INTRODUCTION

Core banking is a general term used to describe the services provided by a group of networked bank branches. Bank customers may access their funds and other simple transactions from any of the member branch offices.

Core Banking is normally defined as the business conducted by a banking institution with its retail and small business customers. Many banks treat the retail customers as their core banking customers, and have a separate line of business to manage small businesses. Larger businesses are managed via the Corporate Banking division of the institution. Core banking basically is depositing and lending of money. Normal core banking functions will include deposit accounts, loans, mortgages and payments. Banks make these services available across multiple channels like ATMs, Internet banking, and branches.

Core banking is all about knowing customers' needs. Provide them with the right products at the right time through the right channels 24 hours a day, 7 days a week using technology aspects like Internet, Mobile ATM.

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Development in Information and Communication Technology in Banking

The rapid advancement in Information and Communication Technology (ICT) has had a profound impact on the banking industry and the wider financial sector over the last two decades and it has now become a tool that facilitates banks’ organizational structures, business strategies, customer services and other related functions. The recent “IT revolution” has exerted far-reaching impacts on economies, in general, and the financial services industry, in particular.

Within the financial services industry, the banking sector was one of the first to embrace rapid globalization and benefit significantly from IT development. The technological revolution in banking started in the 1950s, with the installation of the first automated bookkeeping machines at banks. This was well before the other industries became IT savvy. Automation in banking became widespread over the next few decades as bankers quickly realized that much of their labor-intensive information-handling processes could be automated with the use of computers. The first Automated Teller Machine (ATM) is reported to have been introduced in the USA in 1968, and it was only a cash dispenser. The advent of ATMs helped both to improve customer convenience and reduce costs, as before ATMs, withdrawing funds, accounts inquiries and transferring funds between accounts required face-to-face interaction between bank staff and customers.

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Rapid advancement and gains to the banking sector

1) Overall, technological innovation has brought about the speedy processing and transmission of information, easy marketing of banking products, enhancement of customer access and awareness, wider networking and, regional and global links on an unprecedented scale. IT development has thus changed the product range, product development, service channels and type of banking services, as well as the packaging of such services, with significant efficiencies not only in the banks, but also the ancillary and feeder services to banks. The financial services industry has thus become virtually dependent on IT development. Most banks make visible efforts to keep up with new systems and processes.

2) The development in ICT has enabled banks to provide more diversified and convenient financial services, even without adding physical branches. The present day ATMs are more sophisticated machines that can scan the customer and a bank teller, accept cash or cheques, facilitate customer application for loans and allow for face-to-face discussion with a service representative via video.

3) The development of Internet services, which is an extensive, low-cost and convenient financial network, has facilitated banking services to customers, anywhere and anytime. Along with Internet and Web-based services, a need for changing core banking architecture has emerged. The introduction of new core banking systems by some banks and their links with the improved telecommunication network has enabled banking transactions to be done on-line, in contrast to the batch-processing mode used earlier. The integration of e-trading with internet banking and banks’ websites is also a notable feature. These IT advancements have enabled banks to gradually replace manual work by automated procedures with on-line real time processing.

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Core Banking Application

Core banking is all about knowing customers' needs. Provide them with the right products at the right time through the right channels 24 hours a day, 7 days a week.

Core Banking Suite consists of components that can be installed independently and integrated into current banking environment. At the heart of the Core Banking Suite are comprehensive customer, product, and agreement management modules that provide a single and complete view of the financial institution's customers and their engagements with the institution.

The Core Banking Suite also manages deposit and loan products. The application includes a world-leading cash management component, to be used by large corporate to perform cash pooling, sweeping etc in a cross border, multi-currency environment.

Product management is possible through a configurable product composer. This gives the bank's business people the flexibility to assemble user-definable banking products with flexible pricing structures and then quickly distribute them through any channel to their banking customers.

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How shall CBS help Customers?

All CBS branches are inter-connected with each other. Therefore, Customers of CBS branches can avail various banking facilities from any other CBS branch located any where in the world. These services are:

To make enquiries about the balance; debit or credit entries in the account.

To obtain cash payment out of his account by tendering a cheque.

To deposit a cheque for credit into his account.

To deposit cash into the account.

To deposit cheques / cash into account of some other person who has account in a CBS branch.

To get statement of account.

To transfer funds from his account to some other account – his own or of third party, provided both accounts are in CBS branches.

To obtain Demand Drafts or Banker’s Cheques from any branch on CBS – amount shall be online debited to his account.

Customers can continue to use ATMs and other Delivery Channels, which are also interfaced with CBS platform. Similarly, facilities like Bill Payment, I-Bob, M-bob etc. shall also continue to be available. Bank is in the process of launching Internet-banking facility shortly.

All these aim to provide convenient, efficient, and high quality banking experience to the customers, comparable to world class standards

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What are other benefits to the Customers?

A CBS branch is like a Sales & Service Delivery Center. Back office processes/activities are handled through technology at some other site, called Data Center. Branch, therefore, has more time for serving customers. This improves the quality and efficiency of the services rendered and the customer is directly benefited by way of satisfying and happy banking experience.

