Core banking system modernization: The whys, do’s, and don’ts

Over the past few years, financial institutions have become seemingly obsessed with system modernization and digitization, as they partner with cloud and core banking system (CBS) providers. Banks swore by their CBSs for decades. Until recently, the finesse of banking software was largely defined by how well it could handle a high volume of transactions and operate without major interruptions. Looking at countless examples of how CBS failure made their rivals lose customers, revenue and loyalty, banks marked it down — reliability is key. [caption id="attachment_221974" align="alignright" width="300"] Andrey Koptelov, innovation analyst, Itransition[/caption] We’ve experienced rapid democratization of technology over the past decade. Customers have grown used to flexibility and simple usability from apps they use every day and expect the same from their banking apps. The rapid influx of innovative fintech solutions means the technological gap has become painfully apparent. While these emerging startups are releasing features weekly and continuing to expand their infrastructures, older banks are dumping millions into maintenance. In fact, conventional CBS maintenance is going to become more expensive as many legacy technology experts retire and the talent pool becomes alarmingly narrow. The newer generation of software developers won’t be exploring COBOL — a programming language from 1959, which is incompatible with any modern software solutions yet is used by nearly half of U.S. banks — even out of curiosity, making it challenging for banks to attract new talent. CBS modernization All the aforementioned issues call for change. A flexible, scalable, cloud-enabled, open-banking-compliant system that welcomes frequent feature releases is what every bank should now be after. In general, banks can pursue CBS modernization in two ways: 1. Core system re-architecture: This is the most straightforward, resource-intensive and time-consuming modernization method. The only valid reason for opting for full system replacement should be a regulatory issue that has to be addressed immediately. 2. Cloud-based and service-oriented (SOA) platforms: SOA models enable real-time processing and compatibility with a range of external and internal systems through APIs, which allows for a gradual transition to a new system. It’s far less risky and expensive than going all in on modernization. These subscription-based, cloud-enabled models have already proven to be the least disruptive, yet most effective, modernization solutions. To understand which option will work best for a particular bank, it’s critical to assess current data organization, determine risk tolerance and modernization urgency and define both short- and long-term business goals. Implementation nuances to consider When rebuilding their legacy systems, banks should consider: 1. Cost-cutting strategies Unconventional funding strategies need to be considered, especially when it comes to smaller banks with insufficient resources for legacy modernization. Many banks have found a workaround by optimizing maintenance costs of the existing platform. Some have been able to save on legacy system maintenance by gradually migrating non-core functionality to a new system. It is paramount to establish a clear implementation roadmap in close collaboration with your third-party vendor to make such funding strategies work. Given that most legacy systems are unique, the vendor’s deep understanding of the customer’s system architecture is among the biggest prerequisites for success. For example, some outdated legacy systems still have APIs, which significantly eases the implementation of new features. 2. APIs In general, APIs are the new normal. Instead of relying on internal resources to adjust applications to customer needs, banks are becoming increasingly reliant on fintech partnerships. This collaboration-based business model alleviates the burden of complex customization issues and maintenance and allows for a much-needed reactive approach to consumer needs. 3. Post-migration configuration It may be less obvious and even irrational, but it’s better to fine-tune applications after the migration, and not vice versa. Some banks spend a considerable amount of time and resources rationalizing all their existing applications only to discover that half of them have no use in the context of an updated system. 4. Post-release planning It is also critical to determine the post-release plan. Well-developed training programs are a must. In addition, given that the new generation of core banking systems is built to evolve over time, it’s important to adjust employee management strategies to include regular training. At this point, the need for legacy modernization is out of the question. Fortunately, all the tools and information are there, and it’s up to banks to use them to their advantage. While modernization is an important step on the path to improved business processes, it’s also a great opportunity to revisit valuable institutional knowledge that has been stored in the depths of legacy systems for decades. Andrey Koptelov is an Innovation Analyst at Itransition, a custom software development company headquartered in Denver. With experience in IT, he writes about new disruptive technologies and innovations.

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Core banking system modernization: The whys, do’s, and don’ts

Conventional CBS maintenance costs expected to increase as legacy tech experts retire

Inside Look: BankSouth adopts conversational AI chatbot

Wall Street firms make crypto push to catch up with ‘cool kids’

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