IBM looms as only winner in KB dispute

Lee Kun-ho

By Kim Yoo-chul, Choi Kyong-ae

International Business Machines (IBM) is emerging as the only winner in an internal dispute between KB Financial and its main subsidiary, Kookmin Bank.

"We have no option but to extend our contract with IBM as we've failed to narrow differences with KB Financial Group over the necessity to replace the current banking application system solutions," a senior manager at the bank said, Wednesday.

The manager said the bank plans to sign a new contract with IBM for five more years after its contact expires in July 2015, costing the bank at least 140 billion won.

Kookmin is paying some 3 billion won monthly in return for using IBM solutions, bank officials said.

Such updates come a few days after IBM Korea CEO Shirley Yu-Tsui sent a letter to Kookmin Bank CEO Lee Kun-ho to show that the decision by the bank's board of directors and KB Financial Group Chairman Lim Young-rok to switch the bank's main banking application system to the less-pricey Unix-based system is risky.

The IBM CEO offered a heavy discount if the bank withdraws its plan to drop IBM as a supplier for the system.

But KB Financial opposed as the IBM CEO used her personal e-mail account for the letter to Kookmin Bank President Lee, pushing the nation's financial regulator to begin a special inspection into the issue. Kookmin Bank confirmed the IBM CEO sent the letter.

"As IBM is the exclusive supplier for mainframe systems, it's better than Unix in terms of security. But it's pricey. It's true that we've been consistent in switching our banking application system supplier since 2012. But the current troubles are telling us that we have no option but to use IBM solutions," said another manager at the bank.

Since early 2009, Kookmin Bank has been using IBM's z10 system as its core banking application system. The bank's main data center operations and management are being controlled by IBM solutions.

Attracted by better pricing, leading local banks are using Unix-based solutions. The Industrial Bank of Korea plans to adopt Unix systems from October.

Unix systems are currently being used in application systems by Nonghyup, Korea Exchange Bank, Shinban Bank and Hana Bank, while foreign banks including Citi and Standard Chartered are sticking to IBM-provided mainframes.

Kookmin, in addition to Woori, has become the second local bank to benefit IBM, said officials.

"More banks are using Unix systems as Unix is less pricey. When it comes to maintenance costs, IBM's mainframe system is cheaper, while you should pay more for Unix systems. It's hard to judge whether Unix solutions are better than those by IBM," said Ahn Seng-chei, general manager of the IT department at the Korea Federation of Banks.

As Kookmin reached a consensus to extend the contract, local system integration and software suppliers feel uneasy as their attempts to join the replacement project are destined to perish without any visible returns.

"Over the last two years, we've been teaming up with Kookmin to conduct benchmarking tests upon the bank's request to switch its system. So far, we've invested more than 1 billion won for the Kookmin project. This is really nonsense. If the bank completely drops the project, then we will bring the bank to a local court," said an executive at a local software firm.

Kookmin Bank is one of the largest clients for IBM Korea. IBM is worried about the bank's plan to downsize the banking system to a Unix as this is truly a big blow for IBM. IBM has recently seen a steep fall in its mainframe business.

"IBM probably offered very favorable suggestions that the bank had a hard time refusing because IBM's mainframe business may not easily recover if it loses the bank," said one IBM official.

IBM said it will change its long-time pricing strategy for its mainframe business for its local clients.