Core modernization remains crucial for banks seeking to remain competitive in the ever-changing financial landscape. However, the modernization process is riddled with challenges that can slow innovation, disrupt customer experience, and increase risk.
Developing strategies for de-risking core modernization in banking ensures smoother transitions and unlocks new growth opportunities.
Understanding the Challenges of Core Modernization
Core modernization involves updating banks’ foundational systems to manage transactions, customer data, and other critical operations. While necessary, this transformation can be complex and risky. Key challenges include:
Legacy Systems: Many banks still rely on monolithic legacy systems—outdated core banking platforms often built in the 1970s or 1980s. These systems are deeply intertwined with a bank’s daily operations and have likely been modified over decades to accommodate new regulations, business processes, and customer requirements. The data housed within these systems informs every product or operational process within the bank. However, upgrading or replacing these systems is complex and risky. Minor disruptions can affect thousands of transactions or processes, creating operational and customer satisfaction issues for banks.
Integration Issues: When modernizing core systems, banks face significant integration challenges. Because of the age of most core systems, the infrastructure is not designed to communicate easily with modern software solutions. As a result, banks must either invest heavily in middleware or run parallel systems during transitions. These parallel systems could be temporary duplicates of the existing system or new systems running alongside the old ones. Lack of integration increases the risk of downtime, transaction errors, and data corruption. McKinsey found that more than 60% of core banking transformation projects face delays or fail to meet expectations due to these integration issues, making it critical to address compatibility early in the planning process.
Regulatory Compliance: Financial institutions operate in one of the most regulated industries in the world. Every modernization effort must comply with strict regulatory requirements, including data security, privacy standards, and reporting obligations. The complexity is compounded by region-specific regulations, such as the UK’s FCA guidelines or European GDPR, and changing regulations as tech becomes more sophisticated. Non-compliance can lead to fines or operational shutdowns. Global financial regulators doled out more than $189 million USD in fines in the first half of 2023 alone, illustrating the financial stakes of maintaining compliance during transitions.
Customer Experience: Disruption to customer services during core modernization can lead to dissatisfaction, attrition, and loss of market share. Customers today expect seamless, always-available services. Any lapse in service during upgrades—whether delayed transactions, unavailable accounts, or broken digital interfaces—can harm customer trust.
5 Strategies for Core Modernization
To mitigate these challenges, banks must develop a strategic, well-structured approach to minimize risks associated with core modernization. By developing an incremental strategy, banks can mitigate any disruption to daily operations and even streamline manual processes for better efficiency. And with buy-in from key stakeholders and proper training for teams, banks can modernize their cores without upending operations and pave the way for innovative new financial products.
Strategy 1: Embrace a Building Block Approach
Due to the complexity and risk involved, modernizing a bank’s core systems all at once (a “big bang” system overhaul) can spell disaster. Instead, banks should embrace a building block or phased approach that permits gradual updates to specific core system components while maintaining the stability of others.
Incremental Upgrades: Rather than attempting a “big bang” system overhaul, banks can replace or upgrade specific components—such as payments processing, customer relationship management (CRM), or digital onboarding—one at a time. This approach allows banks to manage risks and costs more effectively and efficiently, as they can isolate each change, test thoroughly, and address potential issues before moving to the next phase.
Pilot Testing: Phased upgrades allow banks to roll out new components in controlled environments, such as specific customer segments or regions, where feedback can be gathered and adjustments made before full implementation. This approach reduces the risk of significant service disruptions during full-scale launches, as issues can be identified early in a smaller, more manageable setting.
By embracing incremental upgrades and pilot testing, banks can modernize while mitigating risks to daily operations, maintaining customer satisfaction, and controlling costs.
Modernization efforts should be guided by one overriding principle: the customer experience. Customers demand personalized, seamless, and frictionless services, and any modernization project should facilitate these capabilities. With a customer-centric modernization approach, banks can better identify and meet their customers’ evolving needs while fostering empathy and understanding.
Digital Account Opening: Customers, particularly in the UK, expect a fully digital onboarding experience that requires minimal effort. In fact, JD Power reports that 70% of customers expect to be able to open a bank account entirely online. Yet only 50% of customers are satisfied with their banks’ digital onboarding processes, indicating an immense opportunity for banks to improve the customer experience. Banks can significantly boost customer acquisition and satisfaction by digitizing the onboarding process and making it more efficient and intuitive.
Personalized Services: Personalization is both a competitive advantage and a customer expectation. Banks using data to provide tailored product recommendations, bundled offers, or custom financial advice can differentiate themselves in a crowded market. Accenture found that 91% of consumers are more likely to shop with brands that provide relevant offers based on their preferences and needs. At its core, modernization enables banks to gather and analyze customer data more effectively to deliver these personalized services and offers.
