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Hua Zhang

Core System Renewal at the Bank of Shanghai: A Case Study

December 2008

Content

3 Executive Summary6 Introduction to the Bank of Shanghai6 The Chinese Banking Industry

10 The Bank of Shanghai’s Strategy12 Project Background14 Vendor Selection—Temenos and Hewlett-Packard17 Challenges and Lessons Learned23 Technology25 IT and Operational Improvements30 Conclusions

Copyright 2008 © Oliver Wyman 3

Executive Summary

The Bank of Shanghai was established in 1995, and has gradually expanded business operations from its base in Shanghai to throughout the country. As of September 2008, its total assets had reached US$51.9 billion. The bank has 7 million customers, 13 million retail accounts and between 300,000 - 400,000 corporate accounts. The Bank of Shang-hai takes a leading position among China's city banks (tier 3 banks) in terms of asset size, profitability, asset quality, branch network, fee-based income, credit card issuance and other areas. As the bank builds its nationwide business, however, it inevitably runs up against the joint stock commercial banks and state-owned banks. In comparison to these tier 2 and tier 1 banks, the Bank of Shanghai is somewhat less competitive.

Against this background, the Bank of Shanghai is advancing a strategy of serving small and medium enterprises (SMEs) and individual cus-tomers in China's economically developed cities. The bank is pursuing a differentiated business strategy while at the same time seeking to strengthen customer relationship management (CRM) and enhance the profitability of each customer.

The bank’s legacy core banking systems, however, were unable to sup-port these objectives: The legacy systems were product-centric, with a data model organized by accounts, not customers. The technology structure was made up of a number of independent systems, which led to decentralization of business data and a lack of uniformity among delivery channels. In addition, system flexiblity was poor, with most functions being hard-coded, making it impossible to develop and bring to market new products quickly.

Beginning in 2003, the Bank of Shanghai started to plan a next genera-tion core banking system. The goals for the new system were to be able to better understand and manage the bank’s customers, to strengthen the management of business operations, and to more rapidly respond to changing market demands, so as to serve its customers more effec-tively and derive greater value from each customer.

Having decided on a strategy of core banking transformation, the Bank of Shanghai then considered whether to rebuild using the legacy sys-tem as a base or to replace it with a completely new system. The bank ultimately opted to implement a brand new system. After considering

4 Copyright 2008 © Oliver Wyman

numerous core banking products, the bank selected the Temenos T24 system. The bank evaluated Hewlett-Packard (HP) and IBM for the role of system integrator, ultimately selecting HP as primary contractor. The Bank of Shanghai also chose an HP Superdome 9000 series server, HPs newest high-end server, to run the system.

The project was divided into two main stages. The first stage involved implementing the corporate business systems (including the core banking, treasury, trade finance and general ledger systems), while the second stage consisted of the retail core banking system. The reason-ing behind implementing the corporate side first was the relative ease of batch processing the corporate business, and the fact that the non-business days of Saturday and Sunday were available to facilitate the system go-live. The corporate banking systems and the retail banking system went live on May 22, 2006 and September 22, 2008, respectively.

A number of banks in China have successfully implemented risk man-agement, treasury and other systems supplied by foreign vendors. But in terms of core systems, the Bank of Shanghai is the first large or medium-sized bank in China to successfully implement a core banking system based on international standards, using a full software suite to support all of the bank’s business lines and products. Moreover, the systems were brought online simultaneously across all of the bank’s branches in big-bang implementations. These achievements make the Bank of Shanghai’s experience well worth studying.

The Bank of Shanghai’s next-generation core system initiative was more challenging than the average IT project. The biggest issue was communication among the various participants in the project. Keeping the project cycle under control was also a major challenge. Moreover, localization was needed to support a great many regulatory require-ments, presenting Temenos and the entire project team with significant challenges. After overcoming these difficulties, the system successfully went live. The new customer-centric business platform and customer service support capabilities put the Bank of Shanghai in the forefront of the Chinese banking industry in these areas.

Key success factors for the project include:

The Bank of Shanghai’s executive management team lent strong leadership and active support to the project.

Organizational restructuring, business process reengineer-ing, and system gap analysis were undertaken in parallel with the project implementation.


The bank focused on optimizing performance, while preserv-ing the essential functionality of the legacy system.

Careful attention was paid to the impact of the system switch-over on the bank’s customers, and on their experi-ence as the system’s ultimate end users.

Strategic decisioning to ensure optimum use of resources.

Conflicts between implementation of the project and the bank’s business development goals resolved on a case-by-case basis.

Effective control of the project cycle and the scope of each of the project’s phases.

The next-generation core banking system runs on an open system, as did the legacy system. The new system has 60 - 70 interfaces, many of which support fee-based business and delivery channels; these inter-faces required the greatest amount of customization in the entire system. T24 supports more than 6,000 tables and 40,000 datafields. Many of the bank’s business operations can be controlled through this parameter-based system. The system supports a variety of standard interfaces and provides regional- and country-specific functionalities.

