Banking on the Future: Why Core Modernization is Key for Financial Institutions

The banking industry has been rapidly evolving over the past decade, driven by technological advancements and changing customer expectations. This evolution has put immense pressure on financial institutions to adapt and stay relevant, not to mention to stay in compliance with regulations. One of the most critical aspects of this adaptation is core modernization.

Core modernization refers to the process of upgrading and replacing the legacy systems that underpin a financial institution’s operations. These systems largely use decades-old technology, often involving third parties, and lack the flexibility required to keep up with the demands of today’s fast-paced business environment. Core modernization is essential because it enables financial institutions to streamline operations, reduce costs, unlock new capabilities, and improve customer experiences.

The Benefits Are Many… Or The Customers Will Be Few

One of the primary reasons for undertaking core modernization is to improve operational efficiency. Legacy systems are often fragmented, with multiple systems handling different functions, which can lead to inefficiencies and errors. By modernizing their core systems, financial institutions can consolidate these systems and create a more unified and streamlined infrastructure. This, in turn, leads to faster processing times, reduced errors, and improved overall operational efficiency.

Another critical reason for core modernization is to improve customer experiences. Today’s customers expect banking services to be fast, seamless, and available 24/7. Legacy systems often lack the flexibility to provide these services, and as a result, customers may face delays or disruptions. Modernizing core systems can help financial institutions provide more personalized and timely services to customers, which can lead to increased customer satisfaction and loyalty.

The Approach Is Core To Success

Achieving success with core modernization requires a comprehensive approach that includes transformation solutions, technology solutions, and risk management solutions. Transformation solutions involve redefining business processes and organizational structures to align with the new core systems. This can include changes to workflows, policies, and procedures, as well as training and education programs for staff.

Technology solutions involve implementing new software and hardware to support the new core systems. This may include cloud-based solutions, artificial intelligence, and other advanced technologies that can help financial institutions streamline their operations and improve customer experiences.

Risk management solutions involve identifying and managing the risks associated with core modernization, and determining where existing risks and controls will need to be modified. This includes developing contingency plans to minimize disruptions to operations and ensuring that the new systems comply with regulatory requirements.

Getting started with core modernization involves developing a business case, assessing the current state, and developing a multi-year roadmap. The business case should outline the benefits of core modernization, including cost savings and operational efficiencies, improved customer experiences, and eventually new or improved revenue streams. The current state assessment should evaluate the existing legacy systems, identifying their strengths, weaknesses, and areas for improvement. The multi-year roadmap should outline the sequence of activities required to modernize the core systems, including prioritizing based on the state of individual legacy systems and the business case.

There are many different approaches to transform legacy applications, but the three most common are rehosting, replatforming, and refactoring. Rehosting legacy applications in the cloud may pose minimal risk, but also can be lacking in transformational value. Its benefit is mostly in lower storage and processing costs. Replatforming usually involves minor updates to applications once moved to a cloud environment and is popular due to a balance between improvement and risk to mission critical business processes. Refactoring not only migrates legacy applications and data to the cloud, but also transforms the application’s underlying code to better take advantage of cloud technologies. While it may introduce more risk, the potential benefits are far greater.

Standing Still Is Riskier

While this large-scale and complex change will introduce new risks, as a senior executive at a Top 10 Banking client of ours often noted, it is a risk to keep counting on outdated technology. More poignantly, she would also note, it is riskier to stand still. It seems that most Financial Services CIOs agree; as noted in research by Gartner, Financial Services CIOs will use 2023 as an opportunity to execute against the demand for capabilities that better support digital optimization and transformation (Gartner, 2023).

Gartner’s research goes on to list those Financial Services CIO priorities to include modularity, integration and discoverability of technologies such as core systems, customer experience capabilities, Internet of Things (IoT) services, public/open API integration capabilities and intelligence platforms for business innovation.

As an example of how transforming business processes using cloud technologies can have significant benefits, read this case study from Amazon Web Services Bank of Montreal Case Study | AWS. In the changing regulatory landscape of Financial Services, the speed at which analysis can be performed is truly game changing, with those companies standing still quite literally behind left behind.