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Core Banking System

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This chapter introduces us to the concept of this research paper and gives a brief outline of the sections into which the paper is divided. These are overview, research questions, methodology and purpose, all of which are later described in detail in subsequent chapters.

Overview

The face of the banking sector is changing with each passing day, what with the new and improving technological advances that have even transformed the conventional banking methods to sophistication with a touch of class. Banks are opting to change their banking systems and embrace the coming changes, all with an aim of increasing efficiency and retain customer loyalty, as well as minimize costs. With many of the banks becoming global, there is a growing need to embrace technological innovations for easier communication and management of data across the globe. Local banks as well need to be able to expand and serve a large customer base with no worries of overwhelming costs and losses as a result of mismanagement. This research paper aims to look at how banks can incorporate Information Technology services into their processes and systems in order to achieve their goals and objectives with much more ease and competence.  In addition to looking at how to make use of IT to their advantage, the paper will also seek to analyze the most applicable software and systems provide a basis for easy data management and analysis. To ease the process into this analysis, the research process will be guided by some core questions that will form the basis of this study.

Research questions

Research questions play a major role in giving us a guideline on what information to look for as we engage in a research process. They are also the basis on which we gauge whether the objectives of the study have been met. In addressing the Core Banking Software, the following questions shall guide the research methodology process. Which technological methodology is best suited for the banking sector? Can another industry’s standards be applied in the financial sector and do they need any modifications? Which one, between the Project management Professional (PMP) and the Project Management Indispensable PMI) system, which one is the best application for banks? What are some of the tailor made technologies that are based on a bank’s infrastructure and which can easily be adopted into the banking system? In what ways does a bank need to prepare in order to undertake the implementation process successfully? What is the importance of carrying out a cost analysis benefit on each of the implementation process and how can it be carried out? How will the new system implementation be reflected in the bank’s operating system? Will it affect the work flow processes and if so, for how long and how will this be dealt with? What will be the milestones to be used to measure progress and indicators to indicate growth? (Paul 2003, p.56)

Bearing in mind that a bank planning to deploy a new core banking system needs to do a thorough process-as-is analysis and put a cost to each process and establish the revenue generated (a detailed MIS report by department can be used to give an indication of the revenue generated); the information gathered from such analysis will assist the management, during the core banking system implementation phase, in making process-change decisions based on quantitative information. Old technological restrictions also need to be considered to establish whether they will in any way restrict the full operation of the new technological implementation (Paul 2003, p.56)

Methodology

The process in which the research process was carried out was as follows;

Literature review that would give us a preview into what has been said by authority figures concerning the issue of IT innovations and implementation in the banking sector. The literature review focuses on case studies of some banks carried out by Cap Gemini and KPMG.A review on the most common approaches used by banks for new system implementation. Comparison of PMI to PMP was done in order to establish the best approach. Creation of a tailor made methodology based on a bank’s services, tools and infrastructure. An analysis of two already existing Bank Software Vendor methodology- Temenos and Avaloq was done. Analyze the concept of Model Bank that software vendors introduce in their global sales effort (Paul 2003, p56)

Purpose

The purpose of the study is to avail a new concept of a software methodology that banks can make use of in order to come up with a complete IT innovation beside on process that flows smoothly from an abstract idea, to a tangible process to a reality (SystemàProcessesàOrganisation) in that order. The process will be based on a process and process innovation approach, as opposed to the most commonly used approach of analysis, development, testing and final roll-out. This old school strategy of implementation normally presents the challenge of carrying forward old mistakes and replicating old systems, hence limiting organizational capacity and hindering growth and new system possibilities.

CHAPTER TWO: THE CORE BANKING SYSTEM

Definition

The core banking system refers to a system of interconnected services that are offered by a group of banks that operate within the same network. This means that clients to these banks are able to access their money from any given branch of these banks. It has also been defined by Gartner as the system that banks rely on for daily processing and updating of records that have to do with transactions like deposits, loans, withdrawals and credit processing activities. Core banking on the other hand refers to the activities affiliated with lending and depositing of money. CORE is an acronym that stands for ‘Centralized Online Real-time Exchange.  What this means is that a centralized datacenter serves a multitude of other datacenters that are connected to it electronically and online. This has really changed the face of the banking system because, unlike in the olden days when transactions would take a day or two to be completed, today, it is now possible to make a deposit in one branch and withdraw that same amount five minutes later from another branch. This way the needs of corporate customers have been addressed effectively by ensuring that there is a constant money flow (Feng 2007, p 43).

