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Core competency
A recent report by TowerGroup, a consulting firm, found that core systems account for more than a quarter of the worldwide retail banking industry's technology budget. Much unnecessary expense is caused by systems that are costly to maintain, so banks need to consider whether an upgrade might actually save them money.
Although many banks are running the latest technology, several smaller banks in the Middle East have still not moved onto full core banking solutions.
"There are some markets like Qatar and Oman where they have not done the core banking stage, they are still on old systems," says Mustafa Moonim, head of the Middle East and emerging Europe, I-flex Solutions. "It's a mix of entire banking systems and people looking for advanced solutions like risk management."
Legacy systems in place at some of the banks leave users with a difficult decision when they need to scale up or add new functionality. "A lot of banks have taken solutions that they have customised so heavily that they've become a bank-specific solution," says Moonim.
"There is not an upgrade path available to them so they're going to have to redo it all themselves."
Banks looking to invest in a core banking solution for the first time have to decide whether they want an all-in-one solution or one based on a modular platform. "The idea of core banking is becoming very open to interpretation," says Hari Padmanabhan, executive director, 3i Infotech. "It depends on each specific bank's focus and depends on which area is most important to them."
Through its KASTLE core banking system, 3i Infotech offers a range of modules covering day-to-day business, which Padmanabhan says lies somewhere between an all-in-one solution and a system of modules. "It's a mixture of the two. It's modular in design so it's very flexible," he says.
This flexibility is important when it comes to new implementations. "We take a mix and match approach and use best of breed," Padmanabhan explains. "We're happy to work with the core that was there before." Many banks are reluctant to change their core banking systems unless they are particularly out of date, since there is the possibility of problems during the changeover.
"There is a business risk involved in such real time implementations," he says. "Each solution is case-to-case. It's very case dependent - on the size of the bank, the maturity of the IT infrastructure, the maturity of the staff and how long they have managed the IT infrastructure."
When Azizi Bank was considering its technology platform before beginning operations in Afghanistan last year, it consulted Futech Software Solutions. "Cost of course was something of importance because it's a pretty new banking infrastructure, they don't really know what kinds of moneys are going to come in, so they didn't really want to spend a huge amount putting in a massive IT system and then not having enough business to recover the cost," says Anil Kumar, director, Futech.
"It is right now mainly built around Kabul, and they plan to be in all of the provinces with 40 branches by mid-summer. They're adding on about 100,000 accounts a month."
Futech recommended a core banking solution from InfoPro, a Malaysian specialist, as the best fit, despite the lack of previous implementations in the region. The bank's systems will be run remotely from Dubai until the organisation is ready to take them over.
"They wanted as minimal integration as possible because you tend to have best of breed loan origination systems, collection systems, etc, but they were looking for something that had it all," says Kumar. "It's all the retail lending modules: branch automation, internet banking, and trade finance. They were looking for good workflow between all the applications, and they were looking for a very strong central repository in terms of customer base. It's a good time to start building your customer information because it's a brand new bank."
Jordanian software developer CEB also had to deploy a core banking solution remotely when working with Al Rafah Bank in Palestine. "The implementation in Palestine was very interesting and it demonstrates the main feature of the ease of implementation," says Ayman Arafeh. "Our team could not get visas to go there and we managed to launch the first branch remotely. In less than 45 days we managed to fully implement a model branch for the bank from our offices here in Amman."
CEB's core banking solution, CABS (Comprehensive Automated Banking Solution) has been installed in 16 banks in Jordan and around the region, including Al Basra Bank in Iraq. CABS offers many administrative functions, and should have Islamic functionality by the end of 2007.
There is no core banking solution designed solely for Islamic banking, but most vendors offer additional modules or conventional systems adapted to Shariah requirements. SAP now delivers out-of-the-box functionality for Islamic banking products, having had customers in countries like Malaysia and Indonesia.
"The beauty of SAP is that it combines both Islamic and conventional banking in one system so it's a matter of product configuration rather than just installing two systems at a bank," says Wassim Hassanieh, sales manager, financial services, SAP Arabia. "Currently out of the box we are around 80 or 90% compliant with Islamic banking."
SAP Arabia is currently working with Islamic Development Bank in Jeddah on the systems that handle project financing. "It involves use of the core SAP ERP (enterprise resource planning) system with the project finance system which manages all aspects of the application coming into the bank, the processing of the funds for the bank for the project, and the dispersal of those funds is being managed by the loans processing system - which for that institution will obviously have to be Shariah compliant," says Phil Blower, sales director, SAP Arabia. "The strength of SAP is all our solutions are built off the same base and the integration is literally out of the box."
