CORE SYSTEM REIMAGINING: The International Investment Bank and Diasoft's Experience

Tuesday, October 25, 2016

Core System Reimagining: The International Investment Bank and Diasoft's Experience

What is Driving Core Banking Modernization?

Today most financial institutions are getting under an incremented pressure caused by ever-increasing customer demands, constantly changing regulations and the cannibalization risk from new FinTech startups, putting them into a position to constantly analyze their strategies, competitive advantages and weak points and making them navigate the transforming landscape to fight for their place in the sun.  As a result, many are discovering that their core systems imply lots of technological constraints and are unable to address all of the new challenges coming from outside. Antiquated technologies and inflexible legacy systems cause inability to quickly or effectively enough modify the existing landscape to meet the current market demands and make Financial Institutions seriously think over the transformation or even replacement of their core systems.

New FinTechs such as Lending Club, Apple Pay, Android Pay among others are expected to eat a significant portion of bank revenues. According to an estimate, close to 30% of retail banking revenues will be at risk from FinTech disruptors by 2020.  Only new technological platforms can help Financial Institutions to substantially empower their position in this highly competitive market and provide them with greater flexibility, improving their ability to be more responsive to new customer and market demands, to quickly respond to new regulatory requirements and to overcome competition from new FinTech start-ups.  

Determining the best way forward in core systems upgrade, Financial Institutions should undertake a thorough analysis of their existing architecture to understand the key bottlenecks and gaps it incorporates. It is critical to keep in mind their focus within the market, the value chain and the key capabilities that should be supported by an upgraded system.

In this article we will discuss how the International Investment Bank managed to fundamentally transform its core banking system, what key reasons lied behind this ambitious project, what approach allowed delivering this project in time while meeting all of the established goals, and how a proper strategy allows for a successful system transformation.

A Clear Path to Modernizing the Core

Embarking on Changes

The International Investment Bank (the IIB) is a unique supranational organization represented by governments of numerous countries (including Bulgaria, Hungary, Cuba, Mongolia, Russia, Romania, Vietnam, the Czech Republic and Slovakia). The Bank focuses on the support of small and medium-sized businesses and participation in financing of socially significant infrastructure projects. It provides loans primarily through the leading domestic publicly owned financial institutions, development banks, export and import banks and agencies, or lends in partnership with other international institutions for development.

The Bank has undergone many significant changes since its foundation more than 45 years ago.  In 2013, the Board of the Bank made a strategic decision to introduce a new managing team that would ensure increased efficiency of the bank and support its global development strategies. The New Management team started its path within the Bank with a very thorough analysis of the bank's business, starting from its political environment to the international status of the IIB, its strategy and operating efficiency.

Time for Action

By results of this analysis, the Bank came to the conclusion that the existing IT infrastructure with an obsolete core banking solution did not allow achieving the Bank's strategic goals:

·         To achieve the level of other international development banks and to become a globally recognized institution (not to simply keep supporting the existing clientele, but to grow its international customer base);

·         To become flexible and responsive to ongoing market changes. The Bank has a unique product portfolio, represented by numerous nonstandard and flexible offerings, and wants to strengthen this position of a provider of unique individually tailored products;

·         To establish a reliable platform for the new start of the Bank aimed at its international expansion and growth, which would support the development strategy of the Bank and help it to provide its customers with modern technology-based financial products and services.

“The existing infrastructure lacked flexibility required for creation and launch of new products, for introduction of new business processes, for system configuration and support”, said Dmitry Bocharov, IT Director, the IIB. “The new management of the IIB came to the conclusion that the existing core system would not allow the bank to reach its future development goals and could not serve as a stepping stone to the future. We decided to replace this system with a new innovative platform capable to ensure the successful delivery of all of the IIB`s strategical goals”.

Dmitry, can you please tell us how you selected a new core system for your bank?

Selecting a Vendor

To select a new core banking solution, we decided to involve an independent consulting agency, which could initiate an in-depth analysis of all existing global core banking systems and come with a list of the most suitable solutions.  For this process, the IIB engaged a representative of Gartner (the world's leading information technology research and advisory company), who analyzed and assessed 33 global core banking systems (28 international and 5 Russian solutions) and provided us with a long list of 11 solutions. By results of a more thorough analysis, there was proposed a short list of 4 systems, meeting the modern technological requirements and supporting international accounting standards.

