Digital transformation hits core banking

The future of digital banking strategy

As banks move to digitize their core banking platform, they need to consider how quickly they want to bring about change and understand the implications of their modernization journey. Our report explores five options for banks to consider as they implement their core banking transformations.

The legacy dilemma

Most of the top US banks run their core banking operations on aging platforms that were deployed in the 1980s and 1990s. These platforms are either homegrown or so heavily customized that they no longer resemble the original vendor product purchased, adding to complexity in maintenance. Institutions are aware that these systems require some level of modernization, but until recently they have found themselves looking at massive investments of time, effort, and money. Historically, replacing core banking systems was an expensive undertaking that often couldn’t demonstrate a return on investment in the short term. A full replacement could be a multiyear effort and a significant resource commitment. There’s also considerable operational risk involved due to the core banking transformation complexity and the potential disruption of day-to-day operations.

Another historical drawback to modernization is that most legacy platforms may still be sufficient to run core operations. So it’s not surprising that the vast majority of banks have chosen to retain their legacy core systems, instead of building stand-alone applications or implementing manual processes to address gaps.

Most large banks have recovered from the burden of complying with the slew of regulations and reporting requirements imposed on them following global events in the early 2000s and the financial crisis of 2008. Responding to regulatory mandates required banks to direct a large portion of their budget and resources toward compliance for more than a decade. But as banks achieve regulatory compliance, they have more funds to focus on growth-centered transformation to enhance their digital capabilities.

Leaving core platforms alone has also become untenable. Today, many banks are faced with expiring maintenance and support contracts and a patchwork of poorly documented customizations and integrations that are cumbersome to unravel. Banks are also dealing with increasingly scarce—and therefore expensive—resources that have knowledge of older technologies, such as common business-oriented language (COBOL) and mainframe systems. Ultimately, given the heavy customization of most legacy platforms, upgrading may be nearly the equivalent of implementing an entirely new platform.

This convergence of factors for change, availability of discretionary funds, advancements in modernization offerings, and a less clear proposition to maintain the status quo make core banking transformation and modernization an imperative that banks must act on.

Read the report to explore different options for banks to consider, as they implement their core banking transformations.

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