Modernizing a bank's core system can be a difficult task that consumes a lot of time, resources, and takes a lot of planning. Yet it's a project that, with the right team and know-how, can be quite accessible.
There are multiple ways to update your banking system; by replacing it, core system peeling and encapsulation or even by utilizing a Banking-as-a-Software system. The decision is up to you and your board. However, when deciding on choosing a certain implementation over another, you should consider multiple variables such as the associated risks, current and upcoming regulations, the robustness of your current system, and current and future integration needs.
Customer expectations are evolving rapidly, and financial technology is advancing at an unprecedented pace. Staying ahead means not only keeping up with current trends but also anticipating future changes. Modernizing your legacy systems is pivotal to fortifying your security, compliance, and ability to innovate.
We'll delve into understanding the intricacies of legacy systems, choosing the right modernization approach, embracing new technologies, ensuring data security, managing change, and future-proofing your systems. By the end, you'll have a clearer understanding of how to approach this critical transition, ensuring your bank remains competitive, secure, and aligned with both current and future banking landscapes.
Legacy systems refer to the longstanding core software and technology infrastructure that have been the backbone of financial institutions for decades. These systems are characterized by their robustness and reliability. However, the rapid evolution of technology has left them struggling to keep pace with modern demands, such as providing faster access to support digitization, access to API integrations, real-time payments, open banking, and more.
It's essential to recognize that these systems aren't just relics; they have been instrumental in shaping the banking industry as we know it and were even once a pillar of banking systems modernization themselves!
A legacy system in banking can be a complex amalgam of various software and hardware components. Typically, these systems were designed in an era where mainframes and batch processing were the norm. They often operate on older programming languages such as COBOL or FORTRAN, making it difficult to integrate with modern technologies such as: all-in-one mobile apps, online banking platforms, real-time payments, contactless payments, AI chatbots, AI lending, RPAs etc. This inability to easily adapt or evolve is what primarily categorizes a system as 'legacy'.
Legacy systems come with a unique set of challenges. Their limited flexibility is a significant issue; they were not designed for the agile, customer-centric world we now inhabit.
High maintenance costs are another concern, as the aging technology requires specialized skills to manage and update – when was the last time you met a COBOL developer? Moreover, these systems often pose significant security vulnerabilities, as their outdated architecture may not support the latest security protocols, leaving sensitive financial data at risk.
Perhaps the most critical drawback of clinging to legacy systems is their impact on a bank's ability to compete and innovate.
Banks saddled with outdated technology find it increasingly difficult to launch new products quickly, offer seamless customer experiences, or leverage data analytics to their full potential. In contrast, competitors who have embraced modern systems enjoy enhanced agility, allowing them to respond swiftly to market changes and customer needs.
The reliance on these archaic systems creates a technological inertia, where making necessary changes becomes progressively more difficult and expensive.
Modernizing your bank’s core system represents more than an industry trend, a modern core system allows you to access new technologies, sources of revenue and industry best practices – helping your bank to not only be more profitable on the long run, but also remain efficient and relevant when competing with other players from the financial sector.
Let’s go through some use cases for a modern core system that would improve your employee's productivity and add new revenue streams to your financial business.
The first most important technological field that you can access with a modernized core system is Open Banking. Open Banking is a new industry best practice that allows banks to open up their systems and data to third party providers. This practice is heavily regulated by PSD2 and while it can hold some disadvantages by allowing third-party companies to access your data, it also allows your bank to provide banking services to fintechs or non-financial companies.
Open Banking relies on technologies like cloud solutions, APIs, cybersecurity, data integrations, decisioning, risk assessment and automation tools, all of which must be integrated with different parts of your core system. A monolithic system unfortunately wasn’t created with Open Banking in mind, meaning that you will need a modular system that would allow you to introduce new technologies that can help you maintain your competitiveness.
Embedded Finance is an emerging technological field that allows non-financial companies such as retail and ecommerce to access financial products and offer them to their customers directly at the point of sale.
Traditional banks are now providing the financial services necessary for embedded finance solutions. These solutions provide value to the non-financial organization, by making quick decisions and allowing the end customer to get credit or make payments without interacting directly with a bank’s ecosystem.
