Core Banking: How to Upgrade the Foundation Stone of Your Bank
Incremental innovation without casting out legacy investments is possible. How?
In a McKinsey survey of banking executives in 2019, more than two-thirds (70%) confirmed that they were reviewing their core banking platforms. Many of these systems were built decades ago, and are now proprietary and highly siloed. They were not designed to support digital services, rapid innovation, or customer-centric experiences.
The external and internal pressures to digitize core banking systems are clear. Banks are feeling the disruptive impact of open banking and lean fintech start-ups, with their modern apps and flexible, personalized financial services embedded within everyday digital commerce.
As shown in FintechOS’s whitepaper on core banking*, there are operational reasons for transforming internal mechanisms, too. Legacy infrastructure is expensive and cumbersome to manage. The cost of maintaining old systems curbs the ability to fund new innovation and to be price-competitive in the market.
Yet, scrapping legacy investments can be just as costly and painful, certainly in the short term. On top of concerns about the risk of destabilizing everyday operations during the transition, there are all kinds of regulatory and security controls built into banks’ foundations which need to be considered. Not to mention the many decades’ worth of data which they still need to be able to access.
Therefore, what to do? Standing still is not an option; indeed, the pace of change and therefore the urgency to do something is growing sharply. The mission starts with identifying the advantages of upgrading the core.
Modernizing the core
Capgemini maps out three different categories of benefit linked to transforming the core. The main goals are likely to include:
- Decreasing time-to-market for new products
- Easing compliance with new regulatory requirements
- Generating more cross-selling opportunities
- Enhancing the bank’s flexibility to innovate with products and pricing
- Achieving a consistent multi-channel experience
- Optimizing existing costs associated with core applications
- Reducing high maintenance costs associated with legacy IT systems
- Achieving a service-oriented architecture, replacing siloed, product-based legacy models for managing data, measuring performance, and guiding business goals
- Building a multi-channel capability
- Achieving streamlined end-to-end business processes
- Increasing interoperability by standardizing business processes
- Eliminating manual operations
- Enabling outsourcing or more flexible delivery models for non-core operations
Why a vertically connected approach
Up to now, banks have faced the dilemma of embarking on radical change or taking a disjointed approach to transformation, exposing them to either too much cost and risk, or a fragmented customer experience.
As banks have moved toward a progressive modernization approach, a vertically connected approach to transformation has proven more effective than creating separate technical stacks horizontally. Replacing only the front layer or the bank’s middleware can result in good-looking apps that lack functionality and aren’t especially smart. Moving the business towards a vertically connected architecture in a comprehensive way is preferable, especially when that technology scales and more services, business lines, or geographies can be added later.
Certainly, future success will rely on banks understanding their customers to the degree seen in e-commerce. The ability to learn from data, and compete on convenience, tailored offers and personalization, will be increasingly critical. To do any of this well, banks need to improve their ability to gather data and learn from it, as well as their ability to launch products and customer experiences more quickly.
Thus, banks need to choose their technology partners carefully. As McKinsey puts it, “The platform decisions leaders make now will set their direction of travel for the next five years or more. They need to think carefully about their next move. Still, there is scant opportunity for delay. The industry is approaching an inflection point, at which technology leaders will put clear blue water between themselves and the competition. The bottom line? CXOs need a clear strategy to avoid being left behind.” 
MAIN PHOTO Credit: UNSPLASH
*About this whitepaper:
Our latest whitepaper, “Core Banking – How to deliver incremental innovation”, explores the options for modernizing core banking systems in a practical, manageable and affordable way. You can also learn from this whitepaper how taking a digital-on-top approach with FintechOS can support this process. The goal is a smooth transition that enables banks to deliver innovative new services and personalized customer experiences at speed.
➡️Download our whitepaper from here.
  Next-generation core banking platforms: A golden ticket?, McKinsey, August 2019: https://www.mckinsey.com/industries/financial-services/our-insights/banking-matters/next-generation-core-banking-platforms-a-golden-ticket
 Core Banking Transformation: Measuring the Value, Capgemini, July 2017: https://www.capgemini.com/wp-content/uploads/2017/07/core_banking_transformation_measuring_the_value_1.pdf
 Next-generation core banking platforms: A golden ticket?, McKinsey, August 2019: https://www.mckinsey.com/industries/financial-services/our-insights/banking-matters/next-generation-core-banking-platforms-a-golden-ticket