The next-generation core system provides enhanced functionality to support products and services. More fundamentally, the system repre-sents a significant advance in terms of technology design. These improvements include: customer-centricity; domestic and foreign cur-rencies as well as corporate and retail banking placed on a uniform platform; integrated accounting; unified channel management; enhanced operations management functionality; a parameter-based system; and better suitability for Basel II and new accounting stan-dards. After going live with its next-generation core banking system, the Bank of Shanghai’s various lines of business are running on a new platform that meets international standards, enabling significant improvements in operational efficiency and the quality of its products and services.


Introduction to the Bank of Shanghai

The Chinese Banking IndustryAt the end of 2007, China's banking industry consisted primarily of three policy banks, five state-owned commercial banks, 12 joint-stock commercial banks, 124 city commercial banks, and a number of other institutions as shown in Figure 1.

The Bank of Shanghai was established in 1995. In the past, it mainly focused on the local market of Shanghai, but has now started to pursue nationwide expansion. As of September 2008, its total assets were US$51.9 billion, making this city (tier 3) bank larger than many joint

Figure 1: China’s Banking Industry

Source: China Banking Regulatory Commission

Credit cooperatives

Enterprise Group Finance Companies (73)

Postal savings bank

Policy banks(3)

Commercial banks State-owned commercial banks (5)

Joint stock commercial banks (12)

City commercial banks(124)

Rural commercial banks(17)

Foreign banks(440)

Rural credit cooperatives(8,348)

Urban credit cooperatives(42)

Rural cooperative banks(113)

Chinese Banking Industry

People’s Bank of China

Credit cooperatives

Enterprise Group Finance Companies (73)

Postal savings bank

Policy banks(3)

Commercial banks State-owned commercial banks (5)

Joint stock commercial banks (12)

City commercial banks(124)

Rural commercial banks(17)

Foreign banks(440)

Rural credit cooperatives(8,348)

Urban credit cooperatives(42)

Rural cooperative banks(113)

Chinese Banking Industry

People’s Bank of China


stock (tier 2) banks. The Bank of Shanghai is representative of a new breed of city banks that are large in scale, competitive and forward-looking.

In 2007, the total assets of the Bank of Shanghai accounted for 0.59% of the total assets of China's banking industry, far exceeding most city banks and even greater than some joint stock banks.

Table 1: Overview of the Bank of Shanghai

Headquarters Shanghai, China

Established December 29, 1995

Assets US$51.9 billion (September 2008)

Employees 4,902 (end 2007)

Branches 215 branches in Shanghai, Ningbo, Nanjing, Hangzhou, Tianjin and Chengdu, with 73 self-help banks and 359 ATMs

Corporate accounts 300,000 - 400,000

Retail accounts 13 million

Transaction volume 3 million transactions per day peak

Operating income US$1.1 billion in 2007

Operating profit US$548 million in 2007

Source: Bank of Shanghai

Figure 2: Comparison of Bank of Shanghai Assets with Other Banks

Source: Banks’ Annual Reports, Celent analysis

Assets of Selected Chinese Banks

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The Bank of Shanghai has more than 200 branches, making it the larg-est among China’s city banks in terms of operational footprint. It also leads the city banks in average assets per branch, although smaller than the joint stock banks by this measure.

Compared to other city banks, the Bank of Shanghai also has a strong fee-based business, which is expanding at a very high annual growth rate.

Figure 3: Bank of Shanghai Branch Structure

Source: Banks’ annual reports, Celent analysis

Figure 4: Fee-Based Business of Selected Chinese Banks


Branch Structure

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Among the city banks, the Bank of Shanghai’s fee-based business is growing at a rapid pace, which is quite close to the average level of growth at China’s listed banks. Indeed, its advisory services business has even outperformed the average growth rate of the listed banks.

The bank’s card business is one of the largest among the city commer-cial banks, but is somewhat overshadowed by the Shenzhen Development Bank, a bank of similar asset size.

Figure 5: Fee-Based Business at Bank of Shanghai and Listed Banks


Figure 6: Revenue from bankcard services


Growth Rate of Fee-Based Business 2006 - 2007

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Cards Credit Advisory Payments TrustBusiness

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Revenue from Card Services

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The Bank of Shanghai’s StrategyIn recent years, China's banking industry has been faced with a num-ber of challenges, including:

Deregulation of interest rates. In the first half of 2008, the interest margin of China's banking industry was 3%, com-pared to 2% in Europe and the US. With further deregulation of interest rates, net interest income in China’s banking industry is expected to decline. Moreover, customer behavior may change; for example, depositors may try to seek savings accounts with the highest possible interest rate. Further, lib-eralization of interest rates will increase interest rate risk, and banks will need to strengthen risk management in this area.

Intensified competition for fee-based business. Compared to lending, banks’ fee-based business provides higher growth rates and profit margins with lowered risk exposure. Reve-nues from fee-based services account for less than 10% of total revenues in the Chinese banking industry. There is thus considerable room for further growth, and indeed annual growth rates of fee-based business are as high as 100%. The high growth potential of this area naturally gives rise to strong competition. Banks in China thus need to strengthen innovation in products and services in order to increase competitiveness.

Economic cycle fluctuations are having a significant impact on China’s banks, requiring them to better manage interest rate risk, exchange rate risk, liquidity risk and other risks.

