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Core Banking at Microsoft
Core Banking at Microsoft
White Paper
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.
Contents
Introduction .................................................................................................................................................................... 1
Conclusion.....................................................................................................................................................................32
Resources .......................................................................................................................................................................33
Introduction
After years of debate about the need for core system replacement, there is finally evidence of
growing momentum both in the market of smaller banks (dominated by package vendors) and
in in-house projects of larger banks.
For the larger banks, the approach to core system replacement is typically based on an overall
service-oriented architecture (SOA) strategy and likely to combine elements of three different
approaches: legacy code migration, core banking package implementation, and the
introduction of re-usable ―banking enterprise services‖ alongside traditional in-house
development.
Clearly, the main business driver for legacy core system replacement is ―agility‖ and as a result
there is a growing focus on incorporating workflow and business process management (BPM)
technologies into the target architecture.
Having long had a strong association with traditional ―surround‖ strategies aimed at
overcoming the constraints of legacy core systems—strategies such as customer relationship
management (CRM) and multi-channel integration that are strengthened by collaborative
technologies—Microsoft now has a clear vision for the future architecture of core banking
platforms.
Microsoft is positioned to support the emergence of a new generation of agile banking
platforms with flexible product definition, customizable workflow, and integrated multi-
channel distribution capabilities, built on SOA principles and using industry-standard
communication protocols and vocabularies.
The necessary mission-critical infrastructure based on Microsoft® technologies has been in
place for some time and is continuously being strengthened by new product releases, including
the 2008 launch of the Windows Server® 2008 operating system and SQL Server® 2008
database software. Combined with the availability of highly scalable commodity hardware and
leading independent service vendors (ISVs) who offer their core banking solutions on the
Windows® platform, this is leading to a gradual change in perception among senior banking
executives. They are starting to recognize that Microsoft can offer a more cost-effective and
agile alternative to legacy mainframe and midrange platforms traditionally used for core
banking, without sacrificing important mission-critical requirements such as scalability, security,
reliability, high availability, and manageability.
Microsoft has also recognized this trend and is supporting it by means of the Mission Critical
Program and membership in the important alliances such as the Itanium Solutions Alliance and
the Mainframe Migration Alliance.
A ―real-world‖ roadmap towards an SOA-based next-generation core banking platform
requires a combination of an end-state vision, an ISV ecosystem that is closely aligned with this
vision, and supporting technologies.
Microsoft is well-placed to assist its customers with delivering on this vision.
“The IBS Sales League Table 2006.‖ International Banking Systems Journal. 2006.
1
(http://www.ibspublishing.com/index.cfm?section=SLT&action=view&id=10109)
Analysts hold a broad consensus that the core banking market in the United States—perhaps
contrary to the rest of the world—is not showing much sign of growth. This market has been
dominated for some time by a relatively small group of vendors. Many of the smaller banks use
outsourced services provided by these vendors as an alternative to the traditional on-site
package implementations. A large proportion of the significant number of core banking deals
in the United States each year is typically associated with ―churn,‖ that is to say, banks moving
between vendors, with another sizeable segment going to ―de novo‖ start-ups.
TowerGroup estimates that, ―on average, 200-300 banks consider replacing their core system in
a typical year [in the U.S.]. Vendors also benefit from licensing to the 100-200 de novo banks
opening each year, although many of these opt for a service bureau solution.‖
2
According to IBS: ―IBS Publishing estimates there were 875 new wins [in 2006] among all types
of financial institutions—banks, thrifts, and credit unions. ... Thus, expect about four-to-five per
cent of US financial institutions to decide to convert their core retail banking systems in 2007,
with most activity occurring among community banks and credit unions, and little (or no)
activity at the top-tier banks.‖
3
2 Robert Hunt. ―In-House Core Processing for Community Banks: Vendor Consolidation Continues, But Choices Get Better.‖ TowerGroup.
December 2003. p. 7.
3 ―The IBS Sales League Table 2006.‖ International Banking Systems Journal. 2006.
(http://www.ibspublishing.com/index.cfm?section=SLT&action=view&id=10109)
Figure 2. Datamonitor; Retail Banking Technology Business Trends Survey, December 2006
Forrester has been carrying out a survey of some 50 European banks for a few years running,
seeking to establish how many of them have core system replacement initiatives in place. In its
most recent survey, Forrester asks, ―Is your company working on a major renewal initiative
regarding its financial services application landscape (e.g. banking platform)?‖
6
The results indicate that 53 percent of respondent banks were already executing such a
strategy and 27 percent were planning to do so, while 9 percent reported already having
completed such a renewal. This suggests that—at least in Europe—legacy core system
replacement is now firmly on the agenda of a significant proportion of larger banks.
The same study also asks respondents the following question: ―Are you already using service-
oriented architecture (SOA)?‖ Here, 56 percent of respondents reported already using SOA and
31 percent were planning to do so.
5 ―Emerging Asia Pacific Markets Play Catch-up—Retail Banking Technology.‖ Datamonitor. December 2006.
6 Jost Hoppermann. ―European Financial Services Architecture Strategy Survey 2007.‖ Forrester. 2007.
It seems fair to conclude that there may be a link between these two trends and that—at least
in the larger banks in Europe—SOA is seen as an appropriate strategy to tackle the long-
standing issue of legacy core system replacement.
regional vendors amounts to some 1426 systems sold. In reality this number will be smaller as a
7 ―The IBS Sales League Table 2006.‖ International Banking Systems Journal. 2006.
