Progressive Core Modernization: The Key to Competing in Today’s Banking Landscape

By Venkataraman Balasubramanian, Chief Evangelist at Zafin

Since the 1980s and 1990s, legacy back-end core tech systems have served as the backbone of the banking industry, offering reliability and effectiveness. However, with the banking landscape swiftly embracing digitalization, the limitations of these legacy systems have become increasingly evident. The emergence of neobanks and digital banking platforms underscores the pressing need for traditional banks to modernize their core systems. Unlike some traditional banks, these newcomers boast the agility to swiftly introduce innovative products and pricing capabilities to the market, attracting a substantial customer base seeking a seamless digital banking experience and product and pricing propositions that are personalized and align with their life stage.

Furthermore, the monolithic nature of legacy systems leads to slower time-to-market and escalating costs. Even minor changes necessitate extensive testing and coding, further impeding agility. Moreover, the working knowledge required to navigate these legacy systems is typically concentrated among long-tenured individuals, fostering a reliance on specialized knowledge. Consequently, when these individuals depart, it creates a void in system management and maintenance.

There is an urgent need for modernization, yet the expense and time required for core system overhauls often deter many executives from embracing newer technologies.

In the past, banks seeking to modernize core infrastructure embarked on multiyear replacements with support from leading core banking providers. None of these replacement efforts achieved success and, in many instances, resulted in public and costly failures.

Recently, some banks began experimenting with light-weight neo-cores to modernize product- by-product while leveraging new state-of-the-art capabilities. Unfortunately, many neo-cores require significant effort to make them viable to operate within their complex banking  ecosystem. This is largely because of the need to ensure that product and pricing are synchronized across all cores as well as the complex integration that is required to ensure a one-bank feel for its customers.

Research from McKinsey indicates that 70% of digital banking transformations surpass their initial budgets, with 7% ultimately costing more than twice the initial estimates. Furthermore, challenges such as time-to-market constraints, insufficient employee bandwidth to support, security vulnerabilities, restricted data integration and reporting, limited flexibility and coordinating the multi-core ecosystem, pose significant obstacles.

What is progressive core modernization and why does it matter?

While replacing legacy cores and implementing neo-cores have not yielded the desired results in the required timeframe, a new path has emerged – one that embraces the demands of delivering near-term paybacks in terms of business agility and functionality while also satisfying the need to modernize the infrastructure and establishing a foundation for the future.

Bank vendors with significant experience suggest an incremental approach to core modernization, eliminating the need for wholesale replacement. Instead, organizations can streamline their core systems by externalizing certain components and integrating them into a modern architecture, while maintaining connectivity with existing systems. Progressive core modernization is underpinned by abstracting three legacy core components: product management and pricing, customer arrangement master and customer information master from their core system reducing the core systems to operate as a thin ledger, which can continue to operate with low operational risks or be replaced/augmented with new thin ledgers built on modern capabilities.

This approach enables faster delivery of new products and services without incurring the full expense of replacing the entire core infrastructure.

Additionally, banks can extract  product and pricing platforms that centralize product data from disparate core systems into a single master platform. By leveraging these capabilities banks can drive product innovation through unlocking new product architectures that bring together different bank products to serve new, personalized propositions to bank customers while concurrently undergoing the complex process of core system modernization.

Why should banks consider partnering with a vendor specializing in core modernization?

Maintaining banking core technology systems demands significant resources, with none more valuable than employee time. Depending on scale of operations and product offerings, banks may require a comprising of software engineers, architects, developers, security analysts and product managers. Each bank must adequately staff these roles to consistently deliver current services while also innovating to meet evolving consumer demands.

While there is no one-size-fits-all approach to core modernization, banks can look to banking technology vendors as true partners to help internal teams and departments working to optimize business operations and develop products that meet and exceed banking customer expectations.

More importantly, core modernization and business transformation are no longer competing objectives. Working with banking technology vendors can increasingly allow banks to secure quick wins by leveraging banking technology capabilities to implement solutions that reframe business processes, create new enterprise capabilities and create initiatives that can uplift business metrics in the short term while simplifying the existing core infrastructure and increasing operational efficiency. The resulting savings, not only build internal confidence across business, technology and compliance stakeholders but can also serve as first steps towards funding the modernization of their core banking systems.

Core modernization isn’t a luxury for banks but rather a necessity. As market dynamics continue to change, business leaders must reimagine business models and modernize core technology to deliver sustainable revenue growth, reduce risk, and deliver an enhanced customer experience.