The big deal in IT for Australian banks is core banking. ‘Core banking’ is shorthand for replacing old product systems with more modern and flexible versions. Most Australian banks are doing this – CBA spent $2bn over five years – but the ones who reap the benefits over the long term will be those who address two strategic problems.
The premise for core banking projects is simple. Each bank has dozens of different product systems, many over 15 years old, each hard-coded to support a different product or a group of products. This is expensive to manage and makes it difficult to innovate across product sets. And the world has changed. Rapid innovation is now essential rather than optional.
To successfully upgrade product systems, two strategic problems need to be addressed. Firstly that the system design will make assumptions about the future competitive landscape, and secondly that enabling product flexibility can lead to management complexity.
The problems are based on learning from the experience of telcos who upgraded their billing systems in the early 1990s. In the 1990s when telcos were deregulated, competition was based on long distance call pricing. Regulated telcos had made vast profits from long distance calling, and competitors rapidly went after those margins as soon as markets were deregulated.
To compete, incumbent telcos upgraded their billing systems to enable flexible pricing. You want to offer cheap calling to China after 7pm? Sure. After the new systems were implemented, it took about 15 minutes to implement, and didn’t require any programming expertise. This was fantastic for competing with long distance calling competitors.
It was not so fantastic when fixed line and broadband competition emerged. The new billing systems proved totally inflexible in enabling new plans and pricing for non-calling products. This was because they assumed fixed lines would continue to be non-competitive, and broadband simply didn’t exist when the systems were designed. When I managed fixed line and broadband products in the late 1990s, it took 12 months and over $1m (a lot of money in the 1990s) to upgrade the new billing system to support new products and pricing.
Core banking systems run the same risk. If they focus on enabling flexibility in deposits and lending pricing – which don’t get me wrong, is a useful thing – they create an assumption that the basis of competition will be the pricing of existing products.
What happens if the basis of competition changes and e.g. moves to the structure of the products themselves? Banks with new systems may be no more able to innovate and compete than those with 20 year old systems. And both will be at a disadvantage to new competitors with systems built around the new product or service.
The other problem telcos found is that pricing flexibility quickly becomes difficult to manage. We had 14,000 calling plans for 1m customers, so it was difficult to quickly work out whether an innovation was good enough for enough customers to be worth pursuing. And if it was and we launched a new plan, sales and service staff needed to be able to answer the ‘will I be better off on this new deal’ question for any given customer who contacted them. (Remembering too that flexible pricing is a two-edged sword, customers perceived telcos were deliberately making pricing complex to make more money, which created a high level of distrust.)
So is it a case of ‘be careful what you wish for’?
Not quite. The good news is that IT systems in 2014 can be architected very differently to the 1990s. Banks who recognise these challenges can build much more flexible systems. This is not by anticipating the nature of future competition (not possible) but by creating open architectures that make future development simpler, faster, and less expensive. And by adding sophisticated analytics tools, to make the task of managing complex pricing much easier.
New IT systems need to enable rather than constrain innovation. The key is to avoid monolithic systems, and create open architectures, with supporting analytical tools, that enable flexibility and innovation across any product.