Attitudes to Core Banking Transformation in Europe

IBM Global Business Services
Attitudes to Core Banking
Transformation in Europe
An IBM survey

2 Attitudes to Core Banking Transformation in Europe
Table of contents
Executive summary 3
Introduction 4
Banking technology leaders’ perception of the industry 6
Current core banking platforms 9
Current challenges 11
Drivers for transformation 12
Impact of the challenges 13
Future plans: IT strategy for core banking transformation 15
Business benefits 17
Conclusions 19

3
Executive summary
Banking technology leaders in Western Europe neither
embrace fundamental transformation of core banking systems
as a strategy nor see the need for it.
They are clear about where they want to get to and the broad
direction of their journey, but find that the only practical
way to get there is through incremental steps. No one is
contemplating the complete replacement of core banking
systems.
Most bank leaders are engaged in investments for which
payback is expected in the same year for highly-targeted
modernisation initiatives, driven mostly by front office
digitisation and regulatory requirements, but also by cost
reduction and operational improvement. Budgets are mostly
tight, but adequate for incremental improvement. Business
cases are typically generalised, high level, or, in some cases,
non-existent.
Security is not a significant driver of core banking
transformation. Agility, compliance and channel enablement
are likely to be more common motivations for core banking
transformation. The dominant trend in banking technology is
to carry out tangibly beneficial investments accompanied by
essential maintenance, repair and selective modernisation.
Leaders at commercial banks with an international geographic
spread are clearly investing more in transformational
programmes than those at retail banks. Leaders at small banks
invest proportionately more in transformational activity than
those at large banks. Leaders at retail banks balance their
investments between what they must do to avoid regulatory
penalties and what the business demands with regard to mobile
channel development.
Bank leaders are not yet actively thinking about cloud for
core banking transformation. Few leaders plan to extend their
use of external bank utilities, whether or not the utilities are
already available for use. More leaders plan to extend the use of
internal utilities when opportunities arise to avoid duplicative
development and running costs.
Given the economic forces that hold sway over Europe, it can
be argued that bank leaders are doing the right thing – and
indeed the only possible thing – for the time being.
However, the emphasis on short-term, tactical change suggests
that as a sector, core banking technology in Europe is mostly
in a holding pattern and that it might be ill-equipped to face
new sources of competition from online challengers and
disintermediating innovation in payments. In addition, the
incursion of foreign banks into European banking markets as
the global economy moves slowly into growth is yet another
challenge which remains to be addressed.

Introduction
Early in 2014, IBM specialists undertook a survey among
leaders at 27 banks and two core banking system solution
providers from among banks and banking solutions providers
across Europe to understand their attitudes and approaches
to the transformation of core banking systems. This report
describes the results and findings of the survey. The
conclusion of this report attempts to outline how the findings
of this survey can be applied to influence investment decisions
in banking technology over the next three to five years.
In this survey, the following three key areas are addressed:
• Industry perceptions
• Current core banking platforms
• Future plans
For this survey, a set of hypotheses are tested which are
developed from the experience of IBM specialists that was
gained by working with retail, corporate and global banks on
core systems and front office modernisation programmes over
many years.
These hypotheses underpin the fact that core systems of many
banks might be vulnerable, thereby exposing the banks and the
financial system itself to possible disruption.
These critical systems are often decades old, written in
long-superseded languages, operationally and architecturally
inflexible, and are ill-equipped to deal with new workloads
generated by front office digitisation and the demands of real-
time services.
The need for the modernisation of core systems of banks is
felt acutely and yet this modernisation is likely to be deferred
in favour of incremental enhancements that are driven by
regulatory and business agendas.
In this survey, certain issues are explored such as the scope
and nature of the core banking platforms that are currently
used at banks, the issues that bank leaders face, the allocation
of budgets, how the budgets are spent, and how adequate the
budgets prove to be.
In addition, through this survey, it was discovered how banking
technology leaders define core banking transformation and
how they believe the technology of their organisations match
the rest of the industry.
Informed by the survey findings, IBM specialists will shortly
publish a white paper that details the IBM point of view
regarding the transformation of core banking systems. The
paper will attempt to offer guidance for leaders at banks who
are considering investment for the transformation of their core
banking systems.
Method and scope
Leaders at 27 banks and two core banking system solution
providers were interviewed for their perspectives on core
banking transformation and the relative importance of
different delivery channels and technologies. The interviews
were conducted between 1 February 2014 and 30 April 2014.
The participants include leaders at a range of tier-1 banks
(large domestic and international banks) and tier-2 banks
(smaller domestic and sector-specialised banks). Domestic
banks are defined as those banks with operations in one
European country. Regional banks are banks with operations
across a region in Europe; for example, the Benelux region.
International banks are defined as banks with operations
throughout different regions in Europe.