Evolution

Core banking services have evolved progressively over time to become what they now are today. They have become a platform on which people now experience improved operations, reduced charges of operations, opportunity for growth. Further more, the core banking systems are an advantage to the banks themselves because they have helped improve data management systems through an overall service-oriented architecture that reduces the chances for data replication an data loss that results from replacement or an overhaul of the system. Use of internet and information and communication technology (ICT) has brought with it a lot of changes that have helped in better time management, where people can now multi-task and at the same time produce efficient results comfortably. This has only been possible due to the use of computer software that has been developed specifically to perform core operations like passbook maintenance, recording of transactions, maintenance of customer records, withdrawal and balance of payments monitoring, among a host of other essential services (Murrell 2001:35). 

Market Figures

Many banks have embraced the new technology that has come with core banking systems. Currently the number of available core banking systems stands at 75. However, with the growing demand for banking services, the services that these systems can offers are slowly becoming limited. Just an example to elaborate what core services have been able to achieve, they have provided an opportunity for growth, profitability and expansion. In Mexico for example, return on equity for the core service banking sector has been considered to be higher and in a consistent mode, than that of the formal banking sector. In terms of figures, this is 27% and 21% accordingly in 2005. Growth in the core banking sector has been steadily increasing at a rate of 42%.  Azteca bank reported a 196% annual increase in the net income in the year 2007, and an approximated 17% increase from the income of the first quarter income in 2007 the following year.  Azteca now hopes to expand its operations to Brazil and Argentina (Mohamed 1999:117). With core banking systems, there is substantial reduction of operation cost because operations become centralized and easier to monitor. Core banking systems allow for cost sharing among the various departments across all levels because after all, whatever costs on services, products or software need to be met will be met uniformly and this becomes cheaper. Market research on the effects brought about by the implementation of core banking systems shows that transactions growth shot up from 380 million in 1996 to 1.5 billion transactions in 2003. This recorded a 294% increase in the performance capability of financial institutions that has implemented the core banking system within this period of time. This is a case study of TEMENOS COREBANKING.

Gaining Competitive Advantage with IT

Competitive advantage implies being strategically placed above one’s competitors in order to enjoy the benefits that can be derived from that kind of positioning. The core banking system has got a lot to tap from the IT sector so as to gain competitive advantage over the formal banking sector. With all the many different software systems that have been developed for different applications, including security, banks have all the opportunity in the world, to grow, expand and prosper. Understanding the way to go in order to gain competitive advantage in areas like marketing, production, finance and control would helps a bank to go for the best software systems in order to achieve this. However, the most recommendable way to go is always to combine all these aspects into a holistic approach.

Among the areas that IT would be of great use to a bank would be

-Innovation of product offers: Core banking solutions that incorporate the use of IT have proved to be efficient and very promising when it comes to design of new products and services that a bank introduce to its clients. These services are for example, top-up loans, offset services and products, mortgages, incremental deposits, mobile transfer services among others.

-Automation Capabilities which refer to the ability of the software system to combine a number of many different services into one component in order to enhance high levels of automation. The software allow for easy and fast response to non-financial transactions when there is high flow of work in the financial based transactions.

-Regulation and compliance which has to do with resting in confidence assured that a bank’s data is safe and is allied with analytical solutions. The system also makes it possible for the operations of a bank to be aligned with regulations such as the Patriot Act.

-Efficient payment systems support: the core banking solutions come in handy to provide a comprehensive payment system especially for across-the-border payments and transactions. To add to this, the module s compliant with globally recognized payment channels like SWIFT, CHIPS and CHAPS.

-The treasury solution which provides banks with the ability to manage their money during market transactions. The solution provides quick and simple approaches to foreign exchange markets that many banks would like to be involved in, securities, and money markets. The ability to do this efficiently means lower risks in accountings as well as management.

-Consumer e-banking solutions: this is a new generation banking application that allows for consumers and corporate customers to conduct their banking transactions anytime, anywhere and is the service that is commonly offered through the Automatic Teller machine and allows one to make inquiries, pay bills, transfer funds, aggregate accounts and make withdrawals, anytime, anywhere.

-Integrated alert capabilities: core banking solutions enable banks to pass information to stakeholders through various channels of communication like Short message Services, email, fax or voice messages. The software system has the ability to allow for delivery of multilingual prompts, two-way alerts; international and local alerts among others services. As such a bank is able to incorporate the following services into one delivery system; clearing, retail loans, deposits, currents and savings accounts and teller functionalities (Patrick 1998:79).

With the core banking system, everyone in the team must be aware that for the organization to gain competitive advantage, they must be ready to play their role and play it effectively. When a company or a firm realizes that it has some competitive advantage to gain, it must realize that it needs to come up with a strategy that is concrete and actionable. In other words, it must engage in observable, manageable and tangible activities that are outstanding and comparably different from those of its rivals. The activities that a firm chooses to adopt with a view to gain competitive advantage bridge the gap between strategy and implementation. Strategy should always be looked at in terms of how and what; ‘what’ should be aligned ‘how’ to achieve the desired results to a given array of clients? These activities, to the best advantage of a firm should be distinguished between organizational activities like compensation systems, overall decision making architecture and training (support services), and activities that are directly related to production, delivery, marketing, servicing of a product and sales. Support services are a source of competitive advantage on their own because they shape the way in which an organization is able to compete with rivals. The configuration of such services shapes the appropriate manner in which relations should be like between employees and other firms. These activities are what make the strategy operational, meaning that since activities are carried out by employees, it goes without saying that everyone is part of the bigger strategy. 

The concept competitive advantage implies that there are some stakeholders in the competition and in this case, these are the competitors or rivals to the firm or organization implementing the core banking systems. In adopting strategies that help a firm gain a higher standing ground than others in the field, it is always important to keep in mind that a quest to gain competitive advantage should not be aimed at damaging good competitors in an effort to battle out bad ones. What is this supposed to mean? An increase in improvement of service delivery systems, in this case the adoption of the core banking system, may be done with an aim of wiping out bad competitors. However, it is always almost impossible to battle bad competitors without spilling harm to good ones. This is because, strategies adopted to wipe out bad competition may cause the share of the good competitor in the market to reduce and eventually wipe him out, which is bad for the implementing firm because lack of competition causes laxity and consequent loss of attractiveness in the market. In summary, activities carried out with an aim of gaining market advantage should be done in moderation. An approach that can be adopted is to try and change bad competitors into good ones. This is possible by giving signals to a competitor so that they can change some faulty assumptions they may have. For example, a company by the name of Alcoa has over time been trying to influence the forecasts by its competitors that the competitors will be meeting 75% of the market demands within no time. If the influence by Alcoa is positively influencing, there is no doubt that the competitor will change its strategies and eventually become a better and a friendlier competitor. Friendly competition should ensure that a firm achieves a sustainable competitive advantage, which can be classified into cost advantage and differentiation advantage. Cost advantage implies that a firm is able to offer a range of services as the competitors but at a lower cost that the competitors. Differentiation advantage implies that the benefits derived from the products or services are much more than those of the competitors. This is exactly what core banking system seeks to deliver because as earlier outlined, the system helps to reduce operational costs, as well as improve the quality and quantity of services that a firm is able to deliver at any particular time. Both the cost advantage and the differentiation advantage are known as positional advantages of competitive advantage because they determine a firm’s position in the market, either in cost, differentiation or both.

Competitive advantage does not come easy, especially where there is implementation of new IT systems.  It requires that a firm combine its resources and capabilities in order to create superior value in relation to the value given by competitors. Resources in this refer to specific assets that few or no competitors can be able to acquire. Such are patents and trademarks, brand equity, firm reputation and installed customer base. Capabilities on the other hand refer to the firm’s ability to put the resources into effective use. An example is being able to use the knowledge gained during training of the core banking system to deliver quality services. As a secret to success, capabilities should not be able to replicate in other firms or by competitors. The ability to combine resources and capabilities form distinctive competencies that enable quality, customer relations management and innovation, all of which play a very big role in creating competitive advantage. Below is a model that captures this concept, as a picture is worth a thousand words.

Customer Relation Management (CRM)

Customer Relations Management refers to the skills that are applied by businesses to handle their customers with care in order to enhance customer retention and subsequent loyalty. In more professional terms, it is the use of methodologies, technology, software and internet capabilities to synchronize organize and make automatic business processes. For example an organization creates a database in which it stores all information that pertains to its clients, such that retrieval of such data becomes fast and easy. A database is a channel in which such an organization is able to update information about its clients and describe the trends of relationship and interaction with the client base. Training bank staff on CRM increases the level of individual and organisational competence as a result of proper interactions among the stakeholders. It helps to reconcile the gap between what should happen and what is happening, between desired targets or standards and actual levels of job performance. CRM also helps to improve knowledge and skills, and to change attitudes. This can lead to many potential benefits for both individual employees and the organisation. Training on CRM can increase the self-confidence, motivation and commitment of employees; help to improve the availability and quality of employees; provides recognition, enhanced responsibility, and the possibility of increased pay and promotion with a feeling of personal satisfaction and widen opportunities for career progression. There are system software packages that banks can develop or adopt with the aim of improving their customer relations electronically, and to boost the actual physical one-on-one services that the personnel offer in a day to day basis.  For example, systems through which customers are able to lodge their complaints and be attended to without being told to wait for a certain number of hours for their issues to be responded to would be of great importance in enhancing customer relations. This also refers to systems that seek customer feedback on services offered by a bank, with the aim of using that feedback in order to improve, seal gaps and meet customer needs more effectively. Furthermore, the less sophisticated a software system is, the easier it is for customers to use and the more attracted they will be to buy services and products from a bank. Simple software applications mean less time used on the transaction process and this is on aspect of being efficient in service delivery (Firdos 1993:4).

According to experts, IT innovations enhance CRM in a number of ways that include enabling the organization’s marketing departments to identify and target the best clients, keep up with the marketing strategies and campaigns and come up with quality leads for the sales department. It also assists the organization in making improvements to telesales, and accounts by distributing information among all employees and putting already existing processes into a streamlined process for example processing of transactions through the mobile phones. Since CRM is all about customer satisfaction, IT allows for the formation of individualized relations with a firm’s organization. Improved customer satisfaction directly translates to increased profits. IT also allow for the sharing of information with employees, which is necessary for a deeper understanding of the firm’s clients, hence a building of a deeper relationship.

There are three phases in which core banking systems enhance in bringing out the best CRM delivery possible. These phases include acquiring, enhancing and retaining. In an elaborate approach, core banking systems play a major role in helping firms to get new clients fro example through contact management, sales and fulfillment. Enhancement means that web-enabled CRM in combination with customer service tools help to offer customers the convenient one-stop shopping because the services are provided by a team of specialists in sales and services.

There are scales of evaluation that an organization can use to gauge whether or not their adoption of core banking systems has helped them to effectively achieve a level of effective CRM or not.

Poor CRM levels- at this level of CRM, there are no clear definition of customers. This in itself is a reflection that the organization does not know whom it targets in the delivery of services. There is also no reliable data on the required information about customers that are in diversified places. Furthermore, at this level, there are no measurable values of organization-client relationship. 

Average CRM levels- at this level of CRM, definition exist on who the clients are, but there is no agreement across all levels of operations and departments. The information available about clients is rarely used in offering services, neither is the information analyzed. Current values are clearly understood, but they are hardly ever used to make future predictions or plan for improvements in the customer relations management issues. Average levels of CRM are characterized with many lost opportunities.

These two levels of CRM management, exhibited in organization that have implemented the core banking system, are strong indicators that there are missing links in the implementation process. Effective and excellent implementation of core banking system is exhibited by CRM levels that are characterized by agrees customer definition across all departments, well planned future strategies, comprehensive customer information that is easy to trace, analyze and plan with, ability to recognize customers byname and face as well as to customize services that suit their needs and there is also a clear understanding of current and potential value in individual clients. At this level of CRM, there is a clear guideline of design of future relationships and investments on clients. A firm should be able to evaluate how much influence there is from implementation of core banking systems and gauge how well or badly they are doing in relation to the two. The following diagram could help elaborate the relation that exists between CRM and core banking system (infrastructure). 

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