Before initiating a selection process, we defined the key quality criteria, which had to be incorporated by the system of our choice. It had to:

·         Be extremely flexible, open and configurable;

·         Allow for further development and support with the bank`s own staff, without any involvement of the vendor;

·         Be modern in terms of the interface, have a component-based architecture, ensure high performance, and be DB/middleware/software-neutral;

·         Be multi-lingual, as one of the Bank`s unique peculiarities is that it has 9 countries among its shareholders and it is the only development bank operating in three continents (Asia, Latin America, Europe);

·         Incorporate a mature Accounting Engine (ensuring full compliance  with international accounting and reporting standards);

·         Be reliable.

Partner of Choice

Transforming the bedrock of our IT-landscape was a top-priority task for us. But we were not simply looking for an innovative core banking system capable to meet today’s business needs, we were looking for a partner who could help us to establish a reliable and fundamentally new foundation for successful development of the bank for the years to come. We were looking to modernize much more than the underlying technology. We wanted to transform our approach to strategic development of the Bank, we challenged to find a partner who could help us to reimagine our core system and be able to predict how all business processes will have to operate both based on today’s realities and future uncertainties, not yesterday’s complications.  

Diasoft jointly with its FLEXTERA Core Banking turned out to respond to all of the above requirements and became a partner of choice for us.

“The power of the FLEXTERA solution is that it allows the bank to select which accounting methodology to apply – the IFRS or the Russian GAAP – independently from its product modules. This becomes possible thanks to the accounting engine, which transforms operational product accounting data into the required financial accounting. At any moment, the bank can switch to any methodology”, Dmitry Bocharov, IT Director, the IIB.

Alexander, what do you believe were the key reasons behind the IIB`s choice?

In comparison with all monolithic and closed-architecture systems, FLEXTERA is built on the open architecture, applies widely-recognized standard technologies and supports quick development. Its underlying platform – Diasoft Framework – will allow the bank to quickly design and provide the business with new functional capabilities on its own, independently from the vendor. This allows reducing the operational risk of being vendor-dependent and the risk associated with the cost inflation by the vendor. This also allows quickly adding new products to the bank's portfolio. 

We do not only share with our customers all advantages of our system – we work together with them. It is important to mention that Diasoft delivers more than 200 projects per year, supporting the real business of our customers and serving as a reliable Partner to them. We share our experience with our clients, helping them to develop in line with existing trends, while trying to forecast future market requirements basing on our expertise, and implementing these predictions into product roadmaps. We always take responsibility for the solutions and projects we deliver to our clients. We know that the contemporary market of financial technologies is not simply a brand-new market of innovations but a constantly changing area. And the product will never be mature enough within such a dynamic market. That is why Financial Institutions, in order to keep pace with ongoing changes, should not just acquire an out-of-the-box solution, they require a reliable Partner that will establish a proper strategy of the product development.

“Diasoft is not simply a software developer, but a guide in the world of financial technologies. Our goal is not to simply deliver a project, we aim to become a reliable and long-lasting Partner for our clients. We help to change the world. And we take the responsibility for the final result, which will help our clients to achieve success”, comments Alexander Glazkov, Managing Director, Diasoft.

Dmitry, which advantages have you obtained while working with Diasoft?

Key Differentiators

Competitors are always there. The IIB operates in the real market, provides loans to real companies, and interacts with real people who can borrow at another bank but for some reason select the IIB. It should be underlined that the project allowed us to implement a unique system that can support accounting for almost any potential credit product. This helps us to reduce operational risks in comparison with other companies that manually manage all features that cannot be automated or shrink the list of credit offerings due to inability to expand it.

The IIB has got rid of all restrictions, can now launch the most complicated credit products (syndicated loans, multi-tranche credit lines with different withdrawal options, loans under different conditions, flexible fees, etc.) and can multiply them without increasing its staff. This became possible thanks to this project. The IIB offers a variety of very different loan products with a personalized approach to each customer. With FLEXTERA, the IIB obtained not only an infrastructure to design any credit product, but an opportunity to individually negotiate loan conditions with any customer to find a proper solution at any stage of interaction with this customer and at any time change these conditions, even for the past dates, to meet customer needs. Independently from the financial position of a customer, the IIB can always find a personized solution for this customer, achieving the best results for its own business (sometimes it is better to waive a fee and save the company from risks). 

