Banking: When Digital Transformation Hits the Core

Banking: When Digital Transformation Hits the Core

Scrapping legacy investments can be costly and painful. Yet, digitizing the core needs to be done – but how? Around 50 per cent of the world’s population is now under the age of 30, so there is an entire generation of consumers who’ve grown up with digital services. Their expectation of their bank is strongly […]

20 May 2021
Core banking

Scrapping legacy investments can be costly and painful. Yet, digitizing the core needs to be done – but how?

Around 50 per cent of the world’s population is now under the age of 30, so there is an entire generation of consumers who’ve grown up with digital services. Their expectation of their bank is strongly influenced by smartphones and their interactions with social media.

“Banks need to consider this forward when approaching core banking – how are they going to respond to deliver that experience?”, pointed out Ed Herman, Global FSI Leader at Microsoft, during a recent FintechOS webinar on core banking transformation.

The webinar explored best practices for transforming core banking systems and addressed the following question: how taking a digital-on-top approach can enable banks to deliver incremental innovation without casting out legacy investments?

The other panelists included Andra Sonea, Head of Solution Architecture, and Andrei Gaman, Commercial VP, both of FintechOS. Here are the best ideas and quotes from the session:

“A large generational gap”

Andra Sonea, Head of Solution Architecture at FintechOS:

  • In a large bank one can find many core banking systems – even 30-70 core banking systems – usually split by products and brands. The debate around core banking transformation seems to be new, but it’s not.
  • The more we try to introduce digital processes in the bank, the more we understand that we must deal with core banking.
  • There is a large generational gap between most core banking technology and the ones used by fintechs, leading to integration difficulties.
  • Core banking systems keep being extended with other systems to accommodate the transactional context required for good CX.
  • 85% of executives said that legacy technology is slowing down the delivery of new payment services, a 2020 European Banking survey run by Marqueta shows.

“Pressure to change”

  •  The new European regulations on open banking put a lot of pressure on banks to change, which is good. It brings two major changes:

#1 To enable transactions with  a third party, with the consent of the customer of the bank

#2 To allow a third party to initiate a payment from the current account of your customer

“Three approaches”

Banks have three approaches for core-banking transformations, according to Sonea:

#1 Big-bang replacement of core

  • This approach occurs when current core is out of support and there is an urgent need to replace
  • Selected systems are upgraded or replaced according to architecture roadmap
  • These are usually rare and very expensive, $100 million to $500 million+

#2 Journey-led progressive modernization

  • Top customer journeys are reinvented end-to-end through zero-based design
  • Current core has support and is usable for the next 5 to 10 years
  • Highly complex product set-up or legacy customers making migration a challenge
  • Investment required: $50 million to $200 million

#3 Green-field tech stack

  • Green-field tech stack leveraging cloud-native architecture (.e.g. hyper-parametrized, real-time, modular, API first)
  • New customers onboarded on the new platform, existing customers migrated
  • Speed of product innovation over risk of data migration challenges for legacy customers
  • Investment required: $50 million to $100 million

“The heartbeat of your organization”

Ed Herman, Global FSI Leader at Microsoft:

  • Core banking is the heartbeat of any organization, and core banking systems are built to be faultless. Therefore, banks were risk-averse in the past when it came to making big changes to the core banking systems. They would apply small incremental modernization techniques. But now cloud brings a different set of capabilities, they can put pilots in place, try new things and scale fast.
  • Cloud provides a rich set of services around machine learning, AI, analytics, and scalability, thus allowing banks opportunities and options that they didn’t have in the past.
  • Migration is inevitable. Data is secured and kept private, so regulators have become comfortable with this trend in most parts of the world.
  • I think there is more flexibility in the mid-tier banks, they have the ability to augment and put on some digital aspects that allow them to migrate to new systems solutions in a much faster period of time than the mega banks.
  • It’s all about data, namely how to access and use the data. There are systems – like FintechOS core banking – which enable access to data that previously was not so easy to reach because it was locked inside in the main core banking platform.
  • Every single device we use, every single transaction we make creates data in massive quantities. Companies, fintechs and banks know more and more about you – the question is how do you utilize that data?

“Successful quick wins”

Sometimes it’s better to build from scratch rather than making huge transformations on the go. For instance, in the UK, Monzo and Starling banks were built from zero. “Every single large bank in the UK spends ten times a budget of any of these neo banks on transformation without achieving the same results”, said Andra Sonea.

Here are two other examples for which Ed Herman uses the term “successful quick wins”:

  • Last year in Italy, Banca Mediolanum, an Italian incumbent, launched its own challenger bank, Flowe in 9 months, utilizing a new cloud-based core banking system. Flowe focuses on tools which facilitate a sustainable financial lifestyle for its users. The fintech can plug into third-party solutions such as core banking system, Temenos Transact.
  • In 2020, The Reserve Bank of Australia was able to move with speed and begin delivering government payments to citizens as the pandemic unfolded, thanks to a major overhaul of its core banking systems. The central bank’s new core banking platform had allowed it to “implement government policy and execute it within weeks”.

“A massive change”

Andra Sonea, Head of Solution Architecture at FintechOS:

  • As we move out of the pandemic, we see a massive change in people’s lives and behavior. Economies were hit and the way people spend money and do banking are different. In the UK, many branches disappeared. People from remote areas need to travel for kilometers to make a deposit.

Ed Herman, Global FSI Leader at Microsoft:

Things have changed permanently; the shift is fundamental. Banks are looking at how to repurpose those branches. The risks are related to customers if banks don’t pay attention to their needs.

  • Studies show that more than 30% of customers surveyed would choose Amazon or Google or Facebook for their banking service providers.
  • Let’s look at what Google did with Google Plex checking account. “11 financial institutions—three big banks, four community banks, two credit unions, and two digital banks announced partnerships with Google for the 2021 launch of the Google Plex checking account”, Forbes wrote at the end of 2020.
  • In short, if I get a Google account, Google becomes my bank, I don’t care who sits behind them.
  • Banks need to consider this when approaching core banking: how are we going to deliver an experience to rival that of the best of the tech companies?


Register now to watch the full recording of the webinar:

For more findings on this topic,  ➡️download our whitepaper “Core Banking – How to deliver incremental innovation”


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