Since a CBS branch is essentially designed to focus on customer-interface and customer service, the special lay-out and ambience of the branch is made to provide a convenient and delightful banking experience. The Customer Service Representatives / Executives at the branch are specially trained to understand, facilitate and deliver banking services efficiently and effectively.

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Benefits of Core Banking

1) Business Benefits Differentiated Product Spread

Core banking solutions offers an unlimited palette of features for banks to design and deploy products for varying market segments. The product bundling capabilities of the solutions offers a wide range of possibilities for banks to create products with innovative features. The facilities provided for differential pricing, channel rules and customization empower banks to continuously innovate and extend their suite of products, across segments.

Agile Operations

The Service Oriented Architecture (SOA) enables the IT team at the bank to effect changes without touching the base code, ensuring lesser vendor dependency and faster adaptability to changing business conditions.

Robust Cross-sell Framework

The CIF and CRM capabilities in core banking solutions offer a unified view of the customer across the entire solutions and across multiple back-end applications, enabling the bank to view the customer from a completely informed angle. This empowers banks to effectively manage customer relationships and aggressively explore cross-sell opportunities.

Increased Operational Efficiencies and Productivity

Core banking solutions supports business events automation and process orchestration, thus eliminating manual tasks and reducing process time. The elimination of error and data redundancies also results in increased branch productivity. Straight Through Processing (STP) abilities enhance reduction in turnaround and processing time, increasing output and enabling speedy completion of tasks.

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2) Operational Benefits

A flexible, industry standard application from which your organisation can grow

Multi banking and multi currency

System and product administration and product development performed completely by bank business personnel

Shorten time to market products

Supports product differentiation

Supports cross-selling

Increases customer satisfaction and loyalty

3) Technical Benefits

24 hours a day, 7 days a week availability Real-time multi-channel access

Distributed solution, i.e. n-tier architecture and co-operative processing

Consistent and logically structured data model reflecting the information requirements of the banking business

Integrated solution, i.e. data sharing and no duplication of information

Parameter controlled

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Business Challenges

In a multi-channel world, core banking systems are mission critical to banks that are required to operate 24 hours a day, 7 days a week. The costs of keeping legacy core banking systems operating are steep: Aging systems and infrastructures constantly need updates and renewal. Banks that delay updating core systems risk losing their competitive edge.

There are a number of challenges involved in maintaining legacy core banking systems and in updating and renewing them:

Banks need to improve and differentiate the customer banking

experience to attract and retain customers more profitably, even

though they are constrained by their existing systems' hard coded

business logic.

Disparate, disconnected, and outdated systems make it virtually

impossible for banks to integrate customer and transactional

information.

Old, inflexible systems take too much time to upgrade, resulting in a

significant lag time introducing new products to market.

The pressure to reduce costs and improve efficiency is difficult to

respond to without making fundamental changes to underlying legacy

systems.

The potentially significant cost of updating ageing core banking

systems makes it difficult to present a strong business case to

modernize legacy systems.

The risk and complexity of implementing new core banking systems causes’ hesitation and uncertainty about where to begin.

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Need of Core Banking

1) Integrate new services:

A large banking operation might want to improve and provide access to consistent and comprehensive customer information. Their front-line staff can then provide better customer service and correctly identify opportunities to offer new products to existing customers. A new customer information service that is fully integrated with existing legacy systems is clearly preferable to replacing the entire core banking system at one time.

2) Implement new systems:

Another bank might want to market a new type of mortgage offering that the existing core banking system cannot support. In this case, it's critical to implement a new and highly flexible lending system that is fully integrated with existing enterprise services, such as customer information, payments, and credit-limit monitoring. With the new system, the bank can integrate processes, provide consistent customer information, and avoid duplicating efforts, such as redundant data entry and writing extra code.

3) Deploy an integrated core banking system:

Yet another bank might want to fundamentally change the flexibility of its core banking capabilities. They would still need to maintain integration with well-established distribution channels that are based on a multi-channel architecture. For this bank, a new, comprehensive, modern, and open-core banking system may be the answer. Such a system could provide easy integration that is assured through compliance with industry standards.

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Core Banking Solutions

Core Banking Solutions is new jargon frequently used in banking circles. The advancement in technology, especially internet and information technology has led to new ways of doing business in banking. These technologies have cut down time, working simultaneously on different issues and increasing efficiency. The platform where communication technology and information technology are merged to suit core needs of banking is known as Core Banking Solutions. Here computer software is developed to perform core operations of banking like recording of transactions, passbook maintenance, and interest calculations on loans and deposits, customer records, balance of payments and withdrawal are done. This software is installed at different branches of bank and then interconnected by means of communication lines like telephones, satellite, internet etc. It allows the user (customers) to operate accounts from any branch if it has installed core banking solutions. This new platform has changed the way banks are working.

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What is core banking system OR solution?

Core Banking System or Core Banking Solution is a term that we hear very often these days. For IT and Banking folks, this term doesn’t need any explanation but for those who want to know a bit, here’s a brief overview of what it means.

Previously a bank’s core operations such as keeping a ledger of various transactions, maintaining customer information, interest calculation of loans and deposits, adjustments to accounts on withdrawal and deposits of funds etc. were done manually. With the advent of ICT, efforts were done to automate various banking processes using software applications so as to make them simple, efficient, effortless and cost effective. Thus, the platform where ICT is used to perform the core operations of a bank, like those mentioned above, is known as Core Banking System.

