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Why Legacy Core Banking Systems Are The Real White Elephant

By Alexandre Vandeput, Partner at Reply

The metaphor of a white elephant is sometimes used in IT to describe projects that run out of control. Where the risk and cost of implementation is out of proportion to its benefits.  As such, it’s often attributed to IT projects which are designed to replace legacy, on-premise Core Banking Systems (CBS). However, this is an outdated way of thinking and is holding many banks back.

Today, there are many technologies and technology providers that can help banks to transition smoothly from a legacy and silo-based architecture to a cloud-native system that offers greater functionality, scope and flexibility.

This is critical because a bank’s CBS plays a vitally important role. It records customer transactions, ensuring they are accurately reflected across all accounts and interfaced with the general ledger, middle-office, finance and risk systems. However, many banks have CBSs that have been in place for decades. They are not designed to integrate with new technologies or respond to the real time demands of customers.

In fact, a bank’s CBS goes to the heart of its competitiveness. There is a strong correlation between the complexity of legacy IT architectures and high cost-to-income (C/I) ratio. The more complex the IT architecture or the CBS, the higher the C/I ratio and the worse the competitiveness of a bank.

Having recognised this, many new banking models have emerged recently which are benefitting from a modernised and streamlined IT infrastructure. Indeed, there are three types of banks today:

Traditional banks: These banks struggle with cost inefficiencies, which can make their operating models barely profitable. Often, the income gained from their activities is almost equal to their expenses.

Challenger banks: These are modern counterparts to traditional banks and, in many cases, feature online-only operations. They typically achieve better administrative and legacy outcomes as they are more simply structured. However, they also strive for new ways to optimise their businesses.

Platform players: This third, and best performing group from a C/I perspective, are those implementing modern cloud-based CBS solutions. These new competitors were launched with IT architectures capable of driving lower costs and faster, more flexible operating models.

They lead the modern Cloud-based CBS model blueprint that is becoming a key competitive advantage.

By enabling Cloud-based CBS, traditional banks can enhance their competitiveness with challengers and platform players. They can remain attractive to their customers and be managed more effectively and efficiently. They can also protect themselves from the new challenges, including high regulatory burdens and demanding customer expectations.

Likewise, even challenger banks and platform players stand to improve their C/I as a result of continued adoption of advanced technologies. Specifically, the adoption of Cloud-based CBS can improve performance in banks in several ways and help them:

  •  Stay ahead of the competition
  •  Meet customers’ growing demands and maximize their experiences
  •  Keep pace with financial regulations and changes in banking law
  •  Maintain profitability in all areas of banking, especially when it comes to performing transactions on tight margins

Cloud-based CBS transformation also allow businesses to optimise core applications. It reduces the costs of legacy systems while enabling omnichannel capabilities. From an internal banking operations standpoint, it helps banks reduce manual efforts; outsource non-core operations and streamline and standardise actual processes. It also improves compliance, supports lead generation and selling of opportunities, and helps banks achieve a faster time-to-market for products and services.

Most of the incumbent banks have inherited these monolithic services. Therefore, the process of adopting new technologies, such as cloud, will require effective planning and risk assessment. Their organisational structures will need to evolve so they can become better at implementing new technologies.  This will take time and resources. Ultimately though, this will enable banks to introduce and implement new technologies company-wide.

Banks are now experiencing a time of constant technological change, heightened customer expectations and new challengers with digital business models. That’s why banks have now to face the white elephant in the banking industry and should start modernizing their legacy systems that are holding them back.