Core Banking with Microsoft Technology White Paper Published: February 2008 For the latest information, please see www.microsoft.com/industry/financialservices/banking/about.mspx#EEG Abstract This paper looks at the latest trends in the market with respect to core system replacement and outlines Microsoft’s strategy for larger banks that are considering a service-oriented architecture (SOA)–based approach to migrating their legacy core systems from mainframe and midrange platforms to a new generation of commodity hardware platforms that run the Windows Server® operating system and that are capable of supporting the largest core banking operations.
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Core Banking with Microsoft Technology White Paper
Trends for Smaller Banks ...................................................................................................................................... 2
Trends for Larger Banks ........................................................................................................................................ 4
Vendors Recognize Relevance of SOA ............................................................................................................ 6
Trends for the Future ............................................................................................................................................. 7
Business Drivers: Moving Toward Agility ............................................................................................................ 9
Core Banking Systems Face Challenges ......................................................................................................... 9
Using Agility to Resolve Issues ......................................................................................................................... 10
Uncovering the ―Core‖ of Core Banking ...................................................................................................... 12
Vision for the Future: A Transformation Roadmap .................................................................................. 14
Surrounding Core Banking Systems .................................................................................................................... 15
Mission Critical: A New Perception ...................................................................................................................... 16
SAP ............................................................................................................................................................................. 16
Mission Critical Program .................................................................................................................................... 21
result of mergers and acquisitions over time and also because many of these sites are or have
become branches and subsidiaries of the large international banks.
Almost without exception, each of these vendors has announced plans that herald a new
version of the system and the possibility of a move away from the IBM iSeries platform. The
vendor with the largest installed base, Misys, serves as a useful example. Misys faced a
particular challenge in that it had to find a way forward for two legacy systems—Midas and
Equation. Initially it attempted re-writes for both towards Java. Then, following the acquisition
of a small ―breakaway‖—Trapedza—who had built a new banking application development
platform, Mysis announced a new strategy.
IBS reported at the time of the Mysis announcement:
Where it is taken on top of existing back office systems, it could be used at the outset
purely for tying together silos and disparate front office layers for tasks such as
channel-based fees (different charges depending on the channel used) or product
bundling. The underlying banking functionality within BankFusion could then be used
to gradually replace the underlying processing systems. ―Facade, enhance, replace‖ is
the Misys rallying cry.8
Fiserv, having addressed its front-end requirements for ICBS through collaboration with
Portrait that resulted in the Aperio offering, instead opted for migrating the core ICBS legacy
code as a first possible step away from the IBM iSeries. It used a set of tools from code
migration specialists PKS and initially targeted Linux through a conversion to C. In addition
Fiserv has made a number of acquisitions that have added specialized services, such as an anti-
money-laundering service through the acquisition of NetEconomy.
Temenos, on the other hand, having recently acquired Actis and its Paba system, which is
installed in a large number of smaller banks in Germany, was reported by IBS as saying:
Temenos will support current clients of Actis.BSP‘s Paba/Q (an iSeries-based universal
banking solution used mainly by international operations) and BSP Trade (a securities
system). However, Temenos will look to move the clients to its own T24.9
To summarize, the approaches range from code migration to front-end replacement and
gradual or more aggressive replacement with a new core banking system, with the possibility
of integrating some entirely new and typically externally acquired capabilities.
Trends for the Future
Datamonitor, in a study carried out in the U.S. market, asked the following question: ―Which of
the following best describes your approach to core systems IT development?‖ It offered the
following alternatives (the order indicates the preferences for this market at the time of the
study.):
Maintain existing system going forward
Wrap existing core systems to enable greater integration
Migrate to a new packaged core system (in-progress or planned)10
8 Whybrow, Martin (editor-in-chief). ―Misys Unveils Product Strategy.‖ International Banking Systems Journal. Issue 16.7, April 2007.
(http://www.ibspublishing.com/index.cfm?section=news&action=view&id=10140) 9 Whybrow, Martin (editor-in-chief). ―Temenos Gains German Presence with Actis.BSP Deal.‖ International Banking Systems Journal. Issue
16.7, April 2007. (http://www.ibspublishing.com/index.cfm?section=news&action=view&id=10143)
One option missing from this list is the one perhaps that may prove of most interest for larger
banks in the future: the gradual replacement of legacy core systems using an SOA-based
approach, one ―service‖ at a time, and using business process management (BPM) technologies
to achieve a more dynamic core banking platform.
