Nationwide Building Society is blazing a trail in the financial services industry by becoming one of the first lenders to replace its outdated legacy systems with off-the-shelf software. Other building societies and banks, with systems that are up to 40 years old, are looking to follow its lead.
Nationwide has moved to a version of SAP's core banking platform and a service orientated architecture (SOA) as part of a £300m business transformation programme. The project aims to give it the agility to introduce new products quickly and to meet the growing demands of regulatory compliance. Regulations including Basel 2, MiFID and SEPA are driving the changes.
Other banks are expected to follow. According to the Capgemini 2008 core banking survey, more than 90% of banks are now willing to change legacy systems. Smaller banks are already taking advantage of packaged banking applications including products from iflex, Oracle and SAP.
"Tremendous industry consolidation, increased customer transaction demands and data management has led banks to feel increasingly limited by the capabilities of their core banking systems," said the report.
But it will take time for the big players to complete projects, according to Paul Pullinger, head of retail banking sales at Capgemini. He pointed out that it is much more difficult for large banks with complex IT infrastructures supporting multiple products to replace legacy systems.
Moving away from legacy systems to packages software for banks is like building a new house around you while living in the old one, he said.
Ralph Silva, analyst at TowerGroup, said that while all banks planned to replace legacy systems, they are unlikely to do so this year. And the current econonic uncertainty means it may not happen next year either.
"We do not believe that large banks would dare make such a radical change such as core banking replacement in 2008 because of economic conditions," he said. "If economic conditions do not improve in 2009 then you will not see it then either."
Banks do not want to take unnecessary financial risks in the current climate. "Core banking systems, although certainly inferior to vendor solutions, do work. They have one characteristic that is equal to vendor solutions and that is reliability."
As a result, Nationwide's move to SAP is unlikely to be repeated by other banks in the near future. "Nationwide may be an exception this year and [the project] will put it in a leading position. The UK is a very mature market and there is not much room to grow unless you win extra business or reduce costs. These can both be achieved through technology."
Nationwide is a mutual organisation owned by its customers, rather than shareholders. It has the resources to invest in IT when listed firms have less room to manoeuvre. But ultimately, other banks and building societies will have little option but to move to packaged software.