NAB plan 'risky but necessary'

analysis The National Australia Bank's decision unveiled today to overhaul its core banking systems was fraught with risk but necessary for a sector now seen as lagging technologically, according to local IT analysts.

"Core banking systems are the crown jewels of IT in banking, and overhauling these systems will make ERP and CRM seem like a walk in the park," Hydrasight analyst Michael Warrilow told ZDNet.com.au this afternoon.

Michael Warrilow
(Credit: Hydrasight)

The NAB this morning revealed plans to approach the overhaul of its core banking systems cautiously, earmarking just $30 million out a total $1 billion in funds available over the next five years for an Oracle-based project that will touch the bank's online bank Star Direct.

Warrilow said while the need for NAB and other banks — such as the Commonwealth Bank of Australia, which has recently announced a similar project — to overhaul the systems was obvious, they would be embarking on projects that in the past have led to disaster.

"All the banks have talked about this for decades, and the last big attempt Westpac had was in the times of CS90, which was just a massive stuff-up and ended up with the overhaul in the too-hard basket," he said.

S2 Intelligence managing director Bruce McCabe said the sector was seen as out of touch. "From early leaders in online services 10 years ago, the banks are now clear laggards," the analyst told ZDNet.com.au. "The need to do the overhaul is very real."

Bruce McCabe
(Credit: S2 Intelligence)

A failure to overhaul ageing banking systems, installed decades ago, has left the banks with a legacy of delays in releasing new banking products to customers, and a need to pay for increasingly rare and expensive software skills.

"Those systems are woeful in terms of fulfilling a bank's potential for new revenue streams and are very inflexible. Where leading online service providers are adapting weekly what they offer online, you will rarely see banks update anything in three months," said McCabe.

The upgrade process may not always be transparent to outsiders. "There will be a hell of lot of smoke and mirrors," said McCabe. "It's really hard to know, however, very large allocations of money may end up being financial buckets to compensate losses in other areas".

The riskiness of the project likely explains NAB's "quick win" strategy which will focus its core banking system efforts on its new ING Direct style online-only offering, Star Direct Bank, which it plans to launch later this year.

While NAB has said that the five-year program will cost the bank around $1 billion, NAB chief information officer, Michelle Tredenick said today that the cost of this element will be around $30 million. The focus on Star Direct will also give the bank time to formulate a strategy to tackle the remaining systems overhaul.

Tredenick said that Oracle's 2005 acquisition of core banking systems vendor i-Flex was "fundamental" to its decision to go with Oracle for the work, adding that NAB was pursuing a "best of breed" systems strategy that will see it share software development initiatives with other banks around the globe.

If NAB and CBA are successful in overhauling these systems in the next five years, S2 Intelligence's McCabe said they would be better positioned to offer outsourced banking system services to other banks.

Some of the impetus for the bank's separate decisions coming at similar times this year could have come from a perception problem, according to McCabe.

"It seems to be a must-have for each bank to overhaul its IT systems and the message goes well on the market because banks are full of legacy software that's not very agile and which still works on overnight processes rather than in real time," he said.

"Everybody seems to be catching this optimistic wave of upgrading at this point in time. It's become fashionable and trendy," agreed Hydrasight's Warrilow.