In Core Banking System, software applications record transactions, calculate interest on loans and deposits etc. The data, instead of huge ledgers, are stored in backend databases in digital form. Now, the same software can be installed in various branches of a bank and can be interconnected through the internet or telephone lines to form a core banking network of the bank. The advantage, a customer can operate on his account from any branch of the bank and if the bank owns Internet Banking or ATM facilities, then the customer can operate on his account from virtually anywhere.

Thus, Core Banking System has radically changed the way in which banks function. The greatest advantage of having a Core Bank System is that new features and functionalities can be easily added to the system that customers will have a whole lot of services that they can use. Electronic funds transfer between banks, online trading in the stock markets etc. are examples of this, which were unheard of in banks pre Core Banking System era.

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Ingredients that form part of Core Banking System

There are 5 ingredients that form part of the Core Banking system. These are the essential building blocks for the entire bank / institution.

(1) General Ledger:

The absolute Core is the General Ledger of the bank accordingly, the absolute core of the banking system is the General Ledger system, every single financial activity that happens at any location within entire bank has to be reflected in the General Ledger system that generates the financial statements for the entire bank which provides any entity to monitor the financial health of the bank.

Throughout the world, almost all banks have all their financial activity reflected in GENERAL LEDGER every night and next morning the GENERAL LEDGER system provides the bank with enterprise wide balance sheet and trial balance report. In short for those who have successfully implemented Core Banking Systems, the concerned entities in the bank know the financial condition of the bank at the beginning of each business day. If one is looking at the financial statements of the whole bank the GENERAL LEDGER System must provide that. If one is in regional office, the GENERAL LEDGER System must provide the financial statements for the region. Each morning all these entities, at the respective workplaces, see these financial statements reflecting the condition as of close of business yesterday.

In a Core Banking System, this is achieved by deploying a centralized GENERAL LEDGER System which provides for thousands of sub legers with. Level's start with individual branch GENERAL LEDGER rolled up to regional GENERAL LEDGER with further rollup of all regional G.L's to bank GENERAL LEDGER financial transactions from various sources throughout the bank update these subsidiary ledgers and the GENERAL LEDGER system then performs rollups to report at branch, region, zone, country wise head office and any other level that is required by the bank / financial institution.

(2) Customer Information System (CIS): 13

The next major ingredient of a Core Banking system is the Customer Information System or CIS. Accordingly in the CIS, a customer is identified by uniquely by his / her CIS number and all information related to that customer (name, address, phones, employment, credit history, relatives, family members, and demographic data) is stored along with this unique number. All this is stored in a centralized CIS system allowing the customer to visit any branch to do business with the bank.

In addition, CIS stores Customer to account relationships. A single unique customer could have a current account a joint saving account with his wife a time deposit, a car loan and a house loan. The CIS links all these five account to this single unique customer I.D. whenever the customer visits any branch of the bank, all that he does is give his name (and / or address or phone or CIS number) and the CIS system shows the branch staff the information about this customer as well as all the accounts linked to this customer and the latest balance in each of these account.

(3) Deposit System:

The third major ingredient is the deposit system. The ability to process various types of deposits is a must. These include current, savings, time deposit and hundreds of variations in each of these. e.g. Simple current accounts, current accounts with overdraft, cash credit accounts, variable rate overdrafts, simple savings, multi-currency savings, time deposits, CDS, variable rate time deposit, recurring deposits, multi-currency, time deposits, and so on. This is required to handle the liability side of the bank / financial institution's business.

Around the world banks do not open a new deposit account for a customer directly in the deposit system. When the customer wants to open a new deposit account, the branch staff to go the CIS screen verifies the customer details and opens the account. This way, the existing CIS data of the customer remains infect and the CIS information shows that this customer has now increased his relationship with the bank / financial institution. As a result banks who have implemented such systems do not need to have an inter branch reconciliation organization / system.

(4) Loan System:

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The fourth major ingredient is the loan system. This system handles the asset side of this business. In most banks / financial institutions around the world loans are separated by those to retail customer and those to commercial customers processing requirement of loans to corporate customers is different form retail customers and hence there are loan systems that cater to retail customers and those that cater to commercial or corporate customers.

The loan process in a bank involves multiple stems. The loan appraisal and sanction step, the disbursement and monitoring step, the non-performance tracking step the recovery step and the closure. Owing to the fact that a multitude of entities and processes are involved in the appraisal and sanction step, most banks around the world separate the appraisal and sanction step and implement a system called a loan organization system. The other remaining steps of the loan process are handling by the loan system.

(5) Management Information System (MIS):

Once the core deposit and loan business transaction for all customers of the bank are captured and appropriate General Ledger accounts are updated, various users of the Core Banking System throughout the bank need to know what is happening within the entire financial institution. As a result, the fifth major ingredient is the management information system. This enables everybody in the bank to obtain the relevant information from the system in order to carry out their business effectively.

MIS is simple terms takes information from the General Ledger, CIS Deposit, Loan Systems and present them to the bank / financial institution. The staff all employees including management.Around the world, typical examples of information that bank staff (each with access rights) retrieves include.

