This blog features over 100 articles on the financial industry’s modernization challenges, architectures, and best practices. In 2023, we will explore the benefits of implementing targeted modernization strategies for banks and discuss how to begin a unique modernization journey. This year, we will examine the market outlook, trends, and opportunities for modernization across financial services and insurance. This is the first in a series of blogs on core banking modernization. In the coming months, we will delve into topics such as core modernization patterns, pricing optimization for profitability, improving customer experience, and maintaining regulatory compliance while managing risk effectively.
Core Banking Platforms as Innovation Catalysts
Retail Banking helps the general public access financial services and goods through retail channels. It is a risk-reward model with a high volume and low margin. This industry has seen intense competition from non-banking businesses such as Fintechs in recent years. Corporate banking consumers and products, however, target a different demographic – businesses. These loans are riskier as they’re more likely to default. The net net is that Banks serve customers of different sizes with varying risk profiles.
That is why technology in banking is key, especially Core Banking platforms.
Financial services institutions (FSIs) struggle with outdated core banking technology and inflexible applications built using such technology that hinders productivity. Many companies are hesitant to update their systems due to the complexity and risks involved in ripping apart all this technical debt. As a result, a significant portion of IT budgets is allocated to maintaining legacy systems, leaving little room for innovation.
By modernizing legacy systems, FSIs can break down data silos, analyze customer data in real time, improve processing speed, quickly deploy new features, and streamline updates. By adopting new, cloud-based technologies, FSIs can also reduce infrastructure and capital expenses while increasing business resiliency.
Management teams at financial services institutions (FSIs) often express dissatisfaction with the level of benefits delivered by technology investments in major business transformations. While some projects may improve customer experience, they do not necessarily improve the overall economics of the firm. This is often due to the fact that legacy infrastructure is only partially replaced, resulting in an increase in the overall cost to serve customers. Additionally, with end-to-end costs difficult to understand and responsibility for delivering innovation and cost reduction fragmented across the institution, it can be challenging to concretely measure the benefits of these investments. Some of the obstacles that impede successful business transformation initiatives include organizational bureaucracy that slows the approval process for modernization projects like moving call centers and trading boards to the cloud, data silos that prevent the generation of innovative insights, and a lack of alignment or inclusivity across internal areas involved in product development which delays the deployment of new features.
Illustration: The Banking Core can hinder or accelerate business innovation (source FIS)
Past posts (https://www.vamsitalkstech.com/category/fintech/) have covered how financial services institutions (FSIs) must re-evaluate their internal and external applications to stay competitive in the digital age. Outdated IT architectures, such as monolithic applications built with traditional integration techniques, cannot meet the demands of today’s fast-paced digital world. A more effective approach is to adopt cloud-ready agile architectures that align with business goals and seamlessly connect systems, data, and other technologies.
This not only reduces infrastructure costs but also enables FSIs to measure risk in real-time and fast-track innovation by making organizational data ready for AI/ML, blockchain, and IoT. Cloud-based deployment can also be less expensive and less complex than on-premises deployment, as the service provider is responsible for managing and maintaining the network infrastructure.
The Underwhelming State of Core Modernization in 2023
Migrating to a new core banking platform is a difficult and expensive task, and next-generation technologies are still being incubated in Banks. That being said, what surprises the author is that many banks have prioritized developing front-ends such as websites and mobile apps over real & effective change – modernizing their core banking platforms. Even refactoring of core banking has lagged behind, for instance, to extend the lifespan of their current core banking systems, some banks have “hollowed out” the core or extracted smaller apps and services, but few have fully switched to a more flexible and cloud-native back-end.
A next-generation core banking system that enables banks to function with the speed and agility needed in a rapidly changing society is the next step for many banks, especially for Open Banking, Banking as a Service etc.
To overcome these obstacles, banks should test next-generation cores on portions of their product range before migrating over completely. This is a challenging task with uncertain returns on investment, but it is necessary to ensure the long-term success of the bank. Banks must consider both the technical and strategic aspects of their systems to determine their future course.
Targeted core replacement programs are increasingly seen by many banking companies as the way forward. While some institutions view core replacements as an essential step, others in developing markets recognize the importance of tailored replacements for grabbing new opportunities. Due to the enormous cost and accompanying dangers, few banks are willing to replace their fundamental banking systems in a “big bang” fashion. Targeted modernization initiatives can deliver this with advantages driven by front-office digitization, regulatory requirements, cost reductions, and operational improvements. Bank leaders seek investments that can demonstrate a return within the same year. Even though bank IT expenditures are often small, they are adequate for a method of gradual progress. Increasing business agility, conforming to regulations, and enabling new channels are typical justifications for core banking modernization. The current dominant trend in banking technology is targeted modernization, which enables investments in particular business outcomes while still sustaining and enhancing IT assets.
Conclusion
Financial services institutions (FSIs) must transition to utilizing cloud-native technology and make their services easily accessible through digital means in order to remain competitive. FSIs may simply grow capacity while lowering costs and boosting efficiency by transferring obsolete systems to the cloud. We will examine core banking transformation in greater depth in blogs this year.
Featured Image by Daria Nepriakhina 🇺🇦 from Pixabay