The Bank of Shanghai has developed the following strategies to address these challenges:

Customer focus: small and medium-sized enterprises and individual customers. In particular, the bank aims to provide comprehensive services for high-end customers, such as the owners of SMEs.

Regional focus: eastern China, centered on Shanghai, and expanding into the economically developed areas of the country.

Differentiated management: strengthen customer relation-ship management and analyze the contribution of each customer, to enable the bank to achieve:

– More thorough segmentation of markets and identification of profitable customers,


– Enhanced ability to innovate in products and services, including introducing advanced services from overseas as well as strengthening the bank’s own capabilities in prod-uct innovation,

– Stronger risk management, and

– Improved operational management capability.

Over the next few years, traditional savings deposit and loan services will remain the primary service categories of the Bank of Shanghai. At the same time, the bank plans to place priority on developing working capital management services, greatly expanding its credit card business, building up inter-bank services and wealth management services, and steadily improving its capabilities in payments services, agency ser-vices and other fee-based business.


Project Background

According to the Bank of Shanghai's strategic development plan, the primary reasons for implementing a next-generation core system were as follows:

The legacy system was composed of a number of separate systems. For example, the retail banking system was inde-pendent from the corporate banking system; similarly the domestic currency and foreign currency systems were sepa-rate systems. These independent systems made it complicated to undertake daily routine maintenance as well as design new products. As the delivery channels are also independent of each other, providing customer service through multiple channels was also an arduous process.

The bank’s legacy system was product-centric, with a data-model organized by accounts, not customers. The Bank of Shanghai needed to have a better understanding of its cus-tomers, but its product-centric system was unable to provide such insight. Nor could it support the requirements of new business models such as relationship pricing for interest rates, service fees, etc. Only by switching to a customer-cen-tric core system could the bank better serve its customers and respond to the challenges of interest rate deregulation.

The Bank of Shanghai’s customer focus targets primarily SMEs and retail customers, and there is considerable overlap between these two categories of customers. The legacy sys-tem placed a sharp division between corporate customers and retail customers, which was not conducive to the bank’s customer strategy.

While the Bank of Shanghai’s regional focus is on mainland China, particularly the economically developed east China region, its business is becoming more and more interna-tional. For example, the bank has established correspondent banking relationships with the head offices of more than 400 domestic and foreign banks, and conducts regular business with over 5,000 of their branch offices. The legacy system lacked functionality to support international business and related financial services such as trade finance or working capital management.


The legacy system lacked expandability and flexibility. Sys-tem functionality was all hard-coded.

The bank’s previous system was unable to respond quickly to changing market needs. Implementing new products or modifying functionality was extremely complicated and time consuming, making it impossible to bring new products to market rapidly.

To address these needs, the Bank of Shanghai embarked on its next-generation core banking system project. The project’s objectives were to enable a smooth migration from the old system to the new, includ-ing migration of the functionality and data of the old system and a seamless transition in terms of service.


Vendor Selection—Temenos and Hewlett-Packard

Selecting an appropriate project plan and suppliers is key to the suc-cess of any project. Two courses of action were available to the Bank of Shanghai: either to modify the legacy system or to implement a com-pletely new system. If a new system were chosen, the bank could opt either for a core system from a domestic vendor or a core system from a foreign vendor. In determining which course to choose, the Bank of Shanghai considered the following issues:

Modify the legacy system, or adopt a new one? The product-centric design of the legacy system was not compatible with the bank's positioning and strategy for growth. Rebuilding the system would require a substantial amount of work, compromises would have to be made in terms of functional-ity, and the life cycle of the system would be limited. For these reasons the Bank of Shanghai chose to implement a completely new core system.

Choose software from a domestic supplier, or software from a foreign supplier? The table below compares Chinese ven-dors of core banking systems with international vendors. The Bank of Shanghai determined that the maturity, track record, design concept, and product functionality of the international vendors help strengthen the bank’s competitiveness.

Table 2: Comparison of Chinese and Foreign Core System SuppliersItem Domestic Vendors International Vendors

Vendor maturity Shorter, less experience Longer, more experienced

Compatibility of vendor’s software with the bank's current business needs, business processes and organizational structure

Relatively suited to China's banking industry

Some gaps, but the system’s business functionality, business process and organizational struc-ture more in accord with inter-national standards

Successful implementations in China

Many Very few

Core system functionality Mainly aimed at satisfying the bank's current requirements

Strong functionality, able to sup-port various kinds of business, including future services yet to be developed by China’s banking industry

Compliance with standards Complies with Chinese regula-tory requirements, but some gaps with international stan-dards

Complies with international standards, but some gaps with Chinese domestic standards (e.g. regulatory standards)

Source: Celent


In choosing suppliers, the Bank of Shanghai emphasized vendors that had been selected by other banks, including Lenovo, Digital China, e-ToYou, Vanda, Huateng, TEMENOS, FNS (now TCS), Hewlett-Packard and IBM. The bank’s selection criteria included business coverage, operational fit, usability, customization required versus out-of-the-box functionality (productization level), risk control capacity, system per-formance, ability to respond speedily to market demands, implementation time, investment required, migratability, vendor expe-rience, after-service and other factors. In the end the bank decided to select an overseas supplier.

