and technology (BOT) dimensions to assess ROI could be the best foot forward. The BOT model can be used to estimate and quantify the benefits from CBS transformation. It recommends that CXO’s consider defining their models upfront, taking into account the desired objectives, and then measuring the benefits against them.

Although cost does play a significant role in the CBS selection process, a business case approach makes more sense as it evaluates the outcomes of major business domains such as growth in loans & deposits, new customer acquisitions (including referral conversion), increase in network (branch and ATM), new product launches, etc. By setting targets for each of the above goals and assigning a weight to them, the bank and IT vendor can prioritize key gaps in the implementation.

Today technology is changing rapidly and CBS renewal, which happened once in every six to eight years, is becoming the order of the day. CIOs are under pressure to assess and justify the quantitative impact of such transformation on their banks’ balance sheets. As per market estimates, the size of the global core banking market stood at $8.6 billion in 2013 and is expected to touch $10.1 billion by 2017, driven by cost and customer demands for agility. While CBS transformation is complex and entails huge costs – licensing fees, implementation costs, and annual maintenance costs, as well as risks – managing the transformation is equally challenging as the pay-off period can be long. Banks should take a holistic view of their strategic and operational objectives as they embark on new CBS rollouts and ensure that it results in leaner and more efficient operations, thereby improving profit-per-staff and cost-to-income ratio as well as keep customers satisfied by enhancing their experiences across various channels and segments.

Many banks are afraid of upgrading / changing their legacy core banking system and keep making peripheral changes in satellite systems. However, that approach will not give them that quantum jump in market share and customer satisfaction. It is CBS transformation alone which will yields significant quantitative as well as qualitative benefits in the form of higher revenues through increased sales-per-customer and new customer acquisition, increase in operational efficiency and service, lower IT Cost and enhanced regulatory and risk management . Every bank needs to strategize and a balanced scorecard that includes all three dimensions – business, operations, and technology – will be a good starting point.

What do you think? Do write in with your views.

About the Author

Tapan Agarwal is a core banking product and domain evangelist with the Banking Products and Emerging Markets team at Wipro Limited. In the last 15 years, he has worked with several companies in the BFSI Space and has helped several banks in their Business Process and Technology Transformation journey. His interests include crosswords, puzzles and blogging.

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