* Branch transaction activity for today (list of all branch transactions)* Loan activity for a single customer or a group of customer.* Branch General Ledger report printed at the branch.* N P A report for the entire bank for all transactions as of yesterday.

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Ingredients not included in Core Banking

Typically these systems are confined to a specific business department within the bank. They are not Core because they do not affect all areas and entities of the bank.

* Trade finance* Treasure* Credit Card* Mutual Funds* Stocks, Bonds* External System* Payment gateways* SWIFT* Shared ATM network* World Wide credit card networks, maestro, electron etc* World wide ATM networks plus, Cirrus etc and possibly other systems that the bank may want to deploy in specific departments.

Implementing core banking solutions is an HR issue16

Technology implementation in the banking sector has come a long and hard way from the time when certain banks gave their staff Rs 200 as hardship allowance to encourage them to use computers.

New private sector banks like ICICI Bank and HDFC Bank were the early adopters; banks like Yes Bank have the advantage of starting off with new technology from the beginning. There also have been banks like Canara Bank, Syndicate Bank that have successfully implemented technology solutions.

Speed is of essence

In the case of technology adoption, banks, especially public sector banks, have to realize that speed is of the essence. They need to take the right decisions and that too in an efficient and effective manner to get the highest returns on technology investments. Delaying matters by adhering to time-consuming processes has a downside—technology-savvy clients move over to the new private sector or other tech oriented banks.

Change management

One of the elements banks tend to overlook in implementing core banking solutions is that it is a human resource issue rather than a plain technology issue. Merely making cosmetic changes in how people are deployed during the course of implementation will just create chaos and be detrimental in the long run.

Banks need to take a holistic view to map and improve the basic processes through which they run their businesses including how productively they use their human resources. Technology is an enabler but each bank must constantly develop and refine their own strategy.

Future trends

Going ahead, risk management—such as the need to implement Basel II norms—and data warehousing are areas where technology implementation will be concentrated. But none of this would have been possible without core banking and a centralized database.

There is the impending opening up of the banking sector to enhanced foreign competition. Already, many foreign banks have started creating a base here and are waiting eagerly for an opening.

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Core banking a challenge and solution for banks to changing needs Today banking industry has achieved more scope on the technology front

than ever before. Earlier banks were just business enabler; IT is now a business driver for the banking sector. With the help of IT banks have been able to implement Core Banking Solutions (CBS). CBS is an automation of banks across multiple delivery channels. Under CBS banks are able to achieve a centralized processing mechanism and in turn provide an ‘anytime anywhere’ service to their customers. However, core banking applications have a set of challenges as well.

With an increasing competition and changing market dynamics, banks have been forced upon to keep updated themselves for newer obstacles every now and then. Besides this fresh regulations and compliance requirements, industry consolidation, delivering cost effective products and services, maintaining secure data platforms, meeting ever increasing customer demands and other strategic issues, all these factors have made banking far more complex than it used to be in the past. Therefore to handle the increasing transaction volumes and do away with issues hanging around the current systems, banks require the right CBS in place.

Banking industry is getting globalize therefore banks need flexible, customer centric core banking environment which should be equipped with multi-currency and multi-lingual features. For instance, Canara Bank recently implemented CBS at as many as 1000 branches, which is one of the largest implementations in the banking industry and has included agricultural loans, loan processing, foreign exchange and service branch functionality. This step has helped the bank to move in line with the changing market scenario.Currently, out of the total IT spending taken on by banks, about 75 per cent go toward maintenance of existing systems and certain that the business of the bank goes through smoothly. Therefore, a major amount of expenditure involved in upgrading core banking architecture is something many banks may not be able to afford at present. To gain a periphery over their competitors and attend to customer demands effectively, banks are required to take balanced steps by replacing old systems with new platforms, without giving up on existing core banking modules which may still cater to changing needs. Although considerable progress in CBS implementation by banks has taken place but there is much more ground left to be covered.

9 Steps for effective Core Banking System Selection

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Core Banking System is the backbone of products and services that Bank offers. With technology becoming a value differentiator, a wrong system selection may cost tremendous opportunity losses. How does one select the best fit for a bank in most effective manner? How does one ensure that the selection process is made objective, transparent and focused?

Expert advices following 9 steps for effective selection of core banking system

1) Define business needs –and have them owned: It is critical for banks to comprehend their business requirements –both present & future, be it customer demand on products and services, or compliance requirement for business operations. Requirements could be classified as ‘data’ requirements or ‘processing’ requirements (e.g. interest accrual). Defining all the requirements in detail is the foundation of a good selection process. It is also important to have this done by the business users, to ensure that this is ‘owned’ by the business team.

2) Prioritize requirements – first thing first: Not all requirements are equally important; some are more critical and nee to be prioritized

Domain level- some business domains are more critical than others. Unit level- within the business area, some requirements assume higher critical than others. It is important to classify requirements by their priority, this also ensures that the final ranking of vendors is on the basis of a Banks defined criticality rating, not purely on overall conformance of vendors.