An indication that some of the international vendors are starting to think in this direction can
be found in their announcements about the adoption of BPM.
I-Flex is one of the leading vendors in the IBS Sales League Table and earlier acquired by
Oracle. When it announced in 2006 that it was unveiling a ―process framework for banking,‖
based on the Oracle Business Process Architect (derived from IDS Scheer‘s ARIS), it triggered
the start of a race for other vendors to look at their offerings in terms of services that could be
orchestrated by a Business Process Execution Language (BPEL) engine.
One of the vendors, Temenos, (I-Flex‘s main rival at the head of the IBS Sales League Table)
reacted and duly was reported by IBS in 2007 as using the same set of tools in a project with a
bank in Lebanon, which clearly indicates its intentions: ―While Temenos has a layer within T24
to expose processes and enquiries as web services ... the BPEL engine will orchestrate the flows
vertically, within T24, but also horizontally, across other systems.‖11
One of the most recent and perhaps most significant signs of a growing trend towards
specialization of services—this time by a much larger bank—came with the Microsoft press
announcement in 2007 at Sibos (the annual SWIFT convention): Spain‘s Grupo Santander plans
to use Microsoft technology to upgrade and consolidate payments systems across its
international business operations. Santander will use a number of Microsoft products to
consolidate individual payments systems from multiple mainframe computers into one
homogeneous IT infrastructure.
10 ―Core Systems in U.S. Retail Banking.‖ U.S. Financial Services Technology Survey. Datamonitor. January 23, 2004. 11 Whybrow, Martin (editor-in-chief). ―BLF to Pioneer Oracle Tools with Temenos' T24.‖ International Banking Systems Journal. Issue
17.3, November 2007. (http://www.ibspublishing.com/index.cfm?section=news&action=view&id=11213)
If legacy core banking migration is gaining momentum, then it is important to understand the
business drivers that are making it possible for CIOs to gain approval from business managers
to undertake these typically expensive and high-risk projects.
In their 2005 survey of 147 senior executives in 17 countries, SAP and Accenture reported
―flexibility‖ as the biggest single issue with legacy core banking systems, followed by ―cost‖ and
―integration.‖
Figure 5. Percentage of Executives Citing Area as Problem Source: “Redefining Core Banking.” Accenture and SAP Core Banking Survey 2005
Core Banking Systems Face Challenges
For a long time, the strategy of CIOs has been to ―surround‖ legacy core banking systems in an
attempt to overcome some of the highest priority issues faced by the business. These issues
have typically been associated with giving customer-facing staff access to a consolidated
picture of the relationship with the customer in order to improve customer service and to
realize the opportunity for cross-sales. Banks also wanted to give a more consistent customer
experience across the different channels to market.
10 Core Banking with Microsoft Technology 10
As a result, the implementation of CRM and multi-channel integration architectures has been a
popular way to surround legacy core banking systems. Unfortunately, these approaches are
unable to overcome some of the more fundamental issues that legacy core systems face, such
as the presence of a lot of batch processing, which makes 24-hours-a-day, 7-days-a-week
availability—a priority requirement in a multi-channel world—prone to inconsistencies
between channels.
Another typical issue that limits what banks can achieve with a surround strategy is the time it
takes to bring new products to market. Legacy core systems were not typically designed with
the concept of parameterized product definition in mind, which means that the introduction of
any new products or even product variants results in a significant amount of changes to the
core system code. Given the risks this entails and the resulting testing effort, it is not
uncommon for banks to only be able to manage one or two new core system releases each
year—something that in turn limits their ability to launch new products.
In a similar way, legacy core systems place significant constraints on optimizing processes
because these processes are typically written into the code and any process optimization again
results in extensive code changes and the associated regression testing cycles.
The inability to change processes in a more dynamic way can also have a clear impact on the
way banks address regulatory compliance, when changes to a number of different systems are
required every time a new regulation is introduced or an existing one modified.