SAP provides packaged solutions for banks, based on its experience with big names like DeutscheBank and UBS, to provide pre-configured best practices.
"It means that you can implement an ERP in a bank and be fully compliant within 200 man days," says Blower. "The core banking solution can be fully implemented, fully configured within six months, and Basel II compliance in four months. It comes preconfigured so the bank will not wait two to three years to have something up and running."
Time to market is particularly important when it comes to mergers and acquisitions of existing banks. One major consolidation recently was in Egypt last June, when three banks, the United Bank of Egypt, The Nile Bank and Islamic International Bank for Investment and Development, were acquired by the United Bank. United Bank of Egypt was a user of Misys Equation and the decision was taken to use the system across the operations of the new organisation. Combining the systems at United Bank has been made easier by thorough planning.
"It's more of a project management thing than a systems problem," says Roy Froud, MEA head of sales, Misys. "You're consolidating three banks into one. As far as the system's concerned eventually you just end up with one bank running on it, but it's a question of getting things in the right order from a project point of view."
Often, this involves moving data into the core banking system of the most technologically advanced bank. "What we tend to find is you'll have one bank of the three that is a bit more sophisticated than the others and they will tend to be the guiding light in the merger," says Froud. "Then you'll find that with one bank perhaps its data is not very well constructed, there isn't the notion of customer data, there's only account data, there isn't the notion of limits.
"You might find that the banks who are merging have common customers but because the data's not that easy to see, they don't know they've got common customers. Obviously what they don't want to do is merge the data and find that they've got the same customer in their system two or three times. You have to clean all the data up first of all before you start moving forward."
Commercial pressures also mean that a consolidated core banking system needs to be up and running as soon as possible. "What tends to make mergers very tricky is when banks merge the shareholders tend to want results very quickly," explains Froud. "They want things to happen very quickly, they're not very tolerant of a long drawn out project. You have to look at getting a merged system up very quickly and then you might have to add the additional functionality over time."
Sun Microsystems provides both hardware and software infrastructure, and has a solution specifically designed to handle M&As. SeeBeyond compound application platform suite provides the capability to integrate different core systems, or to mix one core system with a number of SWIFT systems, trade finance application, treasury systems and risk management.
Klaus Miserra, business development manager, financial services market, Sun Microsystems, MENA, says: "The compatibility of business models and business processes introduces questions like: What applications will remain to be used after a merger, and which ones will have to be removed or modified? Will some applications have to run in parallel for a limited period of time, and how does the bank achieve proper reconciliation and centralised reporting? Our software allows banks to decide and choose based on business criteria and not based on technical limitations and constraints."
Finacle, the core banking solution from Infosys, is built with these considerations in mind. "Essentially what we've got is standards-based open architecture which helps banks to migrate and integrate and ensure the consolidation of data," says Sanat Rao, head of global sales, Finacle. "We've also got a merger toolkit within Finacle, which enables the banks to standardise processes, rationalise products and services across merged entities.
"It helps the bank with niggling problems in the merger, like the issue of duplicate customer accounts."
Finacle is used by many of the Middle East's biggest banks, including National Commercial Bank in Saudi Arabia, and Bank of Alexandria in Egypt. Its scalability is a key selling point, according to Rao. "10 to 15 years ago, scalability was mainly associated with mainframe applications," he says. Today, there is enough evidence that large banks with high volumes and a large number of customers, with a large number of branches, can successfully scale up on Unix-based applications."
Nick Brewer, head of group strategy at Temenos, says that scalability is a major concern for many banks, especially during the M&A process.
"If you look at mergers and acquisitions where we are being run by one bank, there are reasons why you might take us as the preferred platform of the two systems," he says. "One is the fact that we are very scalable, by which I mean that I can run a copy of the system on my laptop and I can also run it on a gigantic Unix farm with 10 million accounts, so it physically scales in volume terms.
"Beyond this our main objective is to try to make sure systems are not the critical point in a merger or acquisition. It's quite a big business issue for banks."
Temenos offers TCB and T24, which was recently adopted by Bank Muscat as its core banking solution. Both systems are designed to be able to grow with the business by providing linear scalability. "If you double the size of the hardware you double the amount of business that they can process," says Brewer.
As banks in the region adapt their systems to cope with rapid expansion and M&As, they have to ensure they have the right technology in place. With vendors placing an increased focus on Shariah compliant solutions and scalability playing an integral role, there are plenty of capable solutions on the market.
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