With FLEXTERA, the IIB has also obtained a very strong compliance control system (AML). The Master Data Management system is integrated into the platform and is broadly used for the financial monitoring, FATCA, etc. The Bank has a complex and large-scale KYC procedure, which was automated by the FLEXTERA AML module. The high quality of customer identification serves as a starting point for assessment of risks connected with banking transactions and other operations. FLEXTERA helps the IIB to identify customers, their counterparties and beneficiaries in accordance with the FATF recommendations; provides strong analytical support for every decision and assists in prevention of financial crimes, ensuring success and a stable financial position of the IIB.

Driving the Transformation

The IIB believes that with the delivery of this project and thanks to the close collaboration between the project teams, Diasoft now has one of the best loan solution in the market. This is a super flexible product with high performance. The Bank`s portfolio incorporates over 30 unique loan offerings, that greatly differ from each other. It also provides very flexible terms for its customers, which are successfully supported by FLEXTERA.

“I am confident that in Russia, and maybe even globally, FLEXTERA is one of the best solutions for the banks like ours (banks for development) that have a great variety of absolutely different loan products. The bank's expertise together with Diasoft's capabilities allowed us to create a product that is unique within the international market”, Dmitry Bocharov, IT Director, the IIB.

The Bank has already started building its international presence: currently the IIB issues bonds at European stock exchanges. The Bank has been awarded by The Romanian Stockbrokers’ Association for contribution to the development of the corporate bonds market of Romania. The IIB has entered the local bonds market this year, having placed its debut bond issue on the Bucharest Stock Exchange in the amount of RON 111 million. The issue became the largest issue of an international financial institution released during the past six years in Romania. The Bank has started to open new horizons and now has a technological reserve to support this development during the next 10 years.

Thanks to the implementation of the FLEXTERA Core Banking system, the Bank achieved the following benefits:

·        Reduced the workload of the back and middle office and released resources to support the growth of its business volume;

·        Reduced the report preparation time by 90% and decreased the workload on the financial department;

·        Ensured a 100% annual growth of operations without increasing the bank's staff or other resources – as of today, the IIB's assets have DOUBLED;

·        Increased automation of accounting processes for treasury operations to 90% versus 40% in the old system;

·        Reached almost 100% automation of payment transactions in comparison with manual processing in the old system;

·        Brought the processing of credit transactions to a brand-new level, with automated loan origination and centralized storage of the complete history of each deal, including storage of information on loan collaterals and on created provisions.

·        Reduced the cost of credit products, which potentially will help to expand the bank's market share. It is very important since each percentage point of the cost plays its role;

·        Eliminated operational risks and the human factor (no human errors at all stages of the business cycle);

·        Achieved high credit scores with low operational risks;

·        Standardized business processes;

·        Achieved flexibility to market conditions;

·        Created a platform capable to support the bank's development at the international market, serve as a foundation for the growth.

Powering Partnership

The situation within the Bank before the project was too out-of-date, and the effect of the implementation was much greater than it would be for any other company. It was a huge breakthrough.

The synergy between Diasoft's and the IIB's teams was in the ability to create a team whose members mutually added to each other's expertise. If the vendor lacked something, the bank could fulfill this, and vice versa. As a result, The Bank obtained Diasoft's solution, and Diasoft acquired a unique expertise in implementation of the international accounting approach and in operational processes.

With FLEAXTERA, the IIB got rid of all technological restrictions for the future development of the bank in any business sector. Today, the IIB has a technological reserve for the next 10 years and all necessary resources for the successful multifold growth. This was the main goal of the Bank's shareholders – to prepare a technological platform for the explosive growth. The business lines of the IIB currently demonstrate this explosive growth, so this task is now considered as a fully solved.

Currently, the IIB decided to design on its own the new module. This is a key advantage of the FLEXTERA platform – the IIB doesn`t not depend on the vendor, and the Bank has a choice as FLEXTERA is a component-based system which can be easily integrated with any third-party solutions. Moreover, with FLEXTERA, the Bank can develop its own solutions. According to Dmitry Bocharov, this means that Diasoft is an open company, which is so strong and so confident of its competence, that it can easily share such tools with third parties.

Read original version of the article following page 18.