3) Determine sourcing model –what suits the best? IT infrastructure involves selection of multiple ancillary applications and also other investments in hardware, networking and third party software. There are two sourcing models:

Prime vendor model: Identify a one-stop-shop vendor, for turn key assignment. Best of Breed model: Determine applications/ IT components that best suit individual requirements

4) Define Evaluation Criteria – upfront:

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Transparency of evaluation process depends on defining the criteria upfront. When these criteria are not defined and frozen, there is every chance of being carried away by certain good features of system or on the contrary, a few limitations overshadowing other features.

5) Manage RFP process – be objective, transparent and focused:

This can be a really tough balancing act, between the degree of detail one needs to get into for clarifying vendor queries, and the time window available for issuing of RPF, and receipt of there responses. The key factor here would be to ensure that information is provided to all vendors, thereby enabling that the process is objective and transparent.

6) Evaluate solutions –for ‘what you want’: Banks get to review demonstrations once a decade whereas vendor makes them for living. Evaluating solutions for “what you want” and not what the vendors would like to showcase is the key to success. It is impractical for anyone to remember marathon of demonstrations. The scoring of vendor should be immediate and consistent.

7) Reference feedback – whom to ask, and what? Reference feedback is critical to make qualitative judgment on vendors’ track record of implementation & support. The important factor is on deciding “whom” to get this feedback from. It has to be another bank that is similar to yours in terms of size, operations and services. The critical element is in determining ‘what to ask”.

8) Define contractual terms – in detail: Care need to be taken to ensure that all that is required to be committed by the vendor-in terms of resources, timeframe, costs, dependencies, etc. are clearly articulated. The success of implementation is directly proportional to the clarity and detail of the vendor agreement.

9) Financial terms – read between the lines: Cost structures should not be just seen from the software license and implementation point of view. Investments in hardware, networking, Database, operating system, and additional investment that might be required in data cleansing and migration, training, should all be considered, before arriving at the Total Cost of Ownership (TCO).

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Core banking system renewal

Core banking system renewal has, for long, been considered a strict no-no by banks. Established comfort level with existing technologies and processes, relatively comfortable margins that provided the luxury of overlooking operational inefficiencies, and finally, the fear of the unknown, have all ensured that banks steered clear of this subject. But the current competitive environment with increasingly demanding customers is forcing banks to take a reality check on their technology environment and ensure that their IT strategy is aligned to their business objectives. And core banking system renewal is often the only solution to their problems. However, replacement of core banking solutions is it for large or small banks, global or regional is akin to a heart transplant. This can be one of the greatest challenges for any institution, which can either result in the bank leapfrogging to a high degree of differentiation and an enriched customer value proposition, or it can create considerable risks for the bank if the transition is not managed properly.

A core banking solution, once implemented, should be robust, scalable and future-proof and serve the business interest for at least 10 years. Banks need to focus on key factors, which make the core banking transformation a successful experience.

Broadly speaking, the key challenges in core banking transformation are:

1) Vendor capabilities and credentials.

2) Dependence on legacy/vendor applications and impact on envisioned technology architecture.

3) Bank’s business goals and alignment to leverage the new technology.

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Core Banking Systems Renewal: An Analysis

The advent of Internet and communication technology has significantly transformed the business of banking. It has also stimulated the development of Core Banking (CB) solutions that drive key banking operations. CB systems provide transaction processing and account management functions underpinning traditional and contemporary banking products and services.

Banking organizations are driving towards core banking systems transformations to re-establish themselves. Banks and other financial institutions are currently experiencing a number of challenges and pressures that are prompting reviews of legacy core banking applications with a focus to either totally or partially replace, or incrementally modify them.

In order to keep up with dynamics of global markets, technology and growing competitive forces, transforming core banking IT systems has become a pending reality for banking and financial institutions of all sizes. However, renewing banking platforms involves prudent requirements analysis, software selection, application development and integration, and technology decisions. Its success depends on top management involvement in the different transformation phases, the availability of operational managers with futuristic mindset and continuous communication inwards and outwards.

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How Much Systems Renewal is Feasible?

Although a majority of legacy systems in most banks are fast becoming obsolete, complete overhaul of the existing back office system that support core banking is a challenging exercise. While a number of banks are contemplating core banking systems reform, CEOs are quite aware of the titanic financial and human resource commitment demanded by renewal projects. Core systems reform projects are suffering significant overruns and past failures of such initiatives in the industry compromise their confidence.

Banks have however realized that process development on replacement systems cannot simply be based on legacy capability. It is this context that banks are now driving process re-engineering efforts to better serve customers and clients. The challenge lies in the skill sets of analysts and to produce these new processes. the way of doing banking resides in the systems affecting people's perception of how the world works, not how it should work.Another dimension of renewal relates to the type of system asset. Third party packaged applications will most certainly be unfeasible to replace due to the investment and intellectual property poured into the solutions over many years. Rebuilding these applications will in most cases not be cost effective. Replacing internally owned self-built capabilities does however provide a more feasible option, but will need to be weighed against cost factors.

Case Studies of Systems Renewal (1) Syndicate Bank- a large Indian public-sector bank chose i-flex's FLEXCUBE and IBM's infrastructure technologies and implementation services in order to upgrade its banking systems. As part of the transformation, i-flex and IBM provided a comprehensive IT plan, mission-critical applications and integration services. The solution has also flawlessly supported the bank's launch of new products.

