May 8, 2012 - The challenge of giving groups of programmers the resources and space to work on different software projects that all tie into the same core processing system could be likened to a busy restaurant kitchen, according to ING Direct's head of IT strategy Ben Issa.

"Imagine you have a number of chefs and they are bumping into each other. The ideal scenario is to give each chef his or her own kitchen," says Issa.

That may sound difficult to pull off, but ING Direct is attempting to bring that concept to life for its Australian unit in a project informally called "bank in a box." Using virtualization and replication technologies, the bank can create "copies" of the core system quickly and provide them to groups of developers in standalone sandboxes.

To do so, ING migrated its core banking applications to the x86 platform from mid-range servers running HP-UX. This hardware change helps the creation of images of the banking platform that can be patched or changed in isolation - producing a "sandbox" for IT development, testing and experimentation. "We have basically provided a mechanism that allows us to virtualize all of the bank's applications and infrastructure, so we can provision resources on demand," Issa says.

"We're able to be far more innovative than ever before because the shackles have been taken off," Issa says. "We can do tests that would have been disruptive before."

ING Direct's "bank in a box" was built using Cisco's USC for server processing; NetApp's FlexClone for a data storage array; Microsoft's Hyper-V as a hypervisor to work with existing development tools; and Dimension Data as a systems integrator to pull those tools together. All of this allows developers to make changes and test changes using a virtual version of ING Direct's entire system - vastly improving speed to market and allowing the institution to develop new products and make adjustments for trouble shooting and risk purposes.

Replication was always part of ING Direct's development process - what's been expanded is the pace of that replication. In less than a year, it's expanded its copies of the banking system from four to 395, tested new transactions and replicated the customers' environment for trouble shooting purposes. Issa says it now takes less than a day, when it would have taken 260 days to do a full replication before the bank in a box project. ING Direct did not comment by press time on expansion of the strategy to markets outside Australia.

"It was quite a lengthy process before, because you would have to provision the mainframe, database, networks, storage...all that comes with making a 'copy' of the bank," Issa says. "We can now eliminate a lot of that process."

The project is drawing the interest of a lot of banks, particularly larger institutions that are looking for fast and economical ways to modernize their legacy core systems so they can develop mobile banking apps and digital payments products, handle the expanded data management required by new compliance mandates and create sophisticated transaction-based marketing and loyalty programs.

The Need for a Modern Core

Although overall, banks are spending more on upgrades and modernization projects, the largest banks are still trying to avoid massive multi-year, nine-figure core overhauls, opting instead to incrementally modernize core systems to enable new digital delivery innovation and complex governance, risk, and compliance (GRC) initiatives.

"Clients want to interact with banks in a way that they haven't in the past. The game changer for banks is to offer personalized products via digital interactions," says Fiaz Sindhu, an executive with Accenture Core Banking Services.

The pressure on banks to make core systems work more efficiently across departments, provision tech resources more accurately, and modernize data management to accommodate added storage and analytics comes from the need to expand compliance reporting and CRM to enable digital transactions and marketing.

"Where the core comes into play is to deliver a personalized experience to clients, to create bundled offer, modernizing the core can enable that," Sindhu says. "One of the constraints that banks have is their core platforms are siloed by product. By linking these systems together, you can get a closer view of what the client has."

While full core replacements, or "rip and replace" in industryspeak, are underway at a number of community banks, larger banks are stopping short of projects that large. But they are starting to get more active in prepping core systems to handle financial service delivery that's more digital and mobile-heavy. "Banks are adding modules to increase functionality, but the transformations in North America and Western Europe aren't happening on the scale of other markets," says Stephen Greer, an analyst for Celent.

Beyond ING Direct, other major core projects underway at larger banks include Bank of America's migration of disparate core systems at regional markets to a centralized "model bank."

BofA's model bank is a customized version of FIS' Systematics, and will enable the bank to place all of its customers and clients on the same platform - previously some markets were on other platforms, some dating to the time before the NationsBank acquisition more than a decade ago.

"The transition to the core platform for all customers and clients will provide the same experience for them no matter where they live, from Laguna Beach, California to Boston, Massachusetts and all points in between," says Mark Pipitone, a BofA spokesperson, who says the bank has had different systems throughout its franchise as a result of acquisitions. "[Model Bank] will allow [all customers and clients] to have the same opportunities with the same line of products, and when we roll out new products and services, they will be available to everybody at the same time, seamlessly. We are confident once the system conversion is completed we will give our customers more reasons to do business with us."

Big Money

Celent in mid-April released new research that predicts the market for global core banking technology is expected to grow to $5.1 billion by the end of 2013, up from around $4.8 billion at the end of 2011. But most of that growth is coming from outside of North America and Western Europe. Asia Pacific alone accounted for $2 billion of the $4.8 billion spent globally in 2011-more than double spent in Western Europe and North America.

"In the emerging markets, where the bigger tech players are moving in, there's more activity than in the mature markets," Greer says.

He says that in North America and Western Europe, where most core systems are 20 years old or older, the prevailing projects are upgrades by the large core vendors such as Fiserv or FIS that allow banks to deploy mobile banking or risk management systems form those vendors-which have acquired the point solutions through a series of acquisitions of smaller tech firms. Other banks are engaging in projects driven by the vendors that reduce siloed systems by combining underlying platforms though middleware deployments.

"The large issue for banks is compliance. Analytics is starting to play a larger role in 'know your customer' regs, which also affects customized marketing. So you want to be able to get the information out of the core and be able to do analytics on that information," says Karen Massey, a senior research analyst at IDC Financial Insights.

Most legacy core systems, which are set up to manage branch banking, excel spreadsheets and manual processing, have to be updated via patches to accommodate web-driven data analytics. "Some of these core platforms are 50 years old," Massey says. "Anytime you do something it impacts the core. Especially with the largest banks, they have to decide how to make changes to the core by using different middleware and wrappers to integrate with the core without having to change it."

Celent says Fiserv and FIS dominate the North American core banking market, along with small bank specialist Jack Henry, which has picked up business from growth in core transformations at community banks. Outside of the U.S., the provider landscape is more diverse with Misys, FIS and ERI tackling projects at large banks that are trying to rationalize the disparate systems that often drive the main bank and subsidiaries in other countries. In Asia Pacific and Latin America, the market is wide open, with firms such as Temenos, Oracle, and Infosys joining the aforementioned firms. Temenos and Misys are particularly strong in the Middle East, Eastern Europe and Africa-though a firm called Path Solutions has made inroads in the Middle East.

"Regulatory requirements and customer expectations are forcing the hand of financial institutions," says David Albertazzi, a senior analyst at Aite Group. "Some of the institutions that have kind of ignored the need to upgrade their core for a long time and are feeling the repercussions of that."

Bottomline: Banks are looking to upgrade their core systems to enable them to quickly develop and bring to market new products.

This story originally appeared at Bank Technology News.