5
Participants by geographical area
Banks and solution providers were selected to provide a
representative spread of west European banking markets.
Figure 1. Participants by geographic distribution
Participants by core activity
The participants were selected to include a representative
spread of different types of banks, sectors and sizes. Where a
bank has activities in multiple business sectors, the dominant
sector was used for the purpose of participant classification.
The classification was based on the geographic and sector-
based position of the participant.
Figure 2. Participants by core activity
Participants by role
The interviewees were selected from IT board and IT
functional leadership roles.
Figure 3. Participants by role
Business areas supported
The participants typically supported more than one area
of business activity, reflecting the scope of their leadership
positions. Figure 4 identifies the frequency of occurrence of
business areas supported by the each participant. Some of the
participants are involved in more than one business area.
Figure 4. Business areas supported by the participants
Denmark, 1
Germany, 1
Italy, 2
Portugal, 1
Benelux, 9
UK, 9
Spain, 6
From 29 responses
From 29 responses
Corporate/
Wholesale
Numberofbanksinvolved
Retail
Securities
Notstated
Tradefinance
Treasury/
Capitalmarkets
Wealth
management
0
5
10
15
20
From 29 responses
International
commercial
Regional
commercial
Domestic
commercial
International
retail
Domestic /
Regional retail
Solutions
provider
59%
7%
3%
7%
10%
14%
From 29 responses
35%
3%
7%
3%
32%
10%
10%
CEO
CIO
CTO
COO
IT directors
Operations
directors
Senior architects

Banking technology leaders’
perception of the industry
All participants were asked about their perceptions of the
industry’s stance towards core banking systems transformation,
rather those of their own institutions. Five hypotheses were
tested out:
• The proportion of the IT budget of the banking industry
that is used for the core banking platforms
• The allocation of banking industry IT budgets for
mandatory and regulatory change
• The impact of budget constraints on the capability of core
banking systems to support front office digitisation
• The nature of transformation approaches deployed by IT
leaders in the banking industry
• The imperative to transform core banking systems to
remain competitive
Proportion of IT costs
Hypothesis 1: In most European institutions, the cost of
maintaining core banking platforms represents an unusually
high proportion of a bank’s IT budget.
Figure 5. The participants’ response to hypothesis 1
Two thirds of the participants in the survey agreed that the
European banking industry has to spend a disproportionate
amount of the total IT budget simply to maintain its core
banking platforms.
Of those who disagreed, most were leaders at domestic banks
with a correspondingly smaller core banking footprint. This
finding is consistent with responses to the question on the
adequacy of core banking budgets. Of the leaders at the banks
who were interviewed, 33 percent reported that their core
banking budgets are adequate as suggested in the section
Future plans on page 15.
Budgetary discretion
Hypothesis 2: The budget for change is heavily skewed
towards mandatory and regulatory change; therefore the
availability of funds for investment in new capabilities is
reduced.
From 27 responses
Disagree, 30%
Neutral, 7%
Agree, 63%
Disagree, 24%
Neutral, 12%
Agree, 64%
From 25 responses

7
Just under two thirds of the participants in the survey believe
that IT budgets are heavily skewed towards regulation-driven
changes. Of the leaders at the banks who were interviewed,
80 percent of those from commercial banks agree with or
are neutral to this hypothesis. Among retail bank leaders, 72
percent of the participants agree or are neutral. This finding
is consistent with the view of the participants on the situation
of their own institutions as suggested in the sections Impact
of the challenges on page 13 and Support for regulatory
change on page 14.
“The traditional spend profile five to ten years ago was
all about functional enhancement. Over the last five
years it’s all about regulatory change.”
- Director of a domestic retail bank
“Forty percent of the IT spend is focused on meeting
mandatory and regulatory requirements. This is
skewed.”
- Head of department of a domestic retail bank
Adequacy of budget to support a digital
front office
Hypothesis 3: With reduced investment in core banking
platforms, the platforms are not as flexible as required to
support the level of innovation needed for digital front office
initiatives.
This hypothesis evoked a mixed response with an unusually
even division of opinion between those who agree, those who
disagree and those who are neutral. This suggests that banking
technology leaders believe that the industry as a whole is able
to cope with the current situation.
“Architecture and systems make it difficult to change
at speed and innovate without massive cost.”
Development approach
Hypothesis 4: The industry is seeing a trend towards an
incremental approach to transformation. This incremental
approach is taken with the objective of preserving more funds
for discretionary spending to fulfil other needs.
From 26 responses
Disagree, 38%
Neutral, 27%
Agree, 35%

