After accelerating digital adoption in 2020-21, banks are now seeking to maximize value from those investments by doing things differently. Our conversations with clients veer between tapping the Banking as a Service opportunity, riding the embedded finance wave, and introducing a Buy Now Pay Later option at checkout, and doing these successfully amid competition from big tech, fintech and challenger banks.
At the same time, banks are focusing their innovation agenda on three things: the products and services to offer, the channels and experiences to offer them through, and the ecosystem partners to work with on both. And everyone is in a hurry to progress in all three areas.
So it is frustrating that so many banks are not able to move fast enough. Mostly, the problem is the underlying legacy infrastructure, in particular the inflexible core systems, which are unable to support product extension, innovation, API development and advanced analytics, to name a few. A secondary problem is that provisioning additional (legacy) resources takes months, way longer than the hours or days that cloud-native infrastructure needs to multiply capacity. But since the business still wants its outcomes, and fast, the organization resorts to shortcuts, such as bypassing the legacy core by layering new capabilities onto it. From algorithm-driven autonomous investing and structured deposits to personalized mortgages and customized small business loans, banks have been forced to build capabilities on top of their existing processes and systems because changing the core is just not prioritized.
While this approach allows the banks to launch offerings quickly – and buys them a bit of time – it gradually piles on both technical debt and architectural complexity to unsustainable levels. A number of banks we know are facing this problem; they can no longer afford to drag their feet on core modernization.
The good news is that core migration in 2022 is far removed from what it was a decade ago. All major vendors have componentized their solutions significantly to facilitate a progressive upgrade of legacy infrastructure. Also, most solutions come with composable architecture, enabling discrete capabilities to be composed effortlessly into innovative products such as Buy Now Pay Later. Open APIs/ RESTful APIs and Events, aligned with BIAN standards, support BaaS propositions without the need for significant investment. Finally, being cloud-native, modern core systems can scale on demand to support galloping banking transaction volumes.
What’s more, every enterprise can choose its own pace and path to core modernization. For example, a small bank might do a full replacement at one go, whereas a large institution with more complexity would transform in stages. Some are even taking a “speedboat” approach, that is, creating a parallel technology stack to support new initiatives to start with, and subsequently migrating existing products on to it.
Given that there are so many options now, banks have little justification for delaying core replacement. If anything, the case for modernization has become stronger since an up-to-date banking core is a prerequisite for digital engagement and innovation, and not just an enabler of automation. Indeed, no digital transformation is complete without it.