Overall, this means that the constraints of legacy core systems affect each of the key
dimensions by which banks establish competitive advantage:
Customer relationships and service
Product innovation
Operational efficiency and price
Worse, it likely has a negative effect on the bank‘s ability to respond to regulatory
requirements in a cost-effective way. Given that compliance-related investments are non-
discretionary, the resulting costs can have a negative impact on the bank‘s overall cost/income
ratio.
Using Agility to Resolve Issues
The term that ties together many of these issues and has become closely associated with
legacy core banking system replacement is ―agility.‖
―Agility‖ in this context refers to how a business looks for a way to implement a new-
generation core banking platform that makes it possible to bring new products to market more
quickly, make them available simultaneously across a multitude of distribution channels, and
fine-tune processes on a continuous basis as the bank‘s people learn or regulators impose new
ways of managing risk and improving customer service.
A further dimension of agility is the organization‘s ability to work with partners. As many banks
grow, their business focuses increasingly (where regulators allow it) towards a ―universal
financial services‖ model that includes other offerings such as insurance and investment
products and services, alongside traditional banking products. With this new model, the ability
to accommodate products sourced from partners within the core banking platform and multi-
channel architecture becomes ever more important.
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As the differentiation becomes sharper between those who specialize in the manufacturing of
products and those who focus on distribution, and as the concept of outsourcing elements of
the value chain (something that has already been in existence for some time in areas such as
card processing and trade finance) becomes more widely accepted, agility can also refer to the
way that banks are able to make frequent changes in the choice of partners that they
collaborate with in order to deliver products and services.
12 Core Banking with Microsoft Technology 12
Core Banking Redefined
Before setting out a future vision for a core banking platform that can meet the competitive
demands of the business, it is important to first define what is meant by a legacy core banking
system.
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, Datamonitor, 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).
12 Balgheim, Thomas and Jean-Marc Olagnier. ―Redefining Core Banking: Worldwide Survey.‖ EFMA, SAP, Accenture. July 2005. p. 5. 13 ―Core System IT Spending in North American Retail Banking (Databook).‖ Datamonitor. May 2006. p. 8.
13 Core Banking with Microsoft Technology 13
The International Banking Systems Journal offers an even broader perspective when it tracks
international software vendors for its Sales League Table and Back Office Systems and Suppliers
Guide. The league table is subdivided into products classified as systems for universal,
retail/private, and wholesale banking, with a recently added class for lending systems.
This is how Temenos, one of the leading vendors in the IBS Sales League Table, describes its
mission-critical applications that are based on Windows are architected, designed,
developed, implemented, operated, and supported to increase the quality and
maintainability of the solution for the life of the solution. The MCP delivers the
confidence that data center class systems will achieve target levels of availability and
performance based on Microsoft and industry best practices. The MCP is a shared
commitment and contribution to customer success from Microsoft for mission-critical
IT systems.17
MCP engagements are available on a case-by-case basis, depending on requirements, and the
service is custom priced. Engagements are designed for continuity across the development life
cycle.
Figure 10. MCP covers the complete solution life cycle of mission-critical projects. Source: “Mission Critical Program: Introduction and Overview.” October 17, 2007.
The MCP Components are:
Solution Management
o Continuity throughout the solution life cycle and Microsoft accountability for
system success
Architecture Services
o Architectural and design guidance and validation by Microsoft solution and
product group experts
Operations Services
o Help ensure the system is operated using industry best practices to meet or
exceed required service levels
Proactive Support
o A regimen of guidance, testing, and change management, designed to
prevent downtime
17 Mission Critical Program: Introduction and Overview.‖ Microsoft. October 17, 2007, p. 1.
23 Core Banking with Microsoft Technology 23
Incident Management
o 24-hours-a-day, 7-days-a-week solution-level support and optimized
escalation process into the product groups
Windows Server and SQL Server
The growing market acceptance of Microsoft technology for mission-critical operations such as
core banking is based on the very substantial investments made by Microsoft in server
operating system, database, and systems management technologies.
The long-awaited launch of Windows Server 2008 (formerly code-named ―Longhorn‖) will take
place in 2008.
The following from the Windows Server 2008 Web site provides a preview of how the new
releases of Windows Server and SQL Server will build on what has been achieved with previous
versions.