Embedded finance solutions are meant to improve the customer experience for the non-financial organizations while also bringing in new business for the financial institutions. From a technological standpoint, you can’t provide embedded finance without open banking capabilities, and open banking can’t exist without a modern system capable of integrating the different types of technologies described above.
Since AI-based solutions became more and more popular, many companies started using AI models to automate the risk assessment and processing of credit and loans, though it still needs sometimes human intervention for special cases, this quickly became a best practice in the financial industry.
By automating the credit and loan underwriting, decisioning or even origination processes, you can take work off your employees' hands so they can focus on other more important tasks. These automated solutions bring advantages such as reducing your recruitment needs and increasing your operations efficiency.
Automated Credit and Loan Processing represents just one example of automated technology, but there are several other processes that can be automated within your bank using AI, ML, or other technologies.
Embarking on the journey to modernize a bank’s legacy systems is akin to navigating uncharted waters. It requires a plan that is meticulously crafted to address the unique challenges and opportunities that lie ahead. This plan should be rooted in a deep understanding of the bank's current position, its future aspirations, and the technological landscape it operates within.
The first step in planning is a detailed assessment of the current systems. This involves an in-depth analysis of the existing technological infrastructure, software applications, data management practices, and user interfaces.
The purpose of the assessment is to identify critical areas that need improvement, and to consider if the current systems align with the bank’s business goals and customer needs.
Here are some areas where modernization can yield significant benefits: updating payment processing systems to enable faster transactions, enhancing data analytics capabilities to derive better customer insights, or implementing stronger cybersecurity measures.
When conducting a modernization project, assessments should be done together with a team of technical experts that have had prior experience of modernizing banking legacy systems.
However, modernization is not solely an IT endeavor; it impacts every facet of the banking operation. Therefore, forming a cross-functional team is imperative. It should include representatives from IT, Software Architects, business units, compliance, and customer service.
Additionally, it is important for the successful implementation of the modernization plan to involve stakeholders from different departments to foster a sense of ownership and collaboration.
Now that the groundwork has been laid, the plan must be clearly written out and communicated to the builders' team.
It should outline the goals of modernization, the approach to be taken, the resources required, and the timeline for implementation. It should also include a risk management strategy to address potential challenges that may arise during the transition, and all these required steps should be taken together with your team of technical experts.
Core banking modernization encompasses a variety of areas and doesn't necessarily require an all-or-nothing approach. There are multiple angles from which to approach modernization.
Modern banking is synonymous with data. Gone are the days of cumbersome data warehouses. Today's trend is about retaining existing data assets while enhancing interface layers through methods like streaming databases and data mesh.
For example, our team at ITMAGINATION created and developed a clickstream analytics system for a well-known polish bank.
By working closely with the CRM and risk teams for retail customers, and by researching customer behavior in eBanking and mobile channels – we helped the bank develop the clickstream analytics system, and the clickstream information deriving from the solution can be used to develop risk models and to prepare better adjusted marketing campaigns.
The solution allows the polish bank to communicate with customers in completely new ways offering a huge competitive advantage.
Working with streaming databases can help banks understand and recognize patterns in customer behavior that can be used to slash implementation time, offer new products, add new features, and upsell existing products, therefore maximizing a bank’s revenue potential.
However, financial institutions shouldn’t limit themselves in using databases and analytics systems solely for marketing purposes, the information output can be also used to understand what processes are redundant, which tasks can be automated, or even predict what might be the best revenue stream for the next quarter.
Using APIs for seamless integration fosters a cohesive technological environment and can drive down costs without sacrificing the variety of applications.
Following this, the shift to SaaS (Software as a Service) or PaaS (Platform as a Service) is becoming increasingly important. This move ensures standardization, facilitates upgrades, and introduces innovative cloud functionalities, all while reducing costs and accelerating implementation. Functions suitable for automation include transaction handling, FAQ databases, payment message generation, MIS generation, data replication, and various account management tasks.
The future of banking hinges on creating a foundation for core systems that expertly balances global scalability with local adaptability. By establishing global platforms that are amenable to local customization, banks can leverage standardized core banking and data platforms in diverse geographies. Such an approach underscores the possibility of expanding a bank's global presence while simultaneously maintaining local relevance and catering to the specific requirements of each market.