Just over half of the participants agree that there is a
shift towards an incremental approach to core banking
transformation with almost as many remaining neutral or
disagreeing. This trend differs with the response of the
individual bankers to the question on their own approach
to core banking transformation, with almost three quarters
adopting an incremental approach as suggested in the sections
Future plans on page 15 and Transformation approach on
page 15.
The responses of all banking industry leaders across the
survey suggest that the participants believe that the use of an
incremental approach is not only reasonably longstanding, but
is also relatively successful till now.
“Especially with the cost of regulation, only an
incremental approach is feasible.”
Mostly, retail bank leaders disagree with the hypothesis. If their
response is viewed in the context of their response to other
questions, it does not suggest that leaders at retail banks are
more oriented towards radical transformation, but rather that
they do not regard their focus on short-term enhancements as
a recent shift.
“In the first instance an incremental approach is
considered and solutions are looked at with a focus on
the short term.”
- COO of a domestic retail bank
Imperative to act
Hypothesis 5: For most bank leaders, ignoring core banking
platform transformation will not be an option if they must
remain competitive.
From 26 responses
Disagree, 23%
Neutral, 23%
Agree, 54%
From 26 responses
Disagree, 38%
Neutral, 8%
Agree, 54%

9
A little more than half of the participants agree that the
industry leaders must start thinking of transforming their
core banking systems to remain competitive. The views of
the participants on the prevalent thinking in the industry and
each individual bank leader’s view of their own situation differ
considerably. Individual bank leaders believe that their own
organisations are in better shape than the industry as a whole.
“We should focus on what brings in more customers
and revenues; focus on your strengths and have less
dependency on old school solutions.”
- COO of a domestic retail bank
Current core banking platforms
Baseline position: The baseline position for this survey is
defined by what banking industry leaders view as the scope of
core banking systems and the footprint of the systems.
The scope of core banking platforms
A broad consensus emerges among bank leaders on which
systems make up a core banking platform. The only real point
of debate is whether payment systems are part of the core
banking platform. The scope of the core banking platform
according to the broad consensus is represented in Figure 9.
“The core banking platform is functionally defined
as the transactional part of the bank for customers,
product systems and agreements or arrangements.”
- Head of department of an international retail bank
Figure 10. The scope of the core banking platform
according to survey participants
Only a few of the bank leaders consider channel and reporting
systems as part of the core banking platform. While they are
few in number, there was a clear rationale for their view.
“The core banking platform is defined as a process and
application landscape of the core products and processes
of the bank, including the channels and infrastructure.
Next to that, the data involved, the ledger accounting
and reporting part are all very relevant and essential
key elements of the core banking platform.”
- CIO of a domestic commercial bank
The footprint of the core banking platform
Integrated platforms: Nearly two thirds of the banks
leaders interviewed run integrated platforms where a single
system provides the majority of core banking capability. The
remainder run a combination of separate specialist applications
or an integrated solution with some more specialist
applications in specific areas.
Included by many
Channel
Payments
Customer information file
Product definition and management
Collateral information
Common services
Reporting
Credit
Deposits
(current account and
savings account)
Securities
(Mortgages)Broad
consensus
Included by a very
limited number