At the time the Bank of Shanghai was choosing its system, the major foreign suppliers of core banking systems had a very limited track record in China. Even today, ongoing projects do not seem to be pro-gressing smoothly and few foreign suppliers can point to successful implementations.

At the time the Bank of Shanghai was making its selection, Temenos was working on developing its presence in the China market. Today, Temenos has completed five implementations, including the Bank of Shanghai and the following institutions:

China Merchants Bank: rapid implementation for China Mer-chants Bank Hong Kong Branch, currently implementing the system for the bank’s New York branch

RZB (Raiffeisen Zentral Bank) Beijing branch

Volkswagen Finance (China) Co.

Swedbank Shanghai branch

The Bank of Shanghai ultimately chose the Temenos T24 core banking system. This was Temenos’ first deal in China.

Having decided on the core system, the Bank of Shanghai then began to consider a system integrator. The bank considered IBM and Hewlett-Packard, and ultimately selected HP. The main reasons for this choice included:

Before the core system project, Hewlett-Packard already had a history of working with the Bank of Shanghai. When it signed on to the core system project, HP established a “finance lab” together with the Bank of Shanghai in order to further collaboration.

HP had strong capabilities in project management, which was an important factor considering the relatively long time-line for this project.


HP had experts in both domestic and international core banking systems. While they knew China’s banking industry well, they could also leverage their experience in overseas banking implementations for the project with the Bank of Shanghai.

In addition to Temenos and Hewlett-Packard, a number of other suppli-ers were also involved in the overall project, including:

Global InfoTech and Shanghai Hicom Technology: responsi-ble for the development and integration of front and external systems;

Ten-plus other suppliers: responsible for modifying and opti-mizing ATM, Internet banking and other peripheral systems.


Challenges and Lessons Learned

The Bank of Shanghai is the first large or medium-sized bank in China to successfully implement a core banking system based on interna-tional standards, using a full software suite to support all of the bank’s business lines and products. Moreover, the systems were brought online simultaneously across all of the bank’s branches in big-bang implementations. These achievements make the Bank of Shanghai’s experience well worth studying.

Like other technology implementations, this project also encountered many challenges:

The largest challenge was the communication issue. A num-ber of projects involving foreign core banking systems have run aground due to communications issues. Communication problems can include cultural differences between China and other countries, differences in communication tech-niques, differences in managerial style, etc.

The long project cycle accompanied by the rapid growth of the bank’s business operations meant that new financial ser-vices and products needed to be developed and supported on both the legacy and next-generation systems simultaneously.

The Temenos software required localization, including Chi-nese language localization and modifications to meet local business requirements. This required not only an under-standing of China’s banking business, but also an understanding of how Chinese banks collaborate with their suppliers.

There were some gaps between Temenos’ software and Chi-nese regulatory requirements. These gaps came to the fore in regard to two aspects in particular: first, business process changes, and second, compliance with regulatory reporting requirements. The People's Bank of China (PBOC) and other regulatory bodies would approve some changes to business processes, but only within a certain scope. The good news, however, is that the PBOC and other regulatory bodies are starting to move in the direction of generally accepted inter-national standards, meaning that it should be easier to implement overseas core banking systems in future. An


example of this is the treatment of the interest rate on corpo-rate deposits. In the past, the People's Bank of China required that an interest rate change must be recalculated retroac-tively for a certain period of time. Later, this requirement was changed to follow general international practice, that is, a change in the interest rate is effective as of the date the change is made.

When the People's Bank of China or other regulatory bodies impose a new requirement for payments, settlements or other services, in order to bring existing inter-bank settle-ment methods quickly in line with the new regulation, they often require banks to implement the new requirement within three months. This means that certain requirements must be implemented within a very short timeframe from an IT systems point of view.

Comparatively speaking, the corporate banking system is more complex than the retail banking system. On the other hand, retail banking systems in China must handle very high transaction volumes, making the performance optimization of foreign software packages challenging.

After overcoming these and other difficulties, the project went live suc-cessfully, making the Bank of Shanghai the first domestic Chinese bank to implement a full core system suite from an international ven-dor across all of its branches. The factors that contributed to the success of the project included:

Strong leadership and active support by the Bank of Shang-hai's executive management. This was crucial to the success of the entire project. Other banks generally demand that the software vendor and the system integrator follow the bank’s existing model, for example to support the bank's existing business processes and organizational structure. The Bank of Shanghai, however, took advantage of the business functions and workflow design concepts contained in the software to modify its own operational model to a considerable degree.

Organizational restructuring, business process reengineer-ing, and system gap analysis were undertaken in parallel with the project implementation. To take full advantage of the new system’s world-class capabilities, the Bank of Shang-hai conducted an organizational and business process restructuring exercise across the entire bank, as well as a product gap analysis. To align the bank with the new system, the Bank of Shanghai developed a full set of detailed rules and operational procedures and organized extensive opera-


tions drills and training. The bank also undertook a coordinated data migration and reorganized its branch net-work. Workflow for key business processes, such as the year-end accounting, were improved, thus enhancing the system’s ability to support the business. These efforts contributed to the successful implementation of the project.

