Tieto: core transformation - Nicklas Jansson
With the vast majority of banks still working on outdated legacy systems, the need for IT transformation is more critical than ever. Future Banking speaks to Nicklas Jansson, head of business development, banking and finance at Tieto, about the need for change and providing a banking framework that can meet future challenges.
There's no hiding from the truth. After the worst recession since the 1930s, retail banks face a string of different challenges: new customer demands, increased regulation and a wider squeeze on bank margins mean a tough period lies ahead.
At a time like this, large-scale IT transformation hardly seems like a priority. Changing a system that undergirds every major banking process is a daunting task - one that many larger European banks have been keen to avoid.
But the dangers of inaction are well known. Chronic underinvestment in core IT systems has led to rising costs, system failures and escalating complexity across the continent.
Last year, a simple software update at one major European bank left millions of customers unable to make payments. As the same banks go through new acquisitions, their IT systems are looking more obsolete by the day.
"In order to be prepared for the challenges of tomorrow, you need to have a proven, customer-centric and flexible core, and a service-oriented architecture [SOA]," says Nicklas Jansson, head of business development, banking and finance at Tieto. "The vast majority of legacy solutions out there cannot fulfil these requirements."
An end-to-end solution
For all the problems legacy systems do face, Jansson remains realistic about the willingness of larger banks to undergo core transformation.
"We discussed this exact same scenario ten years ago," he says. "We said the large banks needed to do something, but it hasn't come true to the extent that was predicted. The SME segment is different. Here, we have a very strong offering and a lot of activity. These banks are under a lot of pressure due to new regulations and tightened capital requirements. They need to distinguish themselves on the market because they cannot compete on the same terms as the larger banks. That means they need a back-end solution that is cost-efficient and can support rapid front-end development and quick product launches."
For the larger, more successful banks that don't have quite the same pressure to differentiate themselves, the main trend has been to 'patch over' existing solutions. Banks have chosen to develop outside the core rather than undergo a major transformation.
In certain cases, this can be the right decision. If a bank's back end or core poses no long-term risk and the legacy system is good enough to handle an SOA service level, then core transformation may be unnecessary.
"Some solutions are suited to this approach," Jansson says, "but some are not. It's down to you to identify which side you're on. In my opinion, if you have a stable, proven and flexible core on SOA with an extensive service layer, then you are as prepared as you can be."
Whatever decision is made, commitment is key. Over the past few years, the IT industry has learned from its successes and failures, but replacing core IT systems remain a complex procedure.
"You need to get the whole organisation on board in order to succeed," Jansson says, "and this means you need to have a clear and shared view of the goal for the project. Is it cost savings, more efficient processes, time to market or all of them? You shouldn't underestimate the value of doing your homework - knowing your business, your processes and your ways of working, good and bad. Only then can you be ready to make the right decision on where you are going."
Virtual account management
Trying to foresee where the market is heading is always a challenge. Over the last decade, movement within core solutions has occurred on the back of compliance and regulatory issues rather than product innovation. But things are liable to change.
"Banks need to be in a position where they can support future development needs and integrations," Jansson says. "That means they need a modular core, wrapped in an extensive service layer. When talking about future-proofing, there are challenges both in technology and in business that need to be addressed. You need scalable systems that can 'plug and play' new functionality and organisations.
"You need to continually improve the end-customer service to meet increasing expectation and market competitions. You need to improve the cost-to-income ratio through operational cost-efficiency and by making the right choices around technology investment. And you need to respond effectively to evolving regulatory requirements."
One solution or vendor is unlikely to achieve this on their own. What banks require, in order to stay competitive, is the ability to integrate other functions and solutions into their existing systems.
Tieto's virtual banking concept is designed with exactly this in mind: moving new functionality and development outside the core and retaining only limited communication with the legacy back-end solution.
"Virtual banking employs a model where physical ledger accounts are replaced by value stores held on a virtual banking system," Jansson says. "These virtual bank accounts are under the control and management of the customer concerned; payments from and receipts into the virtual bank accounts are facilitated by means of a small number of dedicated physical bank accounts.
"This approach reduces risk, shortens implementation and allows higher flexibility and time to market for new features. You reduce the complexity within the core and move the development and functionality to an external module. We think this is an approach that will be used in several related areas of banking in the future."
One of the main concerns holding back change in core IT systems over recent years has been the potential for downtime and lost data. These concerns remain valid, but the industry has benefitted from sharing knowledge and combining its experience to reduce some of the main risks.
Companies like Tieto can use this experience to guide banks through the change process, outlining the different steps that can be taken to remove the more common risks holding back retail banks.
"Some of these are obvious," Jansson says. "Things like portfolio and data clean-up, strict planning and preparations and having a strong decision-making body need to be sorted. These are common sources of delay and confusion.
"It's also important that the bank doesn't try to do everything at once. This is a very critical operation and you cannot fulfil all the needs of the organisation right away. At first, go for a slim, 'as is' operation, getting the existing business onto the new platform. Once there, you'll be much better suited to handling new business requirements with better control and less risk."
Whether banks change their core systems or find ways to cope with their legacy systems remains to be seen. What we do know is that undergoing effective system transformation requires agility and flexibility.
"This is something we have," Jansson says. "We've got an agile and flexible core banking solution that can really benefit our clients."