“We use integrated solutions with some specialised
satellite solutions around it.”
- CEO of a domestic retail bank
Implementation across geographic
regions
While operating in more than one region, bank leaders
generally implement a separate platform in each region.
Very few examples are observed of a single implementation
that supports activities across multiple regions. One notable
exception has a single database, including customer details, that
supports ten banks in different European countries. Among
the positive aspects that emerge from the survey is the fact that
though banks might have separate implementations, essentially
multiple instances of the same software are being run.
“The bank is supported by one single implementation of
the platform over multiple data centres and locations.”
- CIO of a domestic commercial bank
Business line alignment
The largest banks often have more than one platform, split
by business line. For example, one platform might be used for
wholesale and another for retail. The split in certain instances
is also based on the size of the markets.
Bespoke solutions
Two thirds of the bank leaders in the survey run bespoke
solutions that have been developed internally over a number
of years. While the remaining one third run package-based
solutions, all but two of those have customised the solutions
so much that the solutions cannot be managed and upgraded
as a package. The degree of difference between solutions
among different banks means that while banking experience is
transferable, knowledge of how their systems operate is not.
In this survey, it is also found that commercial banks have a
higher proportion of completely bespoke solutions than retail
banks. All but one of the package-based solutions are used
by retail banks, with only one commercial bank building its
solution on a vendor package.
Across the three regions where the highest numbers of
bank leaders were interviewed for the survey, there was no
observable difference in approach to bespoke solutions against
package solutions.
Use of banking utilities
A banking utility in the context of this survey is defined as an
internally or externally-provided common service used across
multiple implementations.
The case for higher adoption of banking utilities is well
understood by banking industry leaders who cite avoidable
work and cost. They believe that investment in commoditised
services does not differentiate the bank and recognise that
better and more-quickly deployable solutions might be
available in the market.
“We would invest in competitive edge systems but
would use utilities for everything else.”
- Head of department of a regional retail bank
However, concerns that the existing core banking platforms
must be first renovated to facilitate the integration of utilities
outweigh any reasons for the higher adoption of utilities.
Leaders at organisations want to direct and own product
processes in-house and they realise that there are few utilities
that can be deployed as a core banking solution, or in support
of it.

11
“Greater flexibility can be achieved by building
additional features and capabilities outside of the core
banking applications.”
- Director of an international retail bank
Only a quarter of the bank leaders surveyed use banking
utilities within or along with their core banking platform. Most
of these banks are in the Benelux region.
In this survey, no common approach to the use of utilities
is identified, suggesting that no new pan-European or even
single-region industry providers are emerging.
However, two repeated patterns are observable in the use of
banking utilities. The first is the use of utilities in support
of payments, though there was little evidence of a common
approach. The second is the reuse of certain components
as utilities across different brands at banks that have grown
through merger or acquisition.
While the bank leaders surveyed expect the use of utilities to
increase over the next few years, this appears to be a slow trend
with the majority claiming that they have no immediate plans
for significant use.
Current challenges
The banking industry leaders who were interviewed
highlighted a number of challenges that they currently face
with the ongoing maintenance and development of core
banking systems. They also cite multiple challenges in the
ongoing management of core banking platforms.
“Regulatory focus is massive. If we had an issue it
would be a while before people noticed, now it is visible
round the clock.”
The existing systems are rigid and inflexible because of the
complexity and age of the design and there are multiple
platforms which makes it hard to understand, run and change
the platforms. Changing the platforms to comply with
regulatory requirements and to respond to round-the-clock
digital banking needs is difficult. Changes and investment are
inevitable, but the business case is difficult to justify.
In more detail, five common themes can be easily identified:
Total cost of ownership: The cost of running core banking
platforms is considered to be too high. Cost reduction is
needed to restore the competitiveness of the banks.
Complexity: The complexity of core banking platforms and
processes is seen as a very big challenge. This complexity
has a significant impact on the ability of the IT team to
track down issues. The cost of running, updating and
changing the platform increases because of the complexity.
The challenge is exacerbated in many organisations by the
need to support and maintain multiple platforms, sometimes
as a result of past renovation initiatives.
Age: Most organisations have aging systems that are forty
years old or are even older. Keeping legacy platforms
current requires ongoing investment in compliance,
security, flexibility and speed to market. Finding ways to
retain skills and knowledge of the legacy technologies and
the systems themselves is also a challenge.