The bank focused on optimizing performance, while preserv-ing the essential functionality of the legacy system. The Bank of Shanghai considers this point to be crucial to the success of the project. While the bank made the strategic decision to adopt a world-class core banking system, it also overcame the difficulty that new systems often have in supporting the large transaction volumes and number of customers at Chi-nese banks, achieving a relatively high level of performance optimization.

Careful attention was paid to the impact of the system switch-over on the bank’s customers, and on their experi-ence as the system’s ultimate end users. The project team established a rigorous emergency plan as well as switch-over / rollback procedures. The go-live command center and IT service desk actively responded to feedback from the branch offices, so that problems or flaws that would affect customer service levels were essentially corrected on their first occur-rence. This helped keep to a minimum the impact of the go-live process on customers, delivery channels, the branch net-work and the front office.

After considering the various risks associated with the proj-ect, the Bank of Shanghai decided to implement the corporate banking systems first. Batch processing the corpo-rate business is comparatively easy, and valuable experience in system implementation and performance optimization could be accumulated during the corporate banking project. It also enabled the foreign engineers on the project to better understand the Bank of Shanghai's business and corporate culture. The experience gained during the corporate banking implementation lay a good foundation for the retail banking project.

Strategic decisioning to ensure optimum use of resources. In a challenging project such as this, many issues requiring a decision will be encountered during the implementation pro-cess. Prompt strategic decisioning is necessary to ensure the smooth progress of the implementation and efficient use of resources.


Conflicts between implementation of the project and the bank’s business development goals were resolved on a case-by-case basis. Due to the long project cycle and unabated expansion of the bank’s business, the lines of business wanted the new system to keep pace with the progress of their developing business. On the other hand, the project implementation team wanted to control the amount of new business requirements. The Bank of Shanghai used a case-by-case approach to resolve these kinds of conflicts.

Effective control of the project cycle and the scope of each of the project’s phases. The Bank of Shanghai undertook large-scale workflow reengineering and organizational adjust-ments in parallel with the project implementation process. It had to strike a balance between the periods of stability required by the implementation process and the rapid devel-opment of the bank’s business. During the course of the project, it was also affected by the IT system stability mea-sures in force during the Beijing Olympics and the relocation and switch-over of its primary data center located in the south Bound to make room for the World Expo Shanghai. Finally, through careful planning and project management by the project steering committee, the project management committee and the project teams, the project’s retail banking phase built on the foundation of the corporate banking phase to achieve tighter control of the project timeline.

To provide faster support and reduce costs, Temenos gradu-ally transferred project implementation from foreign engineers to Chinese engineers. At the beginning of the proj-ect, 80% of the Temenos team was foreign, but by the end of the project the proportion was only 5%.

From the point of view of the Bank of Shanghai, the entire project was divided into three stages: vendor selection for both software and sys-tem integration, the corporate banking systems phase, and the retail banking system phase. The corporate banking systems were first brought online at the Ningbo branch before being rolled out across the entire bank. This sequence was chosen because the Ningbo branch had only recently opened and had less business volume, so it could be used as a final test of the new core system before going live across the entire bank.


The cost of the project exceeded the budget, but not to a serious extent. The main reason for going over budget was due to the division of the project into two stages—corporate banking and retail bank-ing—which caused a certain amount of duplication of work. Project costs included:

Implementation costs: the entire implementation lasted three-and-a-half years, with a project team of over 200 people.

Figure 7: Project Timeline

Source: Bank of Shanghai, Hewlett-Packard, Temenos

Table 3: Project TeamFirm Staffing

Hewlett-Packard ~20

Temenos ~20(25 at the peak, 11 people in the initial stage, 17 at project end)

Bank of Shanghai 200+

Total ~240

Source: Bank of Shanghai, Hewlett-Packard, Temenos

Confirm requirements,system development

Data migration

Integration testing

System architecture designed by HP

2004 2005 2006 2007 2008

Selection Corporate banking system Retail banking system

Set up Temenos T24 demonstration server

Requirements analysis, familiarization with new system

Selection of HP as system integrator

Functionality Testing

Migration of GL to PeopleSoft

Ningbo branch go-live with corporate system

All branches live wi th corporate system

Stabilization of corporate system

Retail systemlive

March 1, 2004Kick-off

May 22, 2006Corporate system live

September 22, 2008Retail system live

Functionality testing

Confirm requirements,system development


Organizational costs: for example, the organizational struc-ture for the retail banking phase included:

– Project management committee: executives from the Bank of Shanghai, Hewlett-Packard and Temenos.

– Project management office: project manager of the Bank of Shanghai, project manager of Hewlett-Packard, project manager of Temenos, business manager of the Bank of Shanghai and technical manager of the Bank of Shanghai.

– Project teams: (1) Business teams were divided by line of business into the core system team, deposits team, cards team, loans team, fee-based business team, delivery chan-nels team, testing team, migration team, etc. (2) The technical team was dominated by software development staff. Management staff responsible for system facilities, networks, maintenance, data security and technical ser-vices were also assigned to the project at different stages in the implementation process.


Technology

The Bank of Shanghai’s next-generation core banking system runs on an open system, as did the legacy system. The central data center for the new system is located in Shanghai. The bank also plans to build a back-up center.

