The future core banking solution – how process centricity will rule the market
Thought Paper
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The future core banking solution – how process centricity will rule the market The biggest challenge that core banking vendors face today is to keep the core banking solution (solution) synchronized with the current global industry requirements. This is a daunting task. The primary reason being the business of banking is not the same across all geographies. In addition, the solution functionalities have evolved over several years with vendors gaining experience and responding to client demands riding on the waves of technology transformation that has moved across geographical regions. This resulted in solution maturity. The flip side
to this being localization of functionalities by region. A solution that is a perfect fit for South East Asia is not an ideal solution for North America. The variation is not in the banking products. It is the underlying processes. This thought paper presents a view point on how a core banking solution that is process centric will have flexibility to be a truly global solution.
It is interesting to map the waves that influenced the product strategy of the new entrants in the core banking arena.
Core banking solution transformation waves The first wave notably started in Africa and South Asia. The simple manual operations moved into a core banking environment. The value was immediate, real and visible. New functionalities were added to the solution. In the product process trade off, the products were primary. The second wave in South East Asia was a little more complex, nevertheless a success; the result, more functionalities. This wave is significant as the business processes asserted themselves in addition to products. The new players with latest in technology smart, lean and fast conquered all. The Rajas of legacy systems with a monopoly in the market had no immediate answer to compete. The third wave that has just started, is embracing the America and Europe and not a technology wave in full measure. This frontier is more process oriented. That is the challenge the vendors are currently confronted with.
The business of banking we all know is not the same in Africa as compared with Asia or for
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that matter Europe. Economy, regulations and customers, profile the business of banking. This troika varies with geography. In India the major local banks have similar business models, the differentiator if any, is not very distinct. The regulators are cautious and regulations strict; the reason, why the recent financial meltdown had little or no impact in India. The customer expectations from a bank in North America are different from Europe or Asia. In this background, the core banking solutions that blossomed in the first and second waves, find themselves very rigid to take on the third wave. This adds a new competition dimension to the core banking vendors, remain rigid play local or be flexible go global. The business imperatives and banking trends require the vendors to tow the second option. This translates to being functionally flexible with strong process orientation.
Core banking product strategy The product strategy of a vendor is shaped by the industry trends and the banking research consultants forward looking vision. The three top imperatives driving the industry today are
(North America, Asia and so on) and channel service (branch, online, mobility banking); this is more pronounced in North America as a direct consequence of the most recent crisis in the banking industry.
1. Customer centricity 2. Regulatory compliance 3. Risk management. While these are generic terms as we read, the definition and degree vary by geography
The focus for vendors is on „how‟ the solution will enable a bank move towards customer centricity, comply with regulations and manage risk in a not too flat a world. To address the „how‟ part the core banking product must be flexible.
The classic core banking A classic core banking solution is product centric. Attributes such as customer type, account type, currency, interest, fee, minimum balance are attached to a product. This makes it rigid from process perspective. Figure 1 and Table 1 represent the Classic Core banking model.
Figure 1: Classic Core Banking Model
Personal Loans
Table 1: Product Demand Deposit Account Attributes and Values Product
Demand Deposit Account
Account Attributes
Value
Customer Type
Individual
Account Type
Checking
Currency
US Dollar
Minimum Balance
USD 1000
Interest
0%
Account Fee (Annual)
USD 10
Home Loans
Certificate of Deposits
Demand Deposit Accounts
This model is simple straight forward but not flexible to address the 2 top imperatives driving the banking industry (Customer Centricity and Regulatory Compliance). The attributes and values are tightly coupled.
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The future core banking solution A truly global core banking solution is process centric. The process centricity will be enabled by a set of scalable repositories (Figure 2). A product will be created by a combination (mix and match) of repository components as illustrated in the table 2. The solidity of a core banking solution will rest on the strength of the repository factory.
Table 2: Repository Definitions with Examples Repository
Definition
Example
Constraint
Business Function
CreateA banking KYC and AML Customertransaction cleared activity that can (Non- Financial) be classified as Financial or Non- Financial
Business Processes
A group of related Business Rules
Business Rules
Set of rules that 1. Open 1. The customer accountdrive a business must be 2. In US dollarfunction existing currency 2. Eligible to 3. Minimum open US deposit dollar amount USD account 1000
Process Component Orchestration
The synergistic association of Business Processes to Business Rules to accomplish a Business Function
Open account
The customer must be existing and approved
Figure 2: Future Core Banking Model
Process Component Orchestration
Business Process Repository
Business Rules Repository
Business Functions Repository
1. Open account 2. In US dollar currency 3. Minimum deposit amount USD 1000 4. Customer who is an individual
Not Applicable
Advantages Scalability: Each of the repository components has the potential to be expanded. New repositories can be added and redundant ones deleted. The process component orchestration will ensure harmonious linkages.
a combination of Business Functions, Business Rules and Business Processes. A customer in an online banking or direct banking scenarios can create their own products limited by constraints as a self-service offering. There is no need to come to a branch or make a call to a call center for account opening.
Adaptability:
The repository components can be categorized on the basis of geography specific variables. An implementation in United States of America will have that set of variables unique to North America.
Customer Centricity: Customer analytics for an on boarded customer will determine the banking products that have the potential to be sold to a customer. A product by definition is
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Regulatory
Compliance: Regulatory compliance is a set of Business Rules. The business rules can be added to business function expanding the related Business Process. For example, if a new regulation requires all new checking accounts to be in US dollars only. The business rule will have this constraint built in to comply with the new regulation.
Conclusion Technology is not a differentiator any more. Over the last decade the story of technology transformation in implementation of a core banking solution has lost the sheen. The technology transformation is a given benefit.
The visible, measurable business transformation benefit is the key deliverable the business and IT leaders need today. To demonstrate this benefit a process centric core banking solution is THE solution.
References 1. “Global Crisis, Recession & Uneven Recovery” Y V Reddy Orient BlackSwan 2. K C Chakrabarty: Beyond Core Banking Solutions (CBS) – fast forward to Banking 2.0! 3. Bank 2.0: How Customer Behavior and Technology Will Change the Future of Financial Services by Brett King
4. Foundations of Banking Risk: An Overview of Banking, Banking Risks, and Risk-Based Banking Regulation – by GARP (Authors Richard Apostolik, Christopher Donohue, Peter Went)
5. Modern Banking by Shelagh Heffernan
Vishwanath Thanalapatti Lead Product Manager, Infosys
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