(2) ABN Amro's- Indian subsidiary selected Infosys as the vendor to phase out an older solution. Interestingly, ABN Amro has been able to achieve considerable cost savings in operations, and has also created some innovative additions.

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Core Banking Systems Reform: Future ExpectationsNext generation core banking solutions face high expectations from user communities.

1) Realizing one bank, one architectureIn a few years ahead banks will most likely consist of a wide range of back-end applications supporting core banking. Thus internally the applications will deliver separate products and services but should converge so the customer can seamlessly hop from one application to another without feeling the difference. One bank one architecture concept is seen as a potential benefit of technology convergence and standardization. Open standards and integration middleware will most likely dominate future core banking systems terrain giving way to the intelligent information networks that will transform banking business into a truly customer-centric operation. The overall solution could embrace IP Telephony, customer care, wireless, IP ATM's and kiosks, IP video surveillance and content delivery network.

Design and architecture of the systems should facilitate rapid response to change which is often going to be driven by frequent redesign of business processes. A focus will be placed on enabling data integration for various purposes such as cross selling, customer relationship management, regulatory reporting and internal management information system at lower cost.

The remaining challenge resides with how an organization can actually identify and separate the common aspects of banking capability from its variations. This is a particularly difficult mindset to adopt especially when businesses are focused on differentiation and often reject the idea of commonality in their own context.

2) Enabling multi-taskingNext generation CB systems will also be expected to perform several functions which most current ones are falling short. These shortcomings include allowing product innovation, bundling, flexible pricing, integration of third party products and real time transaction processing. They should be able to provide a comprehensive database for all business segments that support customer centricity and a functionality that allows smooth IT integration of new product launches in order to accelerate the time to market new offerings.

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3) Open Source-drivenAfter the legacy and the ERP era, the Open Source era appears to advance at a steady pace. Ideally banks want to develop software by leveraging commoditized capability i.e. find Open Source components easily at no or low prices, and once integrated these components can represent a majority of bank core system software. The effect will be low technology costs for banks that could be translated into low fees for high quality products and services. One of the challenges is in the evangelical view that Open Source can replace all software offerings. In niche vertical banking markets, Open Source has no representation or meaning, and will only play a more significant role in the foreseeable future in horizontals.

Conclusion

In order to keep up with dynamics of global markets, technology and growing competitive forces, transforming core banking IT systems has become a pending reality for banking and financial institutions of all sizes. However, renewing banking platforms involves prudent requirements analysis, software selection, application development and integration, and technology decisions. Its success depends on top management involvement in the different transformation phases, the availability of operational managers with futuristic mindset and continuous communication inwards and outwards.

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In year 2006 Accenture & SAP jointly made survey on Core Banking System in Europe. Following are the findings in that survey-

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Uncovering the “Core” of Core Banking

SAP and Accenture collaborated (under the auspices of EFMA, the European Financial Management and Marketing Association) on a worldwide survey of legacy core banking platform renewal in 2005. In the survey, they state: 12 the survey explicitly defined core banking as the sum of all IT components that allow a banking institution to develop, process, and manage its basic financial products and services effectively. These include:

Basic client data Deposit accounts Loans and mortgages Payments Cards

They may also include: Complementary products and services, including those from external

providers Securities (in some countries) Workflow and business enablement systems

The survey offers a fairly broad definition of core banking that recognizes that what is considered ―core may differ from organization to organization and may reflect the main focus of the business. For banks with a wholesale banking focus, the emphasis may be different than for retail banks. By comparison, Data monitor, reflecting a typical retail focus, formally defines ―core system as follows:

Core system includes the deposit processing system, the loan accounting and servicing system, the General Ledger system, the customer information system and the reporting tools.13 a typical example of a class of back-office systems that is not mentioned by earlier definitions of core banking is the class of systems that process domestic and international payments. Yet this is an area that is receiving particular attention as a result of regulatory changes in Europe under the Single European Payments Area directive (SEPA).

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Key Findings in the survey

1. Vendors and bankers have a different definition on Core Banking Systems.

2. Even though the issues are the same around the globe, bankers solve these issues in different ways.

3. Issues are constantly growing and so the risk and cost for a future transformation.

4. Most bankers agree on the target future core system architecture but few of them have a roadmap to get there.

5. Inefficient core systems have a direct impact into the business as it can be seen from the branch operations.

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Following is the interview of Patrick Weber for a newspaper on 16th March 2009

(Patrick Weber leads the Core Banking and Payments practice in EMEA for HP. He has over 15 years of experience in the financial services industry, he was CIO for a financial institution in Germany and Luxembourg, and has extensive experience in managing projects for core banking system replacement.)

Q. What challenges does rapid expansion in banking sector present in terms of core banking systems?

Patrick Weber- The core banking system (CBS) must be flexible enough to ensure quicker time to market for new products and simultaneously be scalable to handle the growth. Furthermore banks must adapt their systems from a risk perspective. Islamic banks share their risk with investors and borrowers, which is fundamentally different to conventional banks. Banks in the Middle East must manage risks common to conventional banks as well as risks unique to Islamic banks.

Q. What benefits can a state-of-the-art core banking system bring – particularly in terms of putting the customer at the centre of a bank’s business?

