Key Drivers for Core Banking Transformation

Core banking 10-Jul, 2023




Most banks are seriously assessing their core banking strategy. A sense of urgency is developing across the industry that banks need to modernize their core banking platforms to avoid risking their digital transformation plans. This article explores the key drivers behind the need for a core banking transformation.





Core banking implementations have a reputation for being notoriously difficult. They are expensive, time-consuming, and very risky. "Changing the aircraft engines midair," "Open Heart Surgery," and "Climbing Everest" are a few metaphors often used to describe a core banking implementation. Unsurprisingly, most banks do not attempt to replace them and consider tactical strategies to be wise. In addition to the complexity, core banking platform replacement is considered a high investment with no significant business benefits associated with them, making it an unlikely candidate for discretionary investment. However, this seems to be changing with a paradigm shift in banking business models as a result of digitalization, growing competition, and new technology trends.


Drivers for Core Banking Transformation


Below are the most significant factors driving the demand for a modern core banking platform:


1. Customer Expectation


Personalization, innovative products, flexible pricing, and a seamless experience combined with transparency, speed, and 24X7 availability have become a default customer expectation. Shifting from a product-centric approach to a data-driven client-centric approach is a stretch for conventional core banking systems (CBS).


2. Changing Environment & New Business Models


Banking services are getting disrupted with new technologies, new players, and new business models. Blockchain, AI, IoT, and many such new technologies are continually pushing the boundaries of innovation. The regulatory environment is continuously changing and evolving, with technology as the key driver. Fintech and Open Banking will change the traditional banking model. Competitiveness in financial services requires providers to be agile, quick to build partnerships and introduce a strong value proposition for their clients. The ever-increasing complexity of such an ecosystem requires a robust core banking platform that is secured, real-time, enables end-to-end digital; driven by data intelligence, easy integration, monitoring, and dynamic scaling.


New technology, customer centricity and adapting to evolving business models will drive future success


3.  Cost Efficiency

The cost of running a legacy CBS takes away a significant part of the IT budget. High costs result from version upgrades, vendor license fees, technical debts, suboptimal infrastructure usage, and manual IT operations. Complexities built over the years within the platform make integration difficult, keeping the cost of change huge and often increasing manual processes. In a digital environment where scale is the game, such high operating expenses are unsustainable. A modern core banking system could significantly reduce cost as they offer a lot more efficiency and flexibility in managing, changing, and integrating.

Modern Core Banking System has a significantly lower running cost.


4. Legacy Risk


Legacy platforms are costly to run, but they also pose a high operational risk to the organization due to obsolescence, manual processes in business, and IT. They are unable to cope with the modern-day availability and resilience requirement. The lack of skilled support staff is also a growing risk for legacy platforms. Legacy platforms are unable to keep up with the latest IT governance, risk, and compliance requirements. The inability to support new business models and inorganic growth opportunities can put banks at risk of a competitive disadvantage.


5. Data, Analytics & Data-Driven Decisions


Customers expect a personalized experience, but that would require client data availability in a single repository. A modern core banking platform is more than just a transaction processing system. It is a repository of structured and unstructured data. The ability to leverage real-time client data with a granularity of transactions, behaviours, preferences, and channel usage across the entire technology stack is crucial for digital services' success. In a digital ecosystem sales, customer acquisition, onboarding, fulfilment, customer due diligence, credit decisions, and servicing functions require rich data. Most traditional core banking systems fail to offer such a level of information at speed.


Granular client data is available real time across layers


6. Flexibility & Agility


You can go as fast as the weakest link. Banks can no longer afford to wait for long core banking release cycles to implement changes. The ability to make quick changes and roll out new capabilities in incremental iterations (MVP's) is essential in today's competitive environment. The core banking platform needs to offer flexibility across all the layers starting from business features to the deployment model. Having a highly componentized and configurable platform gives room for innovating new products, quickly integrating API's and monetizing services in a digital ecosystem.


Transformation is about replacing legacy with modern technology stack and enabling new ways of working and delivering software.



7. Cyber & Data Security


Compliance related to cyber and information security is only getting tougher. Failure to protect sensitive data or any security lapse can attract severe penalties from the regulators and erode consumer trust. Traditional core banking platforms lack the capabilities to meet the stringent security and data privacy requirements and often require workaround and expensive solutions devised around them.



8. Disruptive Technologies


Big Data, Cloud, Blockchain, In-Memory Computing, AI/ML, and many such disruptive technologies will play a significant role not only in financial services but across industries. The core platforms' ability to use such disruptive technologies is needed to offer innovative products to the clients, scale massively, remain competitive and relevant.


9. Modern Architecture                                                   


Monolithic core banking platforms can no longer meet the demands of next-generation banking services. While the traditional systems are functionally rich and reliable, they are just not good enough to provide the flexibility of integration and rapid changes expected. The latest platforms are designed on microservices-based architecture, giving a range of deployment and scaling options combined with ease of management and lower running cost. Traditional architectures do not allow smooth migration to Cloud infrastructure, and their software stack is prohibitively expensive when compared to new open-source platforms. The latest core banking solutions support the continuous delivery of features to production, blue-green deployments, and automation of IT operations necessary to future-proof business growth.



10. Tipping Point


Banks recognize that to be the next generation financial services, they will have to move towards an end-to-end digital. The pseudo-digital strategy of building a workaround to hide the underlying layers of complexities, playing on the edges with mobile and internet banking channels, or wrapping API's over legacy platforms is no longer viable. Tactical approaches cannot support customer expectations and the external environment. The perception of core banking transformation has changed in the last few years; it is no longer just a cost conversation but a case for revenue growth through new business models that offer monetization opportunities. Technology has evolved significantly, making it possible to allow incremental transition from legacy to a modern platform. Digital transformations for many banks hit roadblocks due to their core platforms, which cannot offer fundamental capabilities of 24X7 and real-time data availability. The existing complexities of systems and processes have likely reached a breaking point, which can be solved only by addressing legacy issues. The overall cost and risk of driving complex upgrades are coming down with new technologies and implementation approaches. All these factors combined are forcing banks to consider a comprehensive technology roadmap for their core platforms.


Modern architecture is necessary to future proof business growth.  Banks need to assess their current technology landscape to establish a core banking strategy that aligns with the digital aspiration





Banks have a range of options starting from doing nothing to a complete platform replacement of the core banking system. The choices are not that simple to make. They require careful consideration of various factors such as the current technology landscape, the business strategy, technology roadmap, and other dependencies. The plan will also vary based on the type of bank (global/regional/local), size, client segments, products & services they offer, etc. Banks need to assess their current state, business strategy, vision, and goals against the platform drivers to determine their core banking strategy.



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