The core banking system is the underlying system of record for credits and debits that maintains transactions, histories and balances. The core platform is both the map and the compass that link a bank’s operations, clients and correspondents together as they transact.
When core banking systems were originally put in place, they were considered ideal for the function they were tasked to perform—recording transactions on an account. In today’s banking environment, however, core platforms are expected to do much more than just act as the system of record for credits and debits, and many are challenged to keep up.
Today, technological advancements, ever-changing regulatory requirements and the entry of nontraditional service providers are coupled with continuously evolving performance and client expectations. These factors cause banks to evaluate their existing, monolithic-based core banking technology architecture—and seek alternative, more surgical approaches to decomposing capabilities.
Ripping out old infrastructure and replacing it with a newer, more efficient solution for routing and executing transactions requires fundamental transformation across core processes, data flows and architectures. A full core banking replacement is a multiyear transformation, and it can cost hundreds of millions of dollars depending on the size and complexity of the financial institution, scope of implementation and the deployment approach. It’s no small endeavor.
Using outdated banking technology makes it hard for some banks to make strides forward in providing their customers with faster, more advanced banking services. In order for a bank to be successful when it comes to core renewal, it needs to look at decomposed business capabilities rather than the technology itself.
In our dynamic banking environment, modernization is not always the right answer. Core banking system renewal must move banks toward a more vertical architecture. This provides a modular approach to progressively enabling the bank to deliver fit-for-purpose business capabilities; a set of services that support these capabilities; and a significant uplift to speed, efficiency and data delivery. Ultimately, this should establish a list of required capabilities and determine a mix of current systems and new modular banking technology to reach this target state in the most effective way possible.
The challenge of core banking replacement
For some, a core banking replacement simply presents too much cost and risk. Decisions to replace core platforms are repeatedly being delayed or deferred due to the high cost of implementation, a lengthy delivery cycle, the risk that potential system disruption poses to client experience or the danger that banking technology will already be outdated by the time the system is replaced.
Irrespective of the risks involved, the objectives of core banking replacement must be addressed: delivering a flexible infrastructure that allows banks to meet ever-changing performance improvement goals, client expectations, regulatory requirements and demands for efficiency. There are ways to achieve these objectives without tackling all the obstacles and complexities of a traditional replacement.
A surgical approach to core banking system renewal — progressive enablement
A new, surgical approach breaks the core into components and enables the capabilities one at a time. This allows for a more modular process for core enhancement that can reduce cost and complexity. Individual components can be modified and enhanced one at a time, which allows the bank to work towards a more efficient, advanced core without the large-scale investment needed to complete a full core banking replacement.
An example of this surgical approach is microservices-based architecture. This takes the component approach to the next level by further breaking down the coarse-grained components into deployable, atomic services, each with their own data of records. These atomic services are then aggregated into larger services through rules-based orchestration. This aggregation gets recursively applied to define new operating models and address evolving market and client expectations.
Laser focus on performance and shareholder value
Banks have struggled to show strong earnings on a consistent basis, resulting in slimmed-down organizations, layoffs and branch closings. To continue to grow revenue, banks will need to find a way to lower the cost of doing business and to sustain those efficiencies as revenue grows.
It will also be important for banks to deliver on their value proposition and to provide a superior client experience that grows and maintains revenue generation. To do this, banks, and banking technology, need to be able to target the right clients with the right products and segments and to continually develop new strategies to cross-sell to existing clients, gathering a larger share of each client’s financial assets. Segmenting out products and services in a modular, vertical architecture allows the bank to take a more customized approach for each client group and to quickly and easily change those groups or strategies, as needed.
Achieving sustainable efficiencies through core banking systems
While a traditional core banking replacement offers a significant efficiency lift at the end, the payback is often too long given the volume of competing priorities. Seeking alternate opportunities for short-term gains, including identifying and rationalizing platforms that are high-cost/low-benefit and replacing these with more modern components that can efficiently integrate with the legacy core, is another lever to pull on in support of this lift.
Banks should address the problem of core from the outside in and progressively build the services needed to renew their system. This allows for a bite-sized transformation: banks can build the services needed to support specific products or capabilities (e.g., the Client Information File) and gradually incorporate the rules to utilize these services more broadly. This surgical approach mitigates the risk of core transformation by reducing delivery time, restricting the scope of data and process conversions, and minimizing the risk to the legacy bank. It also allows the bank to sidestep the massive investments required to fund a full core banking replacement.
Thinking around the obstacle of core banking systems
New approaches to core banking replacement should allow for a quick evolution from a tangled and inefficient architecture to a flexible, optimized and future-fit technology and business model that removes the concept (and obstacle) of “core” altogether, effectively meeting the objectives of a core banking replacement while reducing the risk and cost of large-scale implementation.
Banks must continue to focus on maximizing their ability to meet the needs of their clients, regulators and shareholders. For those banks contemplating a core modernization journey, or considering alternative approaches to an existing replacement, a thorough and independent diagnosis of strategic choices available will support effective decision-making and identification of the right course of action, in line with the individual company’s budget, risk appetite, strategic direction, technical infrastructure and operational readiness for change. Careful planning and prioritization upfront are critical to success with core banking replacement and, once agreed upon, can support that strategies for core are embedded in longer-term financial, operational and cultural objectives.
This article is co-authored by members of the EY Financial Services Office: executive directors Wim Geurden and Jan Muralitharan; and principals Matthias Loh and Bob Reveal.