(http://www.ibspublishing.com/index.cfm?section=SLT&action=view&id=10109)
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.
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
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.
11Whybrow, 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)
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.
Payments Alternative
Instruments
Nostro
Reconciliations Structured
Products
Confirmation
Matching Third-Party
Commissions and
Workflow
Trailer Fees
Collateral
Microsoft considers all back-office systems as potentially being within the scope of a legacy
core banking systems renewal strategy.
At the heart of this vision lies the belief that the vendors of packaged core banking
applications and the larger banks who continue to build in house will evolve the architecture of
their banking platforms towards a collection of reusable ―banking enterprise services‖
organized around a clear differentiation between the manufacturing and distribution of
banking products.
Such services are likely to include highly configurable functions to support such things as
relationship-based pricing, production of customer documents, limit monitoring, or the
generation of accounting entries.
It is precisely this need for a people-centric approach where Microsoft plays an increasingly
prominent role in surrounding core banking ―manufacturing‖ systems with ―distribution‖
systems that incorporate collaborative and unified communications technologies.
The EFMA report also comments: ―A major issue is transforming and training branch staff to
take on and excel at an advisory and sales role.‖
This report reflects the opinions of the members of the EFMA banking advisory council (all of
whom are senior business decision makers from leading financial services organizations across
Europe). It strongly indicates that as branch transformation programs progress towards more
focus on customer relationship management and sales, so also the need to support the people
in branches with collaborative and communications technologies is increasingly being
recognized.
Microsoft Dynamics™ CRM business software is rapidly gaining momentum in the financial
services industry because it addresses some of this requirement by bringing easily accessible
CRM technology to people who are making the transition from a transaction-centric role to a
customer relationship, advice, and sales role.
Another area where Microsoft technology is providing the basis for solutions that surround
legacy core banking systems is in formalized document management and workflow—an
increasingly important requirement for compliance purposes—based on Microsoft SharePoint®
technology.
―The Future Role of the ‗Bank Store‘ and Its Interconnectivity with Other Channels.‖ EFMA (European Financial Management and
14
SAP
For example, SAP has seen a significant change in the platform of choice for new SAP
implementations (Figure 7).
28
In response, a benchmark exercise was carried out with HP in December 2005 (Figure 8). The
highlights of this benchmark exercise showed beyond doubt that the transaction volumes that
can be processed on the Windows platform can address the needs of the largest retail banks
worldwide.
The benchmark reported throughput of 2,300 transactions per second and end-of-day batch
processing capacity of 4,270,000 balanced accounts per hour.
15 ―The End of the Proprietary Era: Itanium 2–Based Solutions Are Changing the Economics of Business-Critical Computing,‖ Intel. April
2006, p. 11.
16 Bozman, Jean S. and Matthew Eastwood. ―Scalable Windows Servers for the Datacenter.‖ IDC. March 2006.
(http://www.itaniumsolutionsalliance.org/news/whitepapers_brochures/IDC_Scalable_Windows_Servers_for_the_Data_Center.pdf)
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.
17 Mission Critical Program: Introduction and Overview.‖ Microsoft. October 17, 2007, p. 1.
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.
(http://www.microsoft.com/sql/techinfo/whitepapers/sql_2008_oltp.mspx)
The middle-out approach is a successful hybrid of the top-down and bottom-up approaches.
Business drivers and strategic vision are first used to set clear direction and priorities. Based on
these, the organization takes multiple iterative steps to build out areas of end-to-end
capabilities, with each iteration delivering new, dynamic applications back to the business for
immediate benefit. Such a strategy results in a roadmap that can be deployed in incremental
steps.
Once the business drivers are defined, the process of implementing the technology can begin.
Based upon the clearly defined and prioritized vision, each implementation project is an
iterative one of creating (―exposing‖) new services, aggregating (―composing‖) these services
into larger processes, and making these services available for use (―consuming‖) ubiquitously.
Microsoft has successfully helped customers with their SOA efforts since 1999, when it first
announced its Web services model and followed up with the release of the Microsoft .NET
Framework together with a set of SOA tools and design approaches built into and supported
by its application platform.
Since then, Microsoft‘s real-world approach has helped organizations of all sizes optimize their
business processes and realize greater agility through the use of SOA design principles, best
practices, tools, and technologies.
Guidance for both customers and partners on how to build and implement an SOA roadmap is
available from a number of sources, including Microsoft Patterns and Practices, the Mission
Critical Program, and the Financial Services Industry team‘s initiatives such as the Banking
Integration Factory.
Call
Branch
Centre
Internet Mobile Agent ...
Distribution Channels
Insurance
Partner
Customer
Middleware
S
Mutual Funds
Credit e
P
Insurance
Payment
Pensions
Deposits
Bureau
r
Loans
r
Cards
ANO
SWIFT Limit
i o
c c
Clearing
House Document
e e ...
s
Regulator Fees
B s Product Engines
u
... ... General Ledger
s
External Internal BI – Risk – Profitability – Statutory Reporting
Often the first step on the SOA roadmap is to separate distribution from manufacturing by
introducing application programming interfaces (APIs) into the back-office systems and
making their functions available as services. These can then be connected to by distribution
systems through a variety of different types of ―middleware.‖ This is equivalent to the ―expose‖
part of the middle-out approach. This approach by itself can lead to a form of desktop
integration often referred to as ―composition.‖
Composite applications are a particular aspect of SOA that is an area of specific interest to
Microsoft, for the reason that composite applications are concerned with orchestrating services
at the level of the user interface. The user interface of Microsoft software is undoubtedly the