Patrick Weber -A state-of-the-art core banking system is vital to support the business to sustain the competitive edge and to deliver the bank’s strategy to the customer. With a modern CBS, banks will be able to meet the growing customer demands and to provide, with a very short time-to-market, a wide variety of personalized customer -centric products across all channels used by the respective customer. There will, therefore, be a significant improvement in service quality, including better client segmentation. Banks will, possibly for the first time, have a unified view of the customer across all channels and products. A modern CBS will enable banks to better manage the customer relationship and will support the creation of a customer experience differentiation.

However, banks must be aware that a modern CBS alone will not make the bank client-centric. The organization must change to move from a product/account -driven organization to a client-driven.

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Organization; from a transactional relationship to an advisory relationship. Client-centric implies cross-organizational thinking and teaming and a modern CBS can support this by providing a unified view of the client.

Q. In General, what are the pressures facing today’s banks? What is driving demand for CBS renewal?

Patrick Weber- The main drivers are increasing customer demands and the need for banks to be able to innovate quickly and responsively and to reduce TCO while remaining compliant with ever-changing regulations. Banks must be able to meet the customer’s regularly changing demands for more channels, real-time information and transactions, integrated banking, etc. Banks must deliver what the clients want now and also anticipate the clients’ future needs.

Banks need to be innovative. Time-to-market for new products must be very short. This can work with legacy systems, but it is extremely expensive to stretch legacy technology to meet current demands. Many banks support their operations with up to 100 legacy systems. These have been built up over decades and are costly and difficult to support and modify. Banks need to consolidate systems to simplify the overall operational landscape.

Regulatory pressure is mentioned purely for the sake of completeness. The green factor pressure is also growing. Governments, regulatory bodies and clients are putting pressure on organizations to take corporate responsibility seriously. Green strategies around server usage, power consumption and cooling do more than just benefit the environment. They also greatly improve performance and reduce consumption costs. Banks are keen to reap these cost benefits and reduce their running expenses. So, as well as changing their CBS to achieve more agile processes, banks are working to address their overall infrastructure with a view to reducing costs.

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‘Core banking has not made much difference in banking system’

-Mr. A.K. Khandelwal (Chairman and M.D., Bank of Baroda)

Banks and financial institutions in the country might lay a major thrust to the adoption of packaged software in areas beyond core banking. The non-core banking applications are that of customer relationship management and human resources management among others.

Talking about the relevance and importance of core banking in the Indian banking system, Mr. A.K. Khandelwal, Chairman and Managing Director, Bank of Baroda, said: "Core banking has changed the `DNA' of banking in India, the banks have fought this and the entry into core banking has been rather smooth."

Mr. Khandelwal felt that core banking has not made much difference in the Indian banking system in terms of reduction of cost, though being capable of unlocking a huge potential. He felt that educating the employees was a top most priority for the banks. Core banking offers a couple of advantages over the traditional system of banking. It is capable of handling more number of branches with minimum hassles, it can help innovate new products and services based on demographics and other factors and can also provide 24-hour banking services to its customers, he felt.

Core banking solution has stabilized to some extent but lot more needs to be done to use the technology for retaining the existing customers and to draw a set of new customers, felt Mrs. M.S. Sundara Rajan, Chairman and Managing Director, Indian Bank.

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Largest Core Banking Rollout in Indian Co-operative Banking Sector

 Aug. 18 2008

Punjab State Co-operative Bank (PSCB) and 19 District Central Co-operative Banks have selected Oracle and Flexcel International as their IT partners to deploy Flexcube in the largest core banking rollout in the Indian co-operative banking sector. Flexcube, powered by Oracle Database and Oracle Real Application Clusters, had enhanced the efficiency with which Punjab State Co-operative Bank can deploy people, processes and products in 800 bank branches spread across Punjab.

Commenting on the expectations of PSCB from this deployment, P S Sidhu, MD, PSCB, said, “We expect the market to be increasingly demanding. This kind of deployment will enable us to gear up.”

Training of the staff members and making them embrace the new technology where manual processes still existed and technology adoption rate was much lower, was a major challenge that the bank faced.

In addition to this, sufficient customer data was not available in the manual /old systems. Sidhu also added, “Enriching the data and cleaning it to upload to CBS took a lot of effort. Lack of sufficient technical resources to manage a project of this size was also a challenge for us.”

Having CBS at PSCB

PSCB found that this CBS has improved the value, speed and flexibility of their product offering to customers. With this, the bank would now be in a position to offer many technology-driven channels to customers such as ATMs, Internet Banking and SMS Banking and reduce the stress on branch banking. “It also enabled us to adapt to the changing scenario and maintain our customer information system to track relevant information on an online real time basis,” added Sidhu.

Above all, the PSCB management also believes that this deployment will enable them to compete with private and public sector banks while offering improved customer service thereby retaining the existing clientele while wooing new customers.

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The bank has already built a robust data centre that is sufficient to manage the 800 plus branch roll out. Deployment of the solution in about 40 plus branches across 18 banks has been completed. The second phase of the solution implementation across 200 branches will commence shortly. The roll out across the remaining branches will be completed as part of the third phase.