Regulations and compliance: Regulations and compliance
are consistently reported as a significant challenge. The
pressure is exacerbated by the speed at which bad news
travels because of instant social media communication. The
cost and time of making compliance changes is also a major
challenge.
Batch-focused systems: Most core banking platforms
are basically batch systems. Adapting them to support the
always-on channel solutions of mobile and internet banking
and making the bank appear to be functional round the
clock is a significant challenge.
Drivers for transformation
Banking industry leaders were asked what are the drivers that
shape the core banking transformation thinking and goals. The
following are their priorities:
Improved agility: Enhanced agility was a priority at banks
of all types with the main goal being to enable capabilities
for new business models. The participants in the survey are
pursuing this goal through continuous improvement in the
modularity and componentisation of system architecture,
with leaders at large retail banks and banks involved in both
retail and wholesale in particular favouring this low-risk
approach.
Cost reduction: Reducing costs was a key factor driving
core banking systems modernisation, as current spending
on these systems still uses a large part of the application
maintenance budget. Leaders at large banks have generally
not been able to create significant synergies of scale even
under strong pressure to reduce budgets because although
some of them had initial success renegotiating external
maintenance contracts, they now face the problem of having
to reduce the amount of work required to maintain their
core banking systems.
Sourcing strategy enablement: In a growing trend,
bank leaders, including those at large retail banks, try to
use new sourcing models for core banking systems. They
are motivated by the need of IT management to have a
predictable balance between costs and service levels for a
predefined period.
Radical overhaul: A transformation driver cited by banking
industry leaders is that core systems are simply too old,
obsolescent and complex to be maintained effectively. Fast-
evolving regulations also drive the need for transformation,
most commonly in payments and lending.
Acceptable service level: The maintenance of an
acceptable level of service is still a significant concern. This
concern is especially true for regional and domestic banks as
a result of the regulatory requirements that drive the need
for high system stability and availability.
Architectural evolution: Most of the bank leaders wish
to evolve the architecture of their core banking platform
as a strategy to achieve their objectives. The adoption of
enterprise-wide enabling technologies such as business rules
engines, master data management, analytics and business
process management are seen as significant reasons for their
wish to move to a more flexible architecture. This trend
was more pronounced for regional mid-size banks that can
better balance costs, risks and benefits.
Integration and virtualisation: Front office transformation
makes integration and virtualization transformation drivers.
For example, a leader at a large regional bank expects to
enable the creation of a single virtual product catalogue and
a unified customer view across countries and channels by
adapting all the related core banking platforms in five years.
These changes are to be achieved by progressively adopting
a service-oriented architecture.

13
“We face high cost for licence to operate and (have)
hardly any room to invest in agility.”
- Head of IT of an international retail bank
Ability to deal with change
Almost half of the bank leaders in the survey report that with
their current platforms they are able to meet business demands,
provided that budgets remain at the same level.
Some of them have already completed platform renovation to
meet short to medium-term demands. A minority among them
have undertaken transformation for the long term.
The other half of bank leaders in the survey say that they must
actively address certain aspects of their core banking platforms
such as flexibility, functions and a more modular structure in
the next five years.
The difference in each individual bank leader’s perception
of the level of change required in the industry relative to
their own organisation is modest as suggested by the sections
Banking technology leaders’ perception of the industry
on page 6 and Imperative to act on page 8. All bank leaders
apparently believe that their organisations are in better shape
than the rest of the industry.
“The current platform is a real legacy system and in
some areas, for example, loans, the capability to be
adaptive to the change requests is very critical.”
- Head of department of a regional commercial bank
The impact of the challenges
The participants identified a number of areas of impact as
a result of the challenges the current systems face. Of these
areas of impact, the two that occur significantly more often
and with significantly more weight in the survey are the impact
of regulatory change and the ability to support front office
digitisation programmes.
This section identifies the key areas of impact, the current
capability to manage change and highlights the issues
associated with regulatory change and front office digitisation.
Key areas of impact
The key areas of impact that are reported most often by the
bank leaders interviewed are the following:
Lack of funding for discretionary change: The time and
cost required to meet regulatory changes, particularly in
retail banking, impacts the discretionary budget available
for other changes.
Foregone business: The cost to the business of not being
able to pursue change as quickly as required or of not
being able to pursue change at all, hinders business growth
resulting in lost opportunity.
Too slow to the market: Running with high operational
and change costs impacts the time to market for new
products.
Skills shortage impedes progress: High reliance on skills
in legacy technologies that are difficult to scale impedes
progress.
Inability to simplify IT: The balancing act between
accommodating new business needs and keeping IT as
simple as possible and costs as low as possible is vexing.