The structural features of the Temenos T24 core banking system include:

T24 has more than 6,000 tables and more than 40,000 fields. The Bank of Shanghai uses more than 4,000 tables. Many of the bank’s business operations can be controlled through this parameter-based system.

The system supports many standard interfaces, such as an ISO 8583 ATM interface and interfaces to SWIFT and Routers.

Figure 8: System structure

Source: Bank of Shanghai, Hewlett-Packard, Temenos, Celent

Other Applications

WealthMgmt

Credit Cards

Securities

TelephoneBanking

BEA TuxedoFront office system provided by Global Infotech

General Ledger

Account Mgmt System

Other Reporting/ Analysis Systems

Core Banking System

Temenos T24

HP SuperdomeHP-UXOracle database

External systems

PBOC, MoF UtilitiesPayments

Securities Firms

Other Companies

Internet BankingUsers

Corporate Retail

Treasury Trade Finance

ATM/CDMPOS

Reuters

Telex

SWIFT

Other Applications

WealthMgmt

Credit Cards

Securities

TelephoneBanking

Other Applications

WealthMgmt

Credit Cards

Securities

TelephoneBanking

BEA TuxedoFront office system provided by Global Infotech

General Ledger

Account Mgmt System


General LedgerGeneral Ledger

Account Mgmt System


Core Banking System

Temenos T24

HP SuperdomeHP-UXOracle database

External systems


Securities Firms

Other Companies

External systems


Securities Firms

Other Companies



Corporate Retail


Corporate Retail


Corporate Retail


ATM/CDMPOS

Reuters

Telex

SWIFT


Provide regional / country-specific functionality, such as GSD processing for Singapore and Australia. Double-byte support for Asian and other complex scripts.

The next-generation core system has 60 - 70 interfaces, many of which are in the corporate banking system. These interfaces required the greatest amount of customization in the entire system. They include:

An authorized employee of a certain supermarket chain can access account information for the chain’s 200 stores

Interfaces to government, customs and tax authorities

Payment of public utilities

Annuity payments, etc.

Compared to the legacy system infrastructure, the next-generation core system provides the following improvements:

The legacy system infrastructure was composed of many sub-systems, for example a system for renminbi savings deposits, a renminbi corporate banking system, a foreign currency system, a trade finance system, and a credit card system. As a result, account data was also siloed among the various lines of business. The next-generation core system places corporate and retail customers as well as domestic and foreign currencies on a uniform platform, and provides integrated account management.

The legacy systems were product-centric, with a data model organized by accounts, not customers. The next-generation core system is customer-centric.

The legacy system was not parameter based, and after five to seven years of developing code for new functionality, the sys-tem had become difficult to maintain. The old system lacked flexibility, and could not support speed-to-market for new products. The next-generation core system is parameter-based and capable of rapid development of new products.


IT and Operational Improvements

In addition to more robust functionality, the new core banking system represents a significant improvement in system design in comparison to the legacy system. This enhanced design enables a variety of con-crete business improvements, including:

Supports a centralized IT system, product development and uniform customer service.

Based on a customer-centric data model, with customer information held in an independent system module. A dedi-cated customer service system is devoted to customer information management.

The parameter-based system shortens the development cycle for new products and services. On the legacy system, it took six months to develop an application for a new product, while it requires half this time to do the job on the new sys-tem. Implementation of localized domestic business services can be accomplished simply through parameter configuration.

Provides a foundation for channel integration and ensures fast data exchange between channels and the core system.

Enables 24/7 service.

Maintains a complete record of customer information, prod-uct information and channel information to provide basic data for analysis and decisioning purposes, thus strengthen-ing business management capability.

Reduced error rate: To create new products and services in the legacy system, sections of code were modified, amended or copied, which could lead to unintended system problems. The new system uses parameter-based tables to create new products, greatly reducing the risk involved in adding new functionality.

Integrated risk management and monitoring of products, customers, accounts, transactions etc. across multiple busi-ness modules.


The integrated structure of the system contributes to stan-dardization of business operations. Utilizing a vendor package also means the bank benefits from more standard-ized system upgrades.

The system supports optimization of daily business pro-cesses and calculations, enabling tellers to save two hours of work time per day. On the legacy system, tellers needed to balance the books at the end of the banking day, but this pro-cess is not necessary on the new system. This indirectly enables an increase in the time staff can spend on providing customer-facing service. The process for closing the books at the end of the month has also been shortened by two hours.

The improved system also ultimately promotes essential business and service improvements, including:

The new core banking system is customer-centric, providing a foundation for relationship pricing, customer profitability analysis and customer-centric product marketing. The sys-tem also effectively guards against customer-related risks, provides a comprehensive view of customer information, and supports a broad range of customer analytics requirements.

Coordinated customer service for corporate and retail bank-ing supports integrated marketing activities and strengthens the bank’s ability to provide targeted services to high-end customers, such as SME owners.

In terms of marketing, the new system supports a unified sales and marketing structure, enabling rapid response to market needs, facilitating marketing efforts, supporting the design of effective products as well as the efficient and speedy roll-out of products, and providing coordinated man-agement of pricing and marketing strategies for products and services.

