Banks have been talking about core modernisation for decades but delayed implementation to a point where they may already be too late. We say this because the following factors have compounded the urgency of modernisation in recent years:
Changing customer expectations:
In the last decade, banks’ customer focus was largely on improving experience and engagement. Now, customers have brought the focus back on product innovation by demanding instant gratification as a feature – instant loans, 24 hours a day, 365 days a year. Banks cannot meet this expectation merely by originating product journeys on digital channels at any time; they also need middle and back-office journeys to run at all times, which is only possible in a modern core.
Customers want to be able to design and personalise their products on banking channels. For example, a retail loan customer would like to be able to specify not only the frequency and repayment day, but also avail a repayment holiday in a month with large expenses. A corporate customer may demand the flexibility to change the rules for moving money around via sweeping and pooling as they wish, without depending on their relationship manager. Personalisation at scale requires a modern, flexible, and resilient core.
Then there’s the need for rendering “high-volume” customer support. With the emergence of products, such as Buy Now Pay Later, low-value top-up deposits, and low-ticket investments, banking transactions have exploded, causing a similar increase in support interactions, handled only by a highly scalable and robust core solution.
Vivek Patil, Partner FS Advisory | PwC India, agrees here noting that “Digital transformation that has unfolded over the last decade and half has led to two key trends in banking – accelerated speed of change and nonlinear growth in customer as well as transactions. While in the initial phase digital was about front office, banks have realised without an agile, scalable, resilient, and secure core it is difficult to sustain in the digital era. As they are undertaking core modernisation initiatives, they need to follow three key patterns – externalisation of non core functionality into specialised systems, unbundling of monolithic core into composable speed boats and adopting cloud native architecture.”
Operational imperatives:
Incumbent banks continue to embrace automation to reset cost structures. A key objective is to cut expensive manual effort spent in managing exceptions, compliance, security, etc. Another goal is to improve resilience and uptime, to meet both customer service and regulatory expectations. Banks are also leveraging technologies like AI and machine learning for a variety of outcomes here. A modern core is the cornerstone of automated operations.
Innovation imperatives:
A next-gen core provides integration and agility required for collaboration with ecosystem partners and scaling new business models, such as Banking as a Service, embedded finance, and financial and non- financial marketplaces. A good example is Goldman Sachs, which leveraged a next-gen proven core solution to launch a new savings account along with Apple in the U.S. and acquired more than 10 billion in deposits within 3 months.
Technology factors:
Core modernisation is also the first step to unlocking value from the cloud, achieving dynamic scaling, improving resilience, benefiting from the superior security offered by hyper scalers, acquiring insights in real-time, and using APIs and event streaming to expand reach and partnerships.
More than just core banking
The point is that today, core modernisation is not only about upgrading legacy systems to support core banking operations but about ensuring that banks remain relevant and competitive. Historically, banks have delayed core modernisation over concerns of complexity and risk. For sure, core modernisation is more difficult, and involved, than many technology implementations; however, it has become easier and less risky over the years with the emergence of composable, componentised solutions that allow progressive modernisation. Composable architectures also allow banks to compose discrete capabilities into new, differentiating, products and services.
With this type of modern core, every bank can chart its path to modernisation. For instance, it could take the “sidecar” approach, creating a parallel core to support new products and processes, and gradually, shift existing products and processes onto it from the old core. Another popular option is to abstract or lighten the core by taking away pieces of functionality, such as loans, payments, or collaterals.
Now that they have the option of a proven next-gen core, banks should proceed forward with intent and confidence. There is no more time, nor reason, for delay.