Sometimes it is hard to figure out what would be the best way to achieve a successful core system modernization. The stakes are high, the resources are limited, and everyone’s waiting for a decision.
At ITMAGINATION, we have significant experience working with modernizing legacy banking systems and developing digital banking solutions. We’ve already had successful developments for: American Express, BNP Paribas, Credit Agricole, Santander, PayU and others. From our point of view, you can approach core banking system modernization from three angles: replacement, using BaaS platforms, or a hybrid approach (peeling & encapsulation).
Replacing a core banking system is a comprehensive and strategic process that involves completely overhauling the primary software and infrastructure used by a bank to conduct its essential operations.
The process entails technological upgrades and encompasses a shift in organizational structure, processes, and business strategy. The goal is to enhance efficiency, agility, and customer service, ensuring the bank remains competitive and capable of meeting modern regulatory and market demands.
However, the major problem when overhauling the entire system is that it became increasingly difficult to find developers that have the knowledge and the experience to navigate through prehistoric mainframes such as COBOL based systems – thus introducing a sense of urgency for a lot of banks worldwide, besides the hard task of finding specialists – replacing your entire core system can take enormous amounts of time, financial resources and commitment.
There is also a chance that by the time you finish the project and introduce the new system it might be already redundant compared to the rapid technological advancement happening in the banking industry right now. When replacing your system, it is very important to add a layer of flexibility that allows you to keep pace with any new technology or market demand.
Steps for Core Banking System Replacement
Even though replacing the entire core banking system might bring many long-term benefits, sometimes banks need a quicker solution which comes out of the box but with a lot of room for customization for their specific needs – and this is where Banking as a Service solutions come in.
This approach leverages external providers' technology and services to enhance the bank's capabilities without a complete overhaul of its existing systems. Here's a breakdown of how this can be achieved:
Steps for Integrating BaaS into Legacy Systems
Integrating several BaaS solutions to move away from relying on your legacy systems is a pathway to modernization that is less disruptive and more cost-effective than a complete system overhaul. However, it requires careful planning and management to address integration challenges, maintain regulatory compliance, and data security.
Moving forward with a more hybrid approach, we at ITMAGINATION have achieved significant success in delivering core banking system modernizations with this strategy for our clients, though the specifics cannot be disclosed due to existing NDAs.
Opting for the peeling & encapsulation method helps avoid the unnecessary costs, effort, and risks that may arise from completely replacing the original banking system. Often, these disadvantages outweigh the advantages. Conversely, relying entirely on Banking-as-a-Service (BaaS) platforms can be risky due to potential third-party access to your data, a concern heightened by the numerous regulations protecting individuals from data breaches.
Core system modernization focuses on reducing the core to its essential elements and rebuilding around it with flexibility and scalability in mind. By peeling your core system, your bank can benefit from integrating BaaS solutions to automate non-differentiating functions, while also retaining the advantages of a full replacement.
The goal is to update your system to current technological standards, while keeping costs moderate, interventions to your internal processes minimal, and your data secure within the bank's database, safeguarded from misuse by third-party collaborators.
Here are the three core processes we at ITMAGINATION employ to develop and deploy core system modernization:
There are a few principles you should consider when undergoing a modernization project to your core banking system:
Modernizing a bank's core system through peeling, encapsulation, and API integration offers significant benefits in terms of operational efficiency and service quality. However, banks must navigate the challenges of integration complexity, costs, compliance, operational disruption, and the need for training and adaptation, and then decide which of the three ways of core system modernization is aligned with their current needs and resources.
Modernizing banking legacy systems is an intricate balance of integrating cutting-edge technologies with existing infrastructures. Looking to the future, cloud computing and AI are not just buzzwords but the new standard reshaping the banking sector in coming years.
Cloud computing provides a robust platform that enhances legacy systems with scalability and flexibility. Banks like Capital One have transitioned significant portions of their operations to the cloud, leading to improved agility and innovation capabilities. This shift helps banks meet the dynamic demands of the digital age like offering Open Banking while maintaining the integrity of their legacy systems.
Artificial Intelligence (AI) infuses legacy systems with advanced analytics and automation capabilities. AI can enhance customer service through intelligent chatbots and risk assessment systems, like those deployed by Wells Fargo or NFG, offering personalized assistance, assessing credit worthiness and more importantly - improving operