By John da Gama-Rose, Head of Banking & Financial Services, EMEA and APJ, Cognizant
Core banking systems are the beating hearts of financial institutions. The software helps manage accounts, enabling financial firms to carry out critical processes and transactions, and deploy new features for their customers. Worryingly for such important assets, many traditional banks still rely on systems that are decades old, reluctant to upgrade over fears around data security or labouring under the mentality of “if it’s not broken don’t fix it.” This is only pushing the problem further down the line, with IDC estimating that using outdated technology could cost banks more than $57 billion by 2028.
As banks’ legacy infrastructure increasingly limits their ability to innovate, they risk falling behind new challenger banks and larger technology companies, like Apple who is increasing its work in the banking market. As such, it is crucial banks begin the work to modernise their core systems immediately if they want to stay competitive in the long run.
Why are banks protective of the core?
Unsurprisingly, upgrading the core systems of a bank comes with complexity, cost and risk. For example, as systems are updated it could risk the exposure of sensitive data, and many CIOs fear the wrong upgrade could paralyse the bank completely. Both of these examples would lead to severe reputational damage to the bank and potential fines from regulators.
Many banks lack the necessary in-house skills to successfully transfer from an existing mainframe to a modern, cloud-based system. Likewise, following years of patching old systems, adopting workarounds or taking shortcuts, IT teams often have to contend with disparate systems spread across the globe. For instance, one of the largest banks in the Middle East currently has four different core banking systems across their global entities. This means any effective transformation will need to be preceded by harmonising these various systems and bringing the whole banking group into one core banking platform.
While sacrifices and shortcuts can help banks in the short-term, this approach can quickly result in banks accumulating technical debt. Not only will this hamper their ability to innovate, but it can also begin to have a negative effect on the service they deliver to existing customers. Banks can quickly end up in a situation where they lose customers to competitors who can offer more modern and efficient services than their own.
Why now?
The last year has seen vastly more powerful technology like generative AI enter the market. This technology could help customers better manage their accounts by, for example, making use of AI-powered chatbots that can offer advice on financial products. While the opportunity is huge, the promises of these latest advancements are raising the stakes and expectations on financial firms to deliver these innovations quickly to stay competitive. At the same time, regulators are putting more rules in place, like the recent Consumer Duty policy, to ensure banks are providing a quality service to customers.
The banks that continue to rely on legacy technology to confront these new pressures will quickly start to struggle as old platforms make it harder to add new features, which most of these new technologies include. This will make it nearly impossible to compete with modern banks who will benefit from the cost savings, agility and flexibility a modern cloud banking service can provide in testing and innovating. However, with their strong resources, customer base and access to data, traditional banks have a big opportunity to modernise their core systems and reap the benefits if they take the right approach now.
Charting a course towards modernisation
Every bank’s needs are different. As such, they should start by assessing existing capabilities, customer needs and where the greatest return on investment could come from. By moving specific functions over piece by piece, CIOs can reduce the overall risk to the business and allow them to continuously test new capabilities, ensuring short-term successes are matched by long-term business value.
Next, it is important to consider which solution offers the best value. For instance, an integrated hybrid strategy means firms can use modern mainframes for business-critical applications and still make use of the cloud for customer-facing services. Ensuring data is easily shareable across the banking group also allows banks to adopt broader capabilities by enabling teams to integrate abilities from a wide partner ecosystem.
While there are challenges when it comes to modernising core banking systems, CIOs and CTOs should not be afraid of the task ahead. The challenge may be daunting, but partnering with firms that have experience of managing these transitions, a broad range of relationships with providers and an understanding of the market will help banks find the bespoke path forward that works for them. Banks who aren’t proactive now are setting themselves up to miss out on all the advantages new technology can bring, whereas those who think ahead will reap the benefits from new revenue streams.
