Many banks still have their core banking operations running on technology platforms built and deployed in the 1990s or earlier. These were either home built or customized versions of third-party software and while they can keep operations running, they are not agile enough to meet the demands of modern banking. Today, banks need to deliver scalable, hyper-personalized, relationship driven products, services and even loyalty programs to keep their customers engaged and to ensure profitability. Most banks today are aware of the critical need to modernize their infrastructure, but realize this is a time, effort and cost intensive prospect. There is also significant operational risk involved due to possible disruption in daily activities. Over the years, banks have tried to address short term changes by adding layers of technology and not touching the core systems. But this results in expiring maintenance contracts, poorly documented customizations, security threats, and the unnecessary cost of resources that can handle the outdated languages required for maintaining legacy infrastructure. Core modernization is no longer a choice for banks, but a critical business requirement.
The Need for Modernization
The needs of modern customers are influencing the way financial products are created and delivered. Customers today demand hyper-personalized, relationship-based offerings through channels of their choice, delivered on demand. There is also growing competition from tech giants and new age banks that are delivering exactly what customers want with new functionalities and products. Banks must be able to react faster and deploy innovative new products and engagement models to stay relevant in the market. The sector is also subject to increased and evolving regulatory requirements that require systems to be better integrated to ensure compliance. Modernizing the core will make maintenance and management easier and less time consuming, as outdated UIs are harder to understand, manage and navigate. Outdated systems are also more prone to cyber-attacks and malicious activities.
Identifying the Right Modernization Strategy
Banks must adopt a core modernization strategy that addresses the complexity, risk and cost involved. The journey must begin with an in-depth analysis of their objectives, expected outcomes, risks involved, mitigation strategies and more. The next step is to consider the way they want to execute it. The first option of course is a full replacement of the core. But this is time consuming, expensive, and extremely risky. The second option is progressive replacement, in which core functionalities are slowly transferred from the legacy system to a modernized architecture. The third option is to hollow out the core. This involves keeping the core intact as a system of records and posting ledgers and building the required modern functionalities outside it. This is cost-effective, less risky, and less disruptive for ongoing banking activities. The modern technology stack that is built on top of the core includes sophisticated middleware, digital channels, and marketing platform for a more agile operating model.
To decide which option works best for them, banks must understand the capabilities and gaps in the existing platform, consider their business strategy and objectives, their risk appetite, innovation objectives, and complexity of their data management strategy. Any modernization effort must also keep in mind that the future of business involves being part of an ecosystem or becoming an ecosystem provider themselves. It must help the business move in this direction. Open banking needs state-of-the-art systems that support user experience-based banking models. This calls for a cloud native platform that can leverage micro services-based architecture and a robust application programming interface (API) framework that can ensure easy integration with various internal and external services. Cloud native platforms can support a pay-per-use subscription model and will be easy to maintain and upgrade in future. Banks embarking on the core modernization journey are also looking at deploying advanced technologies like artificial intelligence, machine learning, natural language processing, and IoT to improve processes and facilitate innovation and drive growth. The core modernization approach must be able to support these technologies.
Modern banking is being shaped by evolving customer expectations, disruptive market events and a move to new relationship-driven user experience focussed business model. Legacy banking cores cannot deliver on any of these requirements. Modernizing the banking core is now a business imperative that can no longer be ignored. It is now time for the banking sector to focus on understanding the modernizing approach that works best for them.