FRAMINGHAM, Mass. – Spending on core systems at banks and credit unions alike continues to be a growth industry, although their paths often diverge based on size. And whether the approach is to update piece-by-piece or "rip and replace," the task remains daunting for front office and back shop alike, says Karen Massey, a senior research analyst in consumer banking and credit for Financial Insights.
IT spending on core banking solutions hit $6.1 billion last year, according to a new report from the Framingham-based think firm, a figure expected to increase at a five-year compound annual growth rate of 3.93%.
About three-fourths of that spend will be at the largest, or Tier 1, financial institutions ($10 billion in assets and greater) because of their sheer size, but the activity is being seen at community banks and credit unions, as well.
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In her report-"U.S. Core Banking Solutions 2006-2010″-Massey says growth at financial institutions, brought on by consolidation and organic reasons alike, is putting increasing demands on IT infrastructure. Banks and credit unions also are looking for ways to reduce operating costs while offering new, often fee-based, services in the face of rising interest rates putting pressure on operational income, and thus, the bottom line.
Meanwhile, the analyst cites a number of reasons for resistance to a core system conversion, including high costs and learning curves, disruption to business and the possibility of resulting reputation risk, and the lack of "must-have technology that can only be achieved through core-system replacement."
The need and resistance together are creating a situation in which the Tier 1 institutions are more likely to use a "componentized approach as opposed to a `big bang' rip and replace," Massey says, while the scenario often plays out differently at credit unions and community banks.
"The largest banks are moving at a much slower pace, primarily because existing technology is very complex, making transformation options plentiful and muddying the journey," the Financial Insights analyst told Credit Union Times.
"But credit unions in general can be more nimble to take advantage of modern core banking technology because existing systems and infrastructure are less complex and the end state more easily defined," she says.
However, Massey cautions, "that does not make transformation any less frightening or challenging to smaller institutions than it does to the big guys. The stakes are just as high, and smaller institutions also usually lack dedicated IT staff to lead a core conversion effort. They will rely more heavily on their core system provider."
Credit unions also are more likely to "rip and replace" an entire system or at least use a single vendor for the various components being added on, Massey says, although that tendency morphs as one moves up the size scale.
"As one moves upstream to the mid-market in the credit union space," the Financial Insights analyst says, "we will see some component-based transformation because of budget constraints, risk aversion, proof of concept and so forth.
"We also see these institutions really examining the business and strategic reasons for core conversion, most commonly the ability to support future growth plans."
What they often find is that no add-on component can address a core system's inability to scale and if growth becomes an issue, the core system must be replaced.
"But if the core system is adequately serving both current and planned needs, the credit union will probably leave the core intact and look at other point solutions to address specific needs, such as lending," Massey says. Ultimately, outdated core systems limit growth opportunities and market responsiveness, Massey says, and her report makes several recommendations to financial institutions facing that reality, including: * Assess the risks associated with changing the core system or staying put. "The latter is more risky than one may think," Massey says. * Develop a clear transformation plan that "defines the journey to the core platform end state." * When selecting a vendor, consider technology integration and vision along with financial health and scalability. * Seek inside and outside guidance. "The credit union arena has been quite active in core banking transformation, mainly due to the sheer number of credit unions," Massey says. "Talk to your peers to find out what has worked well and what didn't work so well, in successful core conversions. -
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