With the deployment of Flexcube and Oracle Real Application Clusters, one of the building blocks for grid computing, PSCB will be able to enhance the efficiency of its transaction processing and provide on-line, real-time banking to accounts from any of the 800 bank branches in the network. It will also enable standardization of products and services to customers. 

Commenting on the roll out process, Sidhu further explained, “The deployment went according to plan without any major problem but for some delay in rolling out due to shortage of technical man power and clean data for migration.”

The RoI Effect

Although the bank is confident that this core banking implementation will benefit them not only to increase productivity but also control manpower and enable re-deployment of manpower for functions that are critical to the bank's business. While adding to this, Sidhu quoted, “RoI of CBS would be felt in increased customer base and thus increasing the overall business and profitability of the bank. We are already experiencing the benefits by increased productivity and customer satisfaction which is increasing the customer base. With the planned migration of additional branches in phases 2 and 3, the full benefits would be reaped.”

Future Plans

In the next phase, with increase in branches and transaction volumes under CBS, enhanced Oracle Solutions would be required for the Bank’s growing needs. “We are working very closely with our implementation partners Flexcel on this, which is now part of Oracle organization,” added Sidhu.

PSCB has only completed the first phase of the roll-out. In the second phase, the bank plans to migrate 200 more branches and the remaining 550 plus branches in the third phase. Sidhu also informed, “We are very closely interacting with our technology and implementation partners to help migrate to the next phase which is very crucial in our technology upgrade plans.”

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Retail Banking

Retail banking refers to banking in which banking institutions execute transactions directly with consumers, rather than corporations or other banks. Services offered include: savings and checking accounts, mortgages, personal loans, debit cards, credit cards, and so forth.

Difference between core banking and retail banking?Often retail banking is referred to as "non commercial banking" this would be your common checking accounts and consumer loans. Where as "core banking" is often the very solid business accounts and commercial loans. It is referred to, as 'core' because it is a core or central to the banks business. Few banks survive from just retail banking services, they need those core business accounts that are perhaps more stable than retail business. The exact term usage may also be based on the part of the country you live in as is often the case with our language.

Core banking is a centralized system and every data has been kept at the server side. So, 1- a costumer can open an account and use it in every branch, 2-whenever the connection between a branch and the core is dismissed, that branch is out of work till the connection is repaired.

In a retail banking, every branch has its own portion of accounts and the changes will be synchronized with the center at a certain time (e.g. at the end of that day). So,

1-a costumer can work on his/her account just as the origin branch that he/she registered,

2-in case of disconnecting, that branch still can provide services to its own accounts.

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Core Banking Charges of State Bank of India

CORE BANKING RELATED CHARGES W.E.F 06.09.2008

Sr. No. Facility Maximum Amount Charges

1 Deposit of cash at non home branches

Rs.25000/ per day. Rs.2/ per1000. min. Rs 25/ per transaction

2 Deposit of cheques at home/non-home CBS branch, drawn on any CBS branch / other banks

No Limit Intra-city- free.

Intercity (per transaction )

Upto Rs. 20,000/ Free;

Above Rs. 20000/ & upto Rs 5.00 lac: Rs 1.50/1000. Above Rs.5.00 lac Rs.1.00/1000. Min Rs 750/. Max Rs 1250/

3 Deposit of clearing

instruments at non-home CBS branch, drawn on non-CBS branch/ other banks

No Limit Same as above

4 Encashment of cheque at non-home branch

Cash withdrawal ( by the account holder):

Rs. 50000/ per day

Free

Transfer to another

SB/ CA at another

CBS branch

Same charges as in item ii above

Issuance of draft/

B.Ch/ TT

Same charges as in item no ii above + Issuance charges.

5 Transfer of funds from home branch to third party accounts at another CBS branch

No Limit Same charges as item ii above

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Impact of Core Banking:

The Core Banking Systems have to satisfy the requirements of all the entities that form part of the eco-system of the Bank.

[1] Bank Employee: Head office, regional offices, branches etc: Using Core banking System. With appropriate authority employee as given above can help customers do their financial transaction.

[2] Bank management: Executives / managers at respective locations, head office, regional offices, branches etc. can obtain the financial position from Core Banking Systems related the respective sphere of banking operations and thus help pinpoint potential problems so as to avoid crises.

[3] Bank Customers:  Can operate any of their accounts from any branch or preferred delivery channel and have access to his funds any time 24 hours a day.

[4] Bank Auditors :  Ones accounts audited, they operate the same year on year thus enabling auditors to focus more on systems and procedures at delivery channels like branches, call center etc.

[5] Bank regulators: Core Banking Systems produce the required reports for regulatory bodies like the central bank, financial statement, asset and liability reports, NPA reports, large currency transaction reports etc. are all produced by either the deposits, or the loan or a combination of deposit, loan and General Ledger System.

[6] Bank Share Holders:  Core Banking providing the desired return to shareholders from banking operations Trends overtime on such data informs S.H. about how the banks is doing and help take timely action to accelerate or improve performance.

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BIBLIOGRAPHY

Web Sites

www.wikipedia.com

www.infosys.com

www.accenture.com

www.pnbindia.com

www.businessline.com

www.statebankofindia.com

News Papers

The Economic Times

The Hindustan Times

Books

RBI Bulletin (January 2009, August 2008)

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