Support for front office digitisation
More than half of the banking technology leaders interviewed
remark that core banking platforms will inhibit the
development of front office solutions, rather than enable them.
More than half also expect that this situation will change over
the next three to five years, with the core banking platform
enabling change, rather than impeding it.
This changing trend is driven by a subset of banks, where
the leaders plan to implement transformation strategies that
specifically address front office digitisation.
Bank leaders who plan to transform the core banking platform
for front office digitisation expect to enable front office change
by implementing enterprise middleware platforms that use
well-defined system interfaces. For this purpose, they also plan
to rewrite mainframe services to go along with the middleware
and to rationalise the customer information data stores using
master data management disciplines.
“Recently we have been discussing how to position a
service bus and there is recognition in the business case
of the need to rewrite mainframe elements along with
it.”
- Head of department of a domestic retail bank
The inflexibility of legacy systems was identified as the biggest
inhibitor to enable front office digitisation programmes.
“Legacy systems substantially inhibit front office
digitisation because of lack of flexibility and time to
market.”
Support for regulatory change
Most bank leaders report that the level of mandatory and
regulatory changes impacts their ability to invest in business-
led change.
“Regulatory developments do not give us any
additional value, so my strategy is trying to share
developments with other similar banks in order to
reduce costs.”
A quarter of the bank leaders in the survey believe that they
have adequate discretionary budgets to handle regulatory
change. They also remark that they have managed investment
budgets adequately, adopted market-leading solutions and
their international footprint has limited the impact of a single
country or region. Commercial banks were less impacted than
retail banks by regulatory change and commercial bank leaders
have successfully managed compliance requirements over a
period of time.
Less than a sixth of the bank leaders in the survey reported
that they have no discretionary budget available for investment
in business growth initiatives. The reason is that most of the
burden of change associated with regulatory requirements rests
with their core banking teams.
“The impact on the discretionary budget is increasing
because of many regulations, the high number of
implementation projects and the involvement of the
few key professionals capable to conduct them.”

15
Inhibitors to change
In this survey, all the inhibitors to undertaking core banking
transformation that the bank leaders recognise in their
own organisation are looked at. At the top of the list were
three related factors that inhibit the management and
implementation of change:
• Customisation: The difficulty of customising the existing
application
• Skills: Access to the skills required to change and
customise applications
• Integration: The ease with which integration with the
core banking system can be supported
The results of the survey suggest that there is less concern than
expected with the ability to set realistic expectations. Only one
third of the bank industry leaders believe that the ability to
set realistic timescales, budget and overall expectation inhibits
transformation.
Given the number of failed or problematic programmes that
have occurred across the industry, the number of participants
who believe that the ability to set realistic expectations inhibits
change was expected to be higher. However, the adoption
of incremental approaches, with consequentially smaller
budgets, timescales and expectations might be a factor for the
limited concern as suggested by the section Transformation
approach on page 15.
The low level of concern about setting unrealistic expectations
corresponds with a lack of attention observed in the
development of a business case as seen in the sections Future
plans on page 15 and Business cases for core banking
transformation on page 18.
Future plans: IT core banking
strategy
Because there is a wide spectrum of approaches that bank
leaders can take to transform or modernise their core banking
platforms, this section differentiates between those bank
leaders who adopt an incremental approach and those who
adopt an approach that results in step-change transformation.
Notably, complete replacement of the core banking platform is
not being contemplated by any of the bank leaders.
Transformation approach
More than four fifths of the bank leaders have plans for
some form of core banking transformation. The majority
plan incremental, progressive modernisation rather than
programmatic transformation.
Figure 11. The participants’ view of the inhibitors to core banking platform transformation
From 29 responses
Customisation
In-house expertise
Integration
Support from the system supplier
Unrealistic timescales
Unrealistic expectations
Cultural issues
Data migration
Unrealistic budget
Staff training
Organisational issues
Inappropriate system selected
High Medium Low
0 20 40 60 80 100
Customisation
In-house expertise
Integration
Support from the system supplier
Unrealistic timescales
Unrealistic expectations
Cultural issues
Data migration
Unrealistic budget
High Medium Low

Figure 12. The bank leaders’ preference for
transformation approach
Leaders at retail banks are the most likely to adopt an
incremental approach while those at commercial banks are
more likely to plan transformational approaches.
Relative to the size of the banks, leaders at larger banks plan
for less change than those at the smaller banks and very few
bank leaders plan for a radical transformation or overhaul.
The bank leaders who plan more significant changes are those
who are addressing specific parts of the core banking platform
such as payments, loans, mortgages or those motivated by
enterprise cost-saving initiatives such as business process
outsourcing.
The following are the common themes that emerge on the
transformation approach:
Preference for bespoke solutions over packages: Very
few leaders at large banks plan to adopt a package-based
solution in the next three to five years. Rather, they favour a
bespoke development of current solutions.
Optimisation of development operations: Many bank
leaders plan to improve the flexibility of existing systems by
moving to more transformational application management
practices and by introducing elements of re-engineering
into the change management process. This approach
implies a longer journey with an average programme lasting
between four and seven years.
Business-aligned approach: The detailed definition of
the transformation approach and initiatives are the result of
very close collaboration between business and technology
strategists.
Avoidance of technology-led projects: Few bank
leaders plan technology-led projects such as cloud or SOA
enablement, although these were key elements of business-
aligned programmes for which improved agility is the goal.
Investment agenda
For this survey, the views of the participants on the adequacy of
budget provision for transformation were polled.
A third of the participants believe that the budget for
transformation is adequate after mandatory support and
development changes are paid for. Half of them found the
transformation budget to be less than adequate. The rest
claimed that there was no remaining budget.
Incremental, 71%
Transformational, 29%
From 24 responses

