Most traditional banks realize they need to move faster, and many have picked up the pace of innovation and delivery through new talent, technologies, and ways of working. But banks usually are hobbled by legacy back-end core tech systems, many of which were designed in the 1980s and 1990s. These technological monoliths, which are hardwired to handle the entirety of business needs, are mostly stable and can process transactions speedily but can be inflexible and slow to change.
In planning technology investments, many banks have deprioritized modernizing their core systems in favor of the technological front ends, including websites, mobile apps, and channel experiences. Several have been “hollowing out” the core, or extracting smaller apps and services to extend the service life of their existing core banking system. Very few have truly moved to a more flexible back end. That prioritization may now need to change.
The logical next step for many banks is a next-generation core banking system that allows them to operate with the speed and agility required in an increasingly fast-paced and complex world. This is not a simple undertaking. The core banking system is the heart of a bank and immensely difficult and expensive to migrate. Also, the truly next-gen systems are still maturing, so committing to change now can be misplaced, costly, and slow. To navigate these challenges, banks need to take concurrent actions: hollow out the existing core while selecting multiple next-gen cores to test on slices of their product portfolio in a real-world test-and-learn process before deciding on a core and migrating fully. This is a delicate and complex exercise with often intangible returns on investment, but it is likely better than the other options and is fast becoming a cost of doing business. Most banks will need to view their systems strategically and technically to decide their path forward.
A rapidly evolving banking landscape is making new cores a necessity
The banking industry has been undergoing technological shifts that offer great potential for improving profitability and customer experience:
- From closed systems to ecosystems. The banking industry is shifting away from closed systems, in which each bank handles all the work of providing services directly to its customers, toward a model of operating as part of a larger ecosystem. In the ecosystem approach, market participants make their products and services available through other providers’ channels and offer third-party offerings through their own channels. This open-architecture approach is, of course, predicated on banks’ ability to make discrete components of their core systems available to other systems and to use other core systems’ components. Examples of this approach are numerous and include US Bank’s…