In terms of customer service, the system supports rapid data exchange with front-end channels to facilitate uniform and consistent services among the different channels and provid-ing a base for multi-channel integration. The system is designed to support new electronic and non-electronic chan-nels which may emerge in the future. The system also enables detailed tracking of channel costs and profitability.

In terms of operations, the new system supports the integra-tion of domestic and foreign currencies, the coordination of corporate and retail banking, and integration of the head


office and branch offices, and provides uniform business pro-cess rules. This integrated, standardized approach enables enhanced data exchange across business lines, facilitating more greater centralization of processing, operations, and controls in the middle and back office, and providing a base for multi-dimensional accounting data.

In terms of management, the system enables integrated accounting and consolidated front office operations across the entire bank, supporting inter-regional operations and customer information management. The system supports data queries and data mining at all levels of bank operations, thus providing a robust structure for risk management.

Domestic and foreign currencies as well as corporate and retail banking are placed on a uniform platform; system sup-ports integrated accounting and unified management of business channels: these features of the new integrated sys-tem enhance the efficiency of transactions. For example, on the legacy system, foreign exchange required carrying out an operation first on the domestic currency system, then exe-cuting a similar procedure on the foreign currency system. With the new system, both domestic and foreign currencies are on one system, so only one operation is required.

Many new services which are already deployed internation-ally may already be included in the new system, thus sparing the need to spend time on developing them. One example is cash management functionality, which was not available on the legacy system.

Temenos T24 software includes many functions that are in compliance with international regulatory authorities, poten-tially making it easier for the Bank of Shanghai to pursue a listing on overseas stock markets or to expand its business overseas.

Enhanced support for Basel II and new accounting standards.

By deploying the new core banking system, the Bank of Shanghai has achieved specific advantages across the lines of business, as shown in Table 4.


Table 4: Operational Improvements Enabled by the New SystemLine of Business Operational Improvements State of the Market

Deposits Integration of domestic and for-eign currencies and of corporate and retail banking enhances the bank’s ability to respond to interest rate deregulation and strengthens channel manage-ment capabilities. The system facilitates the use of variable interest rates to attract deposits.

Deregulation of interest rates and technical progress enable banks to attract more deposits by means of favorable interest rates and the leveraging of elec-tronic channels, in addition to capturing deposits through the branch network.

Loans The customer-centric system helps manage customer risk. With interest rate deregulation, the customer-centric system can also be leveraged for relation-ship pricing, reinforcing the bank’s competitiveness in SME lending.

SME lending is becoming more profitable for Chinese banks. Banks need to strengthen their risk control and loan pricing capabilities.

Cash management The legacy system did not sup-port cash management, requir-ing custom development to address the requirements of each customer. The new system supports centralized cash man-agement, risk management and investment services.

Cash management business in China is growing quickly, with a 100% CAGR in 2007. It is an important revenue stream: cash management and payments ser-vices accounted for 10% of HSBC's revenues in 2007. Cash management services also help the bank acquire as customers other SMEs that the bank’s exist-ing customers transact with.

Wealth management 1. Shortened product design cycle

2. Better customer information facilitates design of appropriate products

3. Analysis of data from delivery channels facilitates more appro-priate utilization of channels

Primary methods for attracting wealth management customers are branding, investment yield and product scale. Rapid product design can satisfy different mar-ket segments, and helps strengthen wealth management service capabilities.

Trade finance and international payments

Improved compliance with inter-national standards and strength-ened ability to offer international trade finance ser-vices.

Trade finance in China is domi-nated by international trade finance.

Credit cards Enhanced insight into customers allows the bank to design better priority / points plans and to offer better value-added ser-vices.

Credit cards are still a money-los-ing business in China. Banks need to offer more value-added services, flexible pricing plans and appropriate rewards to increase revenues and attract customers.

Debit cards System supports both domestic debit card functions and interna-tional functions such as pre-authorization.

Debit cards account for 90% of bankcards and 80% of bankcard transaction value. Debit cards are an important method for building the customer’s relation-ship with the bank.

Account management Strengthened Account management capabili-ties of Chinese banks has long lagged behind that of foreign banks.

Source: Celent


Corporate Finance Enhanced capabilities in syndi-cated lending etc.

Corporate finance is a growing proportion of banking business in China, accounting for 20% of industry revenues in 2008.

ATM/POS/Internet bank-ing

Extended service time Bank payment services and sales of wealth management products are becoming more dependent on electronic channels.

Table 4: Operational Improvements Enabled by the New SystemLine of Business Operational Improvements State of the Market

Source: Celent


Conclusions

The Bank of Shanghai is the second largest city bank in China, with total assets of US$51.9 billion. Although only a city (tier 3) bank, its asset scale has already exceeded many joint stock (tier 2) banks, with seven million customers, 13 million retail accounts, and 300,000 - 400,000 corporate accounts.

The Bank of Shanghai targets small and medium-enterprises as well as individual customers, and focuses its business on China's economi-cally developed cities. The bank is pursuing a differentiated business strategy while at the same time seeking to strengthen customer rela-tionship management and enhance the profitability of each customer. The bank’s legacy core systems, based on a product-centric design, could not fulfill this objective, leading the bank to decide to build a next-generation core banking system.