17
Figure 13. The participants’ response to the adequacy of
their budget
This scenario contrasts with the views of the participants on
the outlook over the next three to five years in which just over
a third of the participants expect to increase budgets. Less
than 20 percent expect to budgets to fall. These findings are
consistent across all types of banks.
Figure 14. The participants’ response to the outlook for
changes to core banking transformation budgets
Based on 28 responses
Decrease, 21%
Stable, 43%
Increase, 36%
Focus of investment
Of the bank leaders who expect core banking budgets to
increase, the focus of the investments is to deliver functional
enhancements in support of mandatory and regulatory change.
The focus is also on architectural enhancements to enable
operational cost-saving initiatives such as business process
management and master data management.
Irrespective of whether budgets are expected to go up or down,
most investments focus on in-year business cases which can
provide immediate cost benefits.
In only a few cases do bank leaders plan core banking
transformation through a multi-year programme and these
programmes are driven by the need to continue to enable front
office transformation programmes.
Business benefits
This section reviews the business benefits that the participants
seek to achieve through core banking transformation and how
these benefits apply to the business case.
Expected business benefits
There is a high degree of consistency between the business
goals that bank leaders report as the most significant drivers
for change. Regulatory compliance, time to market and
operational efficiency are important to more than two thirds
of the participants in the survey. Improved delivery channel
support is just behind these goals.
“We would like to achieve cost reduction, better data
quality and leverage data for analytics.”
- CEO of a domestic retail bank
From 24 responses
No budget, 17%
Limited 50%
Adequate, 33%

Figure 15. The business drivers for change
Time to market was expressed as a business driver across
different goals:
• Better support for customers: More flexibility for
customer support such as the capability to offer an easier
to approach, round-the-clock and customised service
• Flexibility: Internal flexibility of the system to support of
time to market for products and to make cost more variable
• Business growth: Support growth into new markets or
segments, particularly into wealth management
• Operational efficiency: Reduce most operational
inefficiency in the back office through economies of scale
and straight-through processing. In this case, an overlap is
observed with a minority who cite centralisation
Improved delivery channel support scores lower in the ranking of
expected business benefits. The lower ranking might suggest that
bank leaders have made more progress with digital front office
development than expected. A large majority, however, emphasise
the importance of mobile and internet channels. A more detailed
examination of the data shows that all retail bank leaders regard
mobile banking and internet channels as important.
Figure 16. The importance of different channels
“Revenue streams are coming from other places; 30 to
40 percent of revenue growth will come from digital
channels.”
Business cases for core banking
transformation
Through this survey, it is clear that the level of maturity
and sophistication of business cases for core banking
transformation is generally low.
“There is a business case. Figures exist at a gross
level.”
- CTO of a core banking solution provider
At those banks in which a transformation has happened, the
business case is usually developed at a high level. A small
number of exceptions exist in which a series of smaller,
delimited business cases have been developed. A significant
minority of bank leaders put a lot of effort into the business
case.
Regulation / Compliance
Time to market for
new products and services
Operational efficiency
Improved
delivery channel support
Risk management
Centralisation
72%
72%
69%
62%
55%
24%
0 10 20 30 40 50 60 70 80
From 29 responses
86%
86%
62%
59%
34%
17%
0 20 40 60 80 100
Mobile banking
Internet
Call centres
Branch networks
Social media
Third party / Agencies
From 29 responses