Windows Server 2008 is the most advanced Windows Server operating system yet,
designed to power the next-generation of networks, applications, and Web services.
With Windows Server 2008, the IT team can develop, deliver, and manage rich user
experiences and applications, provide a secure network infrastructure, and increase
technological efficiency and value within the organization.
Windows Server 2008 builds on the success and strengths of its Windows Server
predecessors while delivering valuable new functionality and powerful improvements
to the base operating system. New Web tools, virtualization technologies, security
enhancements, and management utilities help save time, reduce costs, and provide a
solid foundation for the organization‘s information technology (IT) infrastructure.
Windows Server 2008 is the most secure Windows Server yet. The operating system
has been hardened to protect against failure and several new technologies help
prevent unauthorized connections to networks, servers, data, and user accounts.
Network Access Protection (NAP) helps ensure that computers that try to connect to
the organization‘s network comply with its security policy. Technology integration and
several enhancements make the Active Directory® service a potent, unified, and
integrated Identify and Access (IDA) solution.
Windows Server 2008 provides a solid foundation for all server workload and
application requirements while being easy to deploy and manage. The all-new Server
Manager provides a unified management console that simplifies and streamlines server
setup, configuration, and ongoing management. Windows PowerShell™, is a new
command-line interface that administrators can use to automate routine system
administration tasks across multiple servers. Windows Deployment Services provides a
simplified, secure means of rapidly deploying the operating system via network-based
installations. And Windows Server 2008 Failover Clustering wizards, and full IPv6
support plus consolidated management of Network Load Balancing, make high
availability easy to implement, even by IT generalists. Finally, the new Server Core
installation option of Windows Server 2008 allows for installation of server roles with
only the necessary components and subsystems without a graphical user interface.
Fewer roles and features means minimizing disk and service footprints while reducing
24 Core Banking with Microsoft Technology 24
attack surfaces. It also enables IT staff to specialize according to the server roles they
need to support.
Core banking is a typical mission-critical environment that combines the need for highly
scalable, Online Transaction Processing (OLTP) capabilities with an important element of large-
volume batch processing and transaction history warehousing, within an overall context of 24-
hours-a-day, 7-days-a-week availability.
In terms of mission-critical OLTP support, SQL Server 2008 builds on the momentum of SQL
Server 2005:
Microsoft SQL Server 2008 provides a database platform that is optimized for today‘s
applications and that can scale for any size of business. It drives cost-efficiencies by
dramatically reducing downtime and enabling dynamic and proactive management
that significantly reduces administrative overhead. Finally, SQL Server 2008 provides a
highly secure platform that you can trust with your organization‘s sensitive, business-
critical data.
SQL Server 2008 focuses on four key areas to meet today‘s OLTP database needs:
Scale and Performance. SQL Server 2008 enables companies to build a database
solution with the performance and scalability capabilities that are required by
today‘s applications.
High Availability. SQL Server 2008 provides a database application with always-
on capabilities, while minimizing the management and performance overhead of
high-availability solutions.
Security. SQL Server 2008 provides an enhanced, secure data platform by
encrypting valuable data, auditing changes to data and metadata, incorporating
external cryptographic keys, and encrypting and signing data in backup files.
Manageability. SQL Server 2008 helps companies to reduce the time and cost of
managing their data infrastructure by providing innovative and automated policy-
based administration and improved tools for performance monitoring,
troubleshooting, and tuning.18
Service-Oriented Architecture
It is clear from an analysis of market trends that many large banks see SOA as the correct
architectural approach to modernizing and replacing legacy core systems in a gradual way.
Microsoft advocates a ―real-world‖ approach to SOA, which aligns well with the desire of larger
banks to approach the migration away from legacy core systems in this way.
This real-world approach stands in stark contrast to a potentially disruptive ―rip and replace‖
approach associated with the implementation of a complete core banking solution, and it is
likely to be more appropriate for larger banks.
On the other hand, a real-world approach also tries to avoid a pure top-down approach that
does not take into account the existing IT infrastructure. As a result, it can take a very long time
to be implemented, by which time business requirements are likely to have changed.
18 ―Online Transaction Processing in SQL Server 2008.‖ Microsoft. August 2007, summary and p. 1.