Why the time is right to modernise 

Nobody ever said that replacing a core system would be cheap or easy, and we highlighted this previously when we discussed the challenges of replacing core banking. Nevertheless, not all projects to replace core banking have been failures. Below, we discuss the different ways that banks have approached core banking replacement and discuss a new alternative approach, modernisation:

1. Rip and Replace
2. Speedboat
3. Wrap it
4. Modernise

Rip and Replace: Banks replace the core legacy system with a brand new platform or rewrite it entirely on a new tech stack. Typically, the new core runs alongside the legacy system before a complete migration. This option not only requires the new core to be installed, it requires products to be set up identically on the new platform, customer and transaction data to be migrated and systems to be re-integrated with the new core.

The pros… 

• Banks benefit from being unencumbered by legacy systems and can incorporate new technologies such as cloud and AI or 3rd party fintech offerings.

• Banks can move quickly to launch new products or service lines not supported by their legacy core banking system.

• Increased flexibility and agility to make changes and continually innovate.

• Reduced operating costs based on new technology, and improved skills availability for maintenance. 

Leaping to an entirely new system sounds good in theory, but…

The cons…

• The challenges, risks and costs for core replacement are very high, as we discussed in the challenges of replacing legacy core banking. Specifically, the risks/costs associated with re-integration and data migration. 

• Banks must identify qualified vendors, commit to vast financial outlays, and risk downtime and disruption to existing services. 

• Banks are conservative by nature. Having already sunk millions of pounds or dollars into legacy systems that are operating today, banks are reluctant to rip out and replace everything in one go.

• The cost and resources needed to run two core systems concurrently for a lengthy period of time, with significant duplication of data, operations and creeping complexities, may deter banks from modernising altogether.

• If opting to redevelop a new core, this alone is a significant undertaking, typically, such a development would take 5+ years alone, then a significant migration effort.

Speedboat: Create a new branded digital bank. While this competes with the existing bank, it provides the opportunity to create a new technology landscape to escape the legacy decisions of the past. The goal is to create a compelling offering that incentivises existing bank customers to move over.

The pros…

• Building a new bank from scratch requires no data migration, and modern systems can now make up the technology landscape for the new bank.

• Many solutions for the full banking stack are now available in the cloud.

• No burden of cost for the branch network.

• Products and processes can be designed to be digital first.

The cons

• This is a significant undertaking.

• Risk of reusing staff and technology from the parent bank just to accelerate and reduce the cost of implementation.

• Risk of reinventing the past with new technology.

• Risk of customers moving to other banks rather than the new brand. 

Wrap it: banks progressively modernise their core by simplifying, building, and migrating services over time. This approach is not always planned, and banks that have experienced limitations have typically extended capabilities externally on an ad-hoc or silo basis, which is another reason for the so-called “spaghetti architecture” – a technology landscape of many systems integrated or sharing data based on different technologies and providers/in-house.

The pros…

• Banks can address specific issues like improving credit scoring or fraud management without changing everything to get faster time to value.

• Core systems remain untouched, reducing the risk and cost of implementation.

The cons…

• Limitations in the ledger design prohibit the support of some innovations, such as the store of assets, not just money in ledgers. We will discuss this later when we discuss the advantages of coreless banking.

• Some cores are still not real-time and, as such have a window where they have to be shut, this can not be addressed without addressing the core.

• Ageing technologies and skills availability will remain challenges for maintaining the legacy core.

• Developing around the core creates a greater long-term dependency on it as well as increased complexity to replace at a later stage.

• Painstaking bit-by-bit migration can morph into long-term projects – often between two to five years – that still inhibit banks from offering the kind of services customers demand.

• The underlying core still has the potential to buckle under the weight of new services.

Modernise: this involves keeping the core intact as a system of records, posting ledgers and building the required modern functionalities outside it. This can occur in stages, for example, by adding new product management capability to the bank's existing ledgers or just replacing fraud management with a new AI-driven capability. Standards like BIAN can help banks not only categorise and understand their existing technology landscape but then also select appropriate 3rd party components or choose to develop their own. This approach allows banks to take a “best of breed” approach or if they choose to select a vendor with a componentised solution to implement even a full replacement in phases. One of the key differences between this and the previous “Wrap-it” approach is that this option necessitates solutions built on modern architectures (MACH) to leverage technical capabilities for scalability, agility, security and flexibility

The pros…

• This is cost-effective, less risky, and less disruptive, as ongoing banking activities can continue uninterrupted. 

• A modern tech stack built outside the core can include sophisticated middleware, digital channels, and CRM or other platforms whilst leaning less on the legacy core.

• Greater skills availability by using modern technology.

• Business configurability with low code / no code approach.

The cons…

• Some banks have attempted various forms of these workarounds to address their core banking challenges, but often, such workarounds have only resulted in increased complexity, decreased system stability, and even more potential points of failure. 

• Fewer vendors can provide a coreless solution (we’ll be covering what this is soon; hang tight for now), making this approach much more feasible.

Choosing which approach to adopt depends on banks' specific problems and commercial considerations, including time, cost, deliverability, risk appetite and market opportunity. Multiple core systems could run concurrently in large banks with multiple operational areas spanning different departments (and even countries). That means hundreds or thousands of integrations could be needed using solutions from multiple vendors. 

Leaving aside the sheer scale of technical challenges to deal with, the administrative hassle of identifying suitable vendor solutions, performing due diligence and compliance checks, and assessing the feasibility of project modernisation only serves to slow any further attempts at digital transformation.

Grappling with whether to upgrade existing systems or rip them out completely is even more of a struggle when fluctuating macroeconomic cycles can mean budgets get frozen or slashed altogether. With investment, consumer spending, and liquidity battered over the last few years in the wake of Covid and other geopolitical shocks, cost savings have understandably been the priority for banks. But in a period of rising interest rates and thus more revenues for banks, the cost to replace will be easier to afford. These projects can take years, and a leadership change can affect project success or even continuation.

Forward-thinking banks will follow the adage of ‘make hay while the sun shines’ to plough revenues into IT modernisation projects. Modernisation projects that are goal-specific, like “Improving products agility” or “Reducing fraud”, will mean that scope can be clearly defined, managed and implemented more easily and successfully.