Core revival

Pressure to change

Most banks are not keen to change their core systems, says Eef Gerritsen. He is director at Deloitte Consulting, focused on IT-transformations in the banking industry. “In a lot of cases, core systems of banks have been used for decades,” he explains. “They are deeply engrained in the company and are intertwined with crucial business processes. This makes it understandably complex and risky for banks to change them.”

Nevertheless, the banking industry is under great pressure to modernise their core systems. “First of all, banks face increasing competition from fintech start-ups,” says Timo Span, partner at Deloitte Consulting specialised in IT banking. “Fintech start-ups do not carry the burden of legacy technologies and can optimally profit from new technologies. This enables them to create new products and services at lightspeed.”

Moreover, customers are getting used to the instant results of the digital economy, and they expect their banks to keep up. Lastly, the COVID-19 pandemic has underscored the importance of being flexible and able to adapt to new circumstances, which should be supported with an adequate technical architecture. “You can’t ignore the core,” concludes Span. “If banks want to survive, they need to ensure their core systems are futureproof.”

Replacing core systems: complex and expensive

Data-driven technologies such as Artificial Intelligence (AI), Machine Learning (ML), edge computing and quantum hold a lot of promise for the banking industry. But the current core systems of banks are mostly incompatible with these technologies. “At the moment, most data in core systems is siloed and not in the right format for real-time data processing,” says Gerritsen. “As a result, banks are not able to connect the dots and extract the most value from their data assets.”

As a result, a lot of banks have focused their innovation efforts on new initiatives outside their core systems. This allows them to experiment and create new services without the burden of legacy technologies. Although these initiatives may generate valuable insights, this is not a sustainable strategy in the long run, says Span. “At some point, you need to reconnect these initiatives to your core,” he explains. “Otherwise, you end up with hundreds of different incompatible systems, and you will miss out on the opportunity to effectively leverage your data assets.”

Other banks have set up ambitious projects that aim to replace their entire core systems for new, lean cloud-based systems. So far, these efforts have mostly failed, observes Gerritsen. “Core systems of banks are simply too big. Currently, it takes years to completely replace your core technology. At some point, the costs of such an endeavour can no longer be justified and the project is killed.” Also, replacing entire core systems holds the risk of creating legacy software of the future. “IT is developing rapidly. In five to ten years, these systems might be outdated, and you have to start all over again,” says Gerritsen. He adds that this is a serious risk for new players in the financial industry as well.

Redefine the core modernisation business case

Rather than replacing entire core systems, banks need to think carefully about which parts of their core systems should be modernised right away, and which parts can wait. “Whereas some parts of core systems should be replaced, other parts might be better off staying in business a bit longer – maybe in a leaner, more simplified version,” says Span. Avoiding replicating exceptions that have been defined and built in the past can help to prevent creating future legacy software. “It’s key to have a clear business case for every software exception and to separate exceptions from core technology to avoid issues during updates.”

Span emphasises that banks should closely monitor the market, as tools that support core revitalisation are rapidly improving and maturing. In the past few years, low code/no code platforms have become more sophisticated, user-friendly and cost-efficient. They are increasingly getting ready to transform core systems. Cloud vendors are making major improvements and are getting more fit for core replacement as well. “These developments result in compelling business cases for banks, in which migrations can be cost-neutral or even lead to cost savings,” says Span.

Other examples include tools that scan core systems to see what types of codes need to be replatformed or removed. Some of these tools enable the automatic replacement of certain types of outdated code. Other tools can identify the business rules in the current core system and automatically reuse those in new systems. “These tools help to reduce complexity. They allow you to continue with your current core system, but in a faster and leaner form,” explains Gerritsen. He points out that in the context of core modernisation, these tools represent a game-changing breakthrough, as they not only contribute to better and faster core systems, but they are also improving over time as they leverage AI and ML to automate aspects of the code extraction process.

The way forward: think big, start small

Revitalised core systems that allow for flexibility and real-time data processing will create a lasting foundation for future innovation and competitive advantage. As tools that support core revitalisation are improving and maturing, banks have the opportunity to redefine their core modernisation business case and make this future a reality.

Yet, banks should not rush the transition to a cloud-based core system. “Revitalising core systems is a massive undertaking that shouldn’t be underestimated,” warns Span. “Start with a clear strategy about which parts of your core systems need to be replaced, removed or improved. As the market of tooling is developing rapidly, timing is important. In some cases, it is better to wait a little longer.” The work of improving legacy core assets is not a one-time task but an ongoing opportunity, says Span. “When it comes to core revitalisation, it is best to ‘think big, start small’,” he says. “One step at a time, you will pave the way to faster, leaner and futureproof core systems.”