Should Australia's banks rip and replace their core banking systems or upgrade them incrementally? The argument amongst Australia's banks is heated, writes Brett Winterford.
Billion dollar core banking upgrades underway at The Commonwealth Bank and National Australia Bank were roundly criticised by analysts, vendors and to a lesser degree by competitors at a banking technology forum this week.
The most ferocious commentary came from Simon Millett, director of banking at CSC Australia (a sponsor of the event), who described the two projects as "among the most high risk projects of any banks in the world."
Millett said the $300 million price tag attached to the Commonwealth Bank's modernisation project in 2005 was now well over $1 billion.
"There is massive risk involved," he said. "I don't castigate what the Commonwealth Bank did four or five years ago.
"The rip and replace was beneficial at that time, but very little value has flowed through at great cost."
Gartner financial services industry analyst David Furlonger said 41 percent of global banks had decided to work on core banking systems from the back end of 2010 into 2011.
"This is open heart surgery, not an easy undertaking," he commented.
Executives from ANZ and Westpac were asked why they had opted against a big bang approach to core systems modernisation.
Westpac CTO Sarv Girn said the bank was undergoing a "major transformation", but an iterative one.
The bank has prioritised the front end user interface for its customers, while extending the CSC back end system at St.George to its Bank of Melbourne and Bank of SA ventures. Westpac's retail bank is likely to eventually also shift onto this platform.
Girn said core systems should no longer be defined by the transaction, loan and savings systems the term originally came to mean. Core systems, in his book, could just as well refer to mobile channels.
"It's where the customer sees value," he said. "We are modernising incrementally, but that would have been too slow on mobile, so on that front we are going more for a radical replace.
"In transactions, savings, deposits, our approach is more around modernisation, using the asset we have."
ANZ CIO Anne Weatherston told the audience that core systems upgrades didn't fit with the bank's vision of growing into new markets in Asia.
The Commonwealth Bank, she noted, was more concerned with the Australian retail market by contrast.
But both Weatherston and Girn claimed their system modernisation efforts would still offer the smarts the CBA in particular has touted as key to meeting customer expectations.
Girn insisted that Westpac's systems were "real-time" and "SOE-enabled", and Weatherton said the ANZ will next week announce the details of a new regional payments hub to be built in the next few years.
These projects tried to mimic what the Commonwealth Bank previously said was a major aim of its core systems upgrade - the capacity for the core system to update payments and other transactions in real-time.
The banking industry will note with interest whether the ANZ's new payments system achieves this outcome, or merely pulls data from multiple systems to have balance statements appear to be up to date at any given time, even if the transaction itself doesn't take place until an overnight or weekend batch process.
These band-aid approaches, one industry insider said, can lead to errors and prompt customers to attempt transactions that they do not in fact have the funds for.
Mollett expressed some empathy with the CBA and NAB, being that he had attempted two core system upgrades as an employee of Westpac.
Core system upgrades would have been far easier "when the banks had good years," he said, not in an environment with high costs of capital, intense regulation and little revenue growth.
He nonetheless saw modernisation as a smarter approach to the rip and replace strategies of CBA and NAB (both of which chose other SAP and Oracle over CSC software, incidentally.)
"Progressive modernisers will catch the rip-and-replacers," he said.
"And in the meantime, the rip-and-replacers are going to spend a hell of a lot of money."