BRISBANE — An Australian credit union has taken the plunge on a technology overhaul that could serve as a model for U.S. credit unions and banks that have been reluctant to replace core systems.

Credit Union Australia, the country's largest CU, recently spent $57 million — about 18 months' profits — and two and a half years replacing its core banking system with Tata Consultancy Services' Bancs platform.

The credit union needed to replace an aging legacy system with one that could scale as it grew and allow it to roll out new products and services quickly.

Key to its decision to make the investment was that a new system would also enable it to offer risk-based pricing.

CUA's experience, the headwinds it faced — such as a barrage of negative reactions in social media — and its ultimate success could prove to be instructive for U.S. financial institutions that have been holding off on replacing core systems due to concerns of regulatory scrutiny and the expense and disruption related to such a large and daunting project.

The Risk Of Being Outdated
Still, many U.S. financial institutions are using out-of-date core systems and if they don't upgrade eventually, they risk losing customers to more technologically advanced financial institutions — even nonbanks that are offering bank-like products and services.

The process is painful, but those that have invested in core replacements say that the payoff comes in the form of reduced risk and enhanced ability to innovate and quickly respond to customer demands.

Gordon Baird, the chief executive at Independence Bancshares in Greenville, S.C., says that financial institutions still using old core systems are inhibited in their ability to offer the most up-to-date mobile banking features that customers are increasingly demanding.

"All the infrastructure that's been put in place in the last 20-30 years is not optimized for the mobile channel," Baird says. "It's optimized for bricks and mortar and all the controls and processing around bricks and mortar, which is the traditional banking model."

The $10 billion-asset Credit Union Australia had a 20-year-old, home-grown program that had become out of date — only a half-dozen people even understood how it worked.

Chief Executive Chris Whitehead called for an independent review of the system, which found it was becoming increasingly harder to maintain and support, that it would not be able to scale and accommodate new products as the institution grew and that the user experience for staff was below par — they were looking at decades-old green screens.

The credit union created and the board approved a business case around risk mitigation. The institution was also looking ahead: it had growth aspirations and knew it needed a modern system that could keep up.

Another driver was the unique competitive landscape in Australia.

The four major banks have bought up the formerly second-tier banks. About 90% of all banking business goes to the behemoths, which can afford to price aggressively. The large banks Down Under have been modernizing their banking platforms.

National Australia Bank is spending $1 billion deploying the Oracle Banking Platform. Commonwealth Bank of Australia has completed its conversion to SAP for Banking; it also spent $1 billion on the new system.

"How can a small player remain relevant and play in a competitive market?" asked Sue Coulter, general manager for business transformation at Credit Union Australia.

Alongside the core replacement, Credit Union Australia also decided to replace its online banking system and roll out mobile banking.

It chose TCS for the entire project, based on site references and the fact that the vendor had successfully deployed its technology in other Australian financial institutions. "That gave us comfort that we wouldn't have too many issues with localization, compliance and regulation," Coulter noted.

The credit union signed a contract with TCS in March 2011 and started the project in early May.
The "technology transformation," as CUA called it, took two and a half years. The new system went live in October 2013.

CUA held several dress rehearsals and mock data conversions to make sure the new system would work properly and employees would acclimate.

The credit union also tested the system extensively; for instance, it tested the execution of 28 key transactions prior to "go live."

Now that all the technology is in place, phase two will be what Coulter refers to as business transformation — taking advantage of the new gear to re-engineer more efficient processes and improve the member experience.

A 'Single Customer View'
In one example, the CU has already developed what it calls a "Single Customer View." On one screen, this highlights everything a staff member needs to know about a customer, including total product holdings, accounts open, personal details and all recent interactions and alerts.

"This has resulted in a quicker and more personal experience for our customers from their first point of interaction," she says.

Her team plans to build workflows to guide users quickly through key business processes, such as account opening. They've already built six workflows into the user interface of the core system. They intend to build more in on an incremental basis.

It is hoped that with a modern banking platform in place, the credit union will be able to introduce new products and services more quickly than it could before.

It also aims to provide a consistent customer service experience across all channels. In Australia, there's a particularly high usage of online and mobile banking, according to Coulter. The credit union hopes to evolve its digital channel offerings over the next 18 months.

One change CUA hopes to make across the board (including its digital channels, branches and mortgage brokers) is a shift to risk-based pricing. Uber-competitor Commonwealth Bank of Australia, the largest bank Down Under, has already started down this path, as have several U.S. banks.

Risk-based pricing means different things to different companies. Commonwealth is applying customer data analysis to place a value on the entire customer relationship and price products accordingly.

Risk-Based Pricing Model
Credit Union Australia's risk-based pricing model will look at individual products and members' financial condition relative to those products. A mortgage borrower with a high loan-to-value ratio would pay a higher interest rate, for instance, than someone making a 40% down payment. CUA would not have been able to easily build that kind of price flexibility into its legacy system.

Another business advantage the credit union believes it will reap from the new system is the ability to offer the core banking technology to other credit unions.

"The other credit unions are faced with a problem similar to the one CUA had in 2010," said Coulter. "They have aging technology in which they've underinvested for a number of years. For smaller institutions to embark on core replacements is incredibly difficult, not only from a funding perspective but from a people capability perspective."

Hosting its technology for smaller banks and getting paid for it, of course, could help defray the cost of the system itself for CUA.

One unknown is whether or not other credit unions will be willing to have a competitor host their core platform.

Social Media Backlash
Perhaps the biggest surprise to Coulter over the course of the core replacement project was how closely customers followed it. The credit union changed the background image on its online banking site and faced an astonishing backlash.

"We underestimated the impact of social media," Coulter said.

U.S. credit unions contemplating a core replacement could learn from CUA's experience of the value of ramping up and preparing the social media team for a barrage of questions and complaints in the aftermath of such a large and disruptive project.

"Our call center took a bit of a hit for a few weeks after we went live," Coulter said. "Social media went a little bit bonkers."

The credit union had recently renovated its branches and used a photo of the inside of a branch as the background image.

Members felt the new background was too busy and too dark. Many asked CUA why it had a picture of a restaurant on its online banking site, Coulter recalled. "They were quite right; [the image] looked a bit like a wine rack."

The CU had to quickly ramp up its social media team to respond to the feedback, and the call center was swamped with incoming calls about the changes. In hindsight, it would have staffed up both departments more fully before the go-live date to accommodate the influx of calls.

The credit union now lets members select their own background. "We still have the old wine rack [image] in there," Coulter added. "But not too many people have chosen that."

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