After making the decision to renew its core systems, the bank’s pro-ceeded to devise a transformation strategy:

The Bank of Shanghai considered whether to achieve its objectives by modifying its legacy system, or implementing a completely new system. The bank ultimately opted to install a new system. The main reasons for this decision were the product-centric design of the legacy system, the fact that rebuilding the system would require a substantial amount of work, and compromises would have to be made in terms of functionality.

The bank considered a number of vendors, ultimately select-ing the Temenos T24 core banking system. The bank liked the firm’s long track record and experience with core banking systems, and felt the product’s design concept was in line with the bank’s needs.

After considering Hewlett-Packard and IBM for the role of system integrator, the Bank of Shanghai chose HP. HP had previously worked with the bank, had a close working rela-tionship with Temenos, and was experienced in managing projects of long duration.

Like other IT implementations, the project encountered a number of challenges:


The largest challenge was the communication issue, as proj-ect team members were from different countries with different languages, cultural backgrounds and styles of doing business, which created barriers to communication.

A long, difficult to manage project cycle.

Localization of the core system, including Chinese language localization and supporting local business processes.

Temenos’ software had some gaps in regard to Chinese gov-ernment regulatory requirements.

Transaction volumes for the retail banking system are very high, putting high demands on system performance.

After overcoming these and other difficulties, the project went live suc-cessfully, making the Bank of Shanghai the first domestic Chinese bank to implement a full core system suite from an international ven-dor across all of its branches. The factors that contributed to the success of the project included:

Strong leadership and active support by the Bank of Shang-hai's executive management. When the new system’s workflow did not match the bank’s existing workflows, the bank did not insist on modifying the system in order to match the bank’s business processes. Rather, if the system’s workflow was superior to the bank’s existing process, the bank used the system’s workflow.

Organizational restructuring, business process reengineer-ing, and system gap analysis were undertaken in parallel with the project implementation.

The bank focused on optimizing performance, while preserv-ing the essential functionality of the legacy system.

Careful attention was paid to the impact of the system switch-over on the bank’s customers, and on their experi-ence as the system’s ultimate end users.

Strategic decisioning to ensure optimum use of resources.

Conflicts between implementation of the project and the bank’s business development goals resolved on a case-by-case basis.

Effective control of the project cycle and the scope of each of the project’s phases.

The next-generation core banking system runs on an open system, as did the legacy system. The central data center for the new system is located in Shanghai, and the bank also plans to build a back-up center.


The new system has 60 - 70 interfaces, many of which support fee-based business and delivery channels; these interfaces required the greatest amount of customization in the entire system. T24 supports more than 6,000 tables and 40,000 datafields. The Bank of Shanghai uses more than 4,000 tables. Many of the bank’s business operations can be controlled through this parameter-based system. The system supports a variety of standard interfaces and provides regional- and country-specific functionalities.

The Bank of Shanghai’s new core banking system provides more robust functionality and support for products and services. More importantly, the system represents a significant improvement in system design in comparison to the legacy system. These improvements include:

Customer-centric data model

Parameter-based system

Integration of domestic and foreign currencies, integrated corporate and retail banking systems, integrated accounting, uniform management of business channels

Enhanced operational management capability

Enhanced support for Basel II and new accounting standards

After going live with its next-generation core banking system, the Bank of Shanghai’s various lines of business are running on a new platform that meets international standards, enabling significant improvements in operational efficiency and the quality of its products and services.

Copyright Notice

Prepared byCelent, a division of Oliver Wyman

Copyright © 2008 Celent, a division of Oliver Wyman. All rights reserved. This report may not be reproduced or redistributed, in whole or in part, without the written permission of Celent, a division of Oliver Wyman (“Celent”) and Celent accepts no liability whatsoever for the actions of third parties in this respect. This report is not a substitute for tailored professional advice on how a specific financial institution should execute its strategy. This report is not investment advice and should not be relied on for such advice or as a substitute for consultation with professional accountants, tax, legal or financial advisers. This report is intended to be read and used as a whole and not in parts. Separation or alteration of any section or page from the main body of this report is expressly forbidden and invali-dates this report. Celent has made every effort to use reliable, up-to-date and comprehensive information and analysis, but all information is provided without warranty of any kind, express or implied. Informa-tion furnished by others, upon which all or portions of this report are based, is believed to be reliable but has not been verified, and no war-ranty is given as to the accuracy of such information. Public information and industry and statistical data, are from sources we deem to be reliable; however, we make no representation as to the accuracy or completeness of such information and have accepted the information without further verification. Celent disclaims any respon-sibility to update the information or conclusions in this report. Celent accepts no liability for any loss arising from any action taken or refrained from as a result of information contained in this report or any reports or sources of information referred to herein, or for any con-sequential, special or similar damages even if advised of the possibility of such damages. There are no third party beneficiaries with respect to this report, and we accept no liability to any third party. The opinions expressed herein are valid only for the purpose stated herein and as of the date of this report. No responsibility is taken for changes in market conditions or laws or regulations and no obligation is assumed to revise this report to reflect changes, events or conditions, which occur subsequent to the date hereof.

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