Is It Time To Replace The Mainframe

For at least a decade, bankers have been talking about replacing their aging mainframes with systems that offer all the benefits of modern-day computing. But the tremendous expense and risk of replacing the day-to-day operating systems that run millions of customer accounts never seemed to be worth whatever benefits could be achieved. Seen as too big to replace, the legacy systems have hung on and on.

Now, the conversation that never seemed to go anywhere has a fresh sense of urgency. Sunbelt superregional BBVA Compass, a Birmingham, Alabama-based subsidiary of Compass Bancshares Inc., announced in late 2012 that it has replaced the system running its 716 branches with a thoroughly up-to-the-minute core processor. Salt Lake City, Utah-based Zions National Bank, a subsidiary of Zions Bancorporation, is finalizing the commercial terms of a similar conversion. At $65 billion and $53 billion respectively, both banks have the type of size and complexity that traditionally has kept banks away from such radical restructurings.

The advances might have been a long time coming, but Joe Reilly, chief information officer of Zions, says his bank and others suddenly can’t move fast enough. Many core banking systems today are only being run by a handful of banks, given ongoing consolidation, he points out. At Zions, three of the four best-of-breed systems it uses to run deposits and loans have few other customers besides Zions. “We don’t want to end up being the last man standing and end up on a system that’s not supported,” he says. “We feel as if we have more risk in doing nothing than in taking some action.”

From a broad perspective, the actions of the two banks hardly seem out of the ordinary. Small banks in the United States have been moving to more modern core systems for years, helping to explain why data processing behemoth Fiserv of Brookfield, Wisconsin, paid $1 billion in January to acquire Glastonbury, Connecticut-based Open Solutions Inc., a provider of advanced core systems for small banks, thrifts and credit unions. In European and Asian markets, the movement off old-school processors has become standard. In Reilly’s view, there is a lagging perception of outsized risk related to core conversions among big U.S. banks. “A large number of these conversions occur every year,” he says. “We don’t believe it carries the same risk profile that bankers, particularly in the U.S., ascribe to it.”

For some, the memories of failed projects may still be too fresh. In 2011, San Francisco-based Union Bank N.A., a subsidiary of UnionBanCal Corp. with assets of $97 billion, pulled the plug on a new core processing system after two years of work. Before that, People’s United Bank, a subsidiary of $30-billion asset People’s United Financial of Bridgeport, Connecticut, failed to go through with a similar project. Additionally, the vendors with the greatest amount of expertise and experience in pulling off such large-scale projects are foreign, putting them at a disadvantage in addressing the complex regulatory environment of the United States.

Given the risk of such large-scale failure, some observers question whether the benefits of moving to a newfangled core processor are worth all the effort. BBVA Compass says its $362 million project is letting it post transactions in real time, open new accounts in five minutes instead of 45, and reduce the time it takes to get new products to market by up to 75 percent. This month it introduced its first product built on the new core system-an NBA-branded online account that lets users deposit checks by uploading photos.

Big whoop, says one analyst. “BBVA could have a small leg up on relationship banking, but will customers really see that?” asks Karen Massey, senior analyst at IDC Financial Insights, based in Framingham, Massachusetts. “I don’t see BBVA taking over market share in such a big way that other banks will say we need to do this to compete with them.” Many large banks, she notes, have already been making steady investments in their core systems, adding workarounds that give them all the capabilities they need.

But in a mobile world where checks are getting deposited through phones, it won’t be long before customers do begin noticing the differences between banks that operate in real time and those that don’t, contends Stephen W. Greer, analyst at Celent. The success of BBVA and Zions could be just the push the industry needs to disentangle entirely from the mainframe. “If they outperform other banks, that could cause a wave of core migration in the U.S. for the first time,” he says.

Reilly says the results of Zions’ conversion will “speak for themselves.” Now the question is whether they will speak for the industry.

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