Fintech partnerships provide banks with advanced technology, specialized expertise, and innovative solutions that would otherwise be costly and time-consuming to develop in-house. By collaborating with fintech companies, banks can accelerate modernization and de-risk the process. By emphasizing the importance of these partnerships, banks can instill a sense of optimism and forward-thinking in their approach to modernization.
Advanced Technology: Fintechs are typically at the forefront of technological innovation. Rather than building new platforms from scratch, banks can adopt fintech solutions that have already proven effective. For example, FintechOS offers modular platforms that integrate seamlessly with legacy systems, reducing the complexity of modernization while accelerating deployment.
Innovation Acceleration: Fintechs often operate with greater agility and creativity than large banks. Partnering with fintechs can inject fresh ideas into traditional institutions and accelerate innovation in areas like open banking, embedded finance, and data analytics. A Finastra survey reveals that 3 of 4 banks consider fintech partnerships as critical to digital transformation efforts.
Risk Mitigation: Collaborating with fintechs allows banks to share the innovation risk. By outsourcing specific capabilities or relying on pre-built fintech solutions, banks can reduce the burden on their internal teams and limit the potential impact of failure.
Strategy 4: Focus on Compliance and Security
As banks modernize, they must prioritize compliance and security to avoid regulatory pitfalls and protect customer data from breaches. The increasingly stringent regulatory landscape demands new systems comply with data protection laws, anti-money laundering (AML) rules, and reporting standards. By adopting a proactive approach, rather than reactive, banks can stay a step ahead of potential data breaches or regulatory changes.
Built-in Compliance: When selecting new platforms or software solutions, banks should prioritize those with built-in compliance features. This ensures that the systems meet local and global regulatory requirements from day one, reducing the likelihood of costly compliance breaches. Compliance-related fines and settlements have cost banks billions over the past decade, underscoring the importance of adopting compliant systems from the start.
Enhanced Security Measures: Cybercrime is one of the fastest-growing threats in the financial sector. As banks modernize their systems, they must also upgrade their security protocols to safeguard against increasingly sophisticated attacks. Cybersecurity Ventures predicts that global cybercrime costs will reach $10.5 trillion annually by 2025, with the financial sector being a prime target. Implementing advanced encryption, multi-factor authentication, and real-time threat detection systems should be top priorities during modernization.
Ensuring compliance and robust security measures mitigates risk and builds trust with customers and regulators alike.
Strategy 5: Invest in Employee Training and Change Management
Technology alone cannot drive successful core modernization. The people using these systems must also be equipped to adapt. Investing in employee training and effective change management is critical to a smooth transition and widespread adoption.
Comprehensive Training Programs: Modernizing core systems often requires employees to learn new processes, interfaces, and protocols. Employees may resist change or struggle to adopt new systems without proper training. A survey by Prosci revealed that projects with excellent change management are seven times more likely to meet their objectives than those with poor change management practices.
Change Champions: Appointing internal “change champions” who can advocate for the benefits of modernization and guide colleagues through the transition can significantly reduce resistance. These champions act as key influencers within their teams and play a critical role in ensuring that modernization efforts are embraced and adopted across the organization.
By investing in employee training and fostering a culture of change, banks can ensure a smoother modernization process and reduce the risk of failure.
De-risking Modernization with FintechOS
Core modernization is no longer optional for banks that want to remain competitive and meet the demands of today’s customers. Banks can de-risk their modernization efforts by adopting a phased approach, prioritizing customer needs, leveraging fintech partnerships, ensuring compliance, and investing in change management.
FintechOS provides an innovative, AI-driven financial product engine that seamlessly integrates with banks’ existing technology stacks. It offers a robust, low-code platform that accelerates digital transformation by enabling rapid innovation without replacing existing core systems. With FintechOS, banks can create, onboard, distribute, and manage financial products quickly and easily, allowing them to stay agile in a competitive market.
Through its AI-driven decision-making capabilities, FintechOS empowers banks to deliver personalized, data-driven customer experiences. Its robust focus on compliance ensures that institutions remain aligned with regulatory requirements, reducing the risks and costs associated with traditional tech transformations.
Learn more about how FintechOS can support your bank’s modernization journey with innovative, low-risk solutions here.
Kyla is the Content & Communications Director at FintechOS. With nearly a decade of experience in content and PR, she has spent most of her career growing content strategies at tech startups and scale-ups. In her free time, you can find her strolling through an antique market, reading in a coffee shop, or buying one too many house plants.