19
“Business case is very detailed and separated for the
main countries…”
Two reasons why the quality of business cases is quite low are
clear from the responses to related questions.
First, the use of incremental approaches with in-year pay
back by bank leaders, is the dominant investment choice as
suggested in the sections Future plans and
Transformation approach on page 15. With this incremental
approach, the bank leaders place less emphasis on the long-
term business case that requires detail, and emphasise a more
credible short-term business case. Second, the ability to set
expectations does not inhibit embarking on core banking
transformation.
Conclusions
From this survey, a clear picture of an industry that is content
to adopt an incremental approach to investment in core
banking platforms emerges. The strategies of the bank leaders
focus on small steps that address the most immediate needs
through in-year investment. This approach has been in place
for the last three to five years and most bank leaders expect to
keep this approach in the immediate future.
The IT leaders are more pessimistic about the state of the
industry than they are about their own organisations and they
express concern about the sustainability of an incremental
approach seen elsewhere.
The concern about sustainability seems to be reasonable.
From this survey it can be inferred that that the short-term
focus that prevails is more or less a mechanism to cope with
immediate concerns and it falls short of a long-term strategy.
The pressure for more radical change is expected inevitably
to increase because the following fundamental issues are not
being addressed through incremental transformation:
Cost: The total cost of operation of core banking
applications is increasing, albeit slowly as a proportion of IT
spending while the revenue and profitability driven by these
systems is decreasing.
Skills: The skills required to maintain the existing core
banking platforms are increasingly difficult to find. While
access to technical skills can be addressed, the people who
built the solutions and understand their complexity are
retiring.
Architecture: Recent high-profile systemic failures shift
the regulatory pressure from operational compliance to the
architecture of the systems itself. Some of the issues that
might emerge from the architecture can be very complex to
address.
Digitisation: The rush to keep pace with innovation in
digital channels adds to the complexity, rather than being a
catalyst for simplification.
Operations: Not enough progress is being made to support
improvements and cost savings in business operations.

Bank leaders must consider the current holding pattern as an
opportunity to take a broader look at the problem. They must
develop a long-term strategy that addresses the fundamental
issues identified earlier in this report. The dilemma that bank
leaders face is understandable. Big replacement programmes
are fraught with difficulty and risk while, incremental
approaches might not help deliver the level of change that is
needed.
With the following practical steps that can help resolve the
dilemma, bank leaders can start to adopt new strategies to get
the most out of their investment in core banking programmes:
Better business cases: The business cases that underpin
the planned transformation must be improved significantly.
The business case must extend beyond IT cost savings and
focus on business savings and higher revenue.
Virtualisation and utilities: A better understanding of the
business case can drive new approaches to transformation.
A clearer understanding of the levers the business needs
to pull can change the focus of investment. Two new key
trends are expected to emerge. First, the current approach
of service enablement can evolve into the virtualisation of
core banking systems. This evolution can further reduce
the dependence of other systems on a specific core banking
implementation and it can allow bank leaders to select niche
solutions for entry into specific markets. Second, over a
longer period, new industry utilities are expected to emerge.
Rebalancing the change portfolio: Bank leaders must
change their approach to managing change programmes to
deliver more from the same level of investment. The clearer
business case and revised approaches to transformation must
be complemented with changes to the delivery approach.
Portfolio management must be a vehicle for long-term
change as well as short-term change. Ideally, bank leaders
must be able to manage and measure the big shifts as a series
of small increments.
Adoption of industry frameworks: The use of banking
industry frameworks is expected to increase. Bank leaders
must tackle the skill gap in the knowledge of the current
solution to fully benefit from these changes. The use
of a standard framework to describe the capability and
architecture of existing platforms can significantly increase
the portability of core banking skills.
A more comprehensive discussion on the issues discussed so
far and specific guidance on core banking transformation will
be covered in an IBM white paper, New Approaches to Core
Banking Transformation that will be published in the second
half of 2014.
For more information
To learn more about the IBM core banking solutions, please
contact your IBM representative or IBM Business Partner, or
visit the following website(s): http://www.ibm.com/banking/
core_banking.html

21
Authors
Michael Davison
Business Development Executive,
Banking and Financial Markets
Michael.davison@uk.ibm.com
+44 (0)7715 161 155
Simon Gregson
Executive IT Architect,
European Core Banking and Payments Lead
sgregson@uk.ibm.com
+44 (0)773 9876210
Contributors
Jack Hu
Senior Managing Consultant,
IBM Global Business Services, UK
Pascal Ter Horst
Senior Managing Consultant,
IBM Global Business Services, Netherlands
Riccardo Laurenti
Financial Services,
IBM Global Business Services, Italy
Keith Tutton
IBM Banking Transformation Leader, Europe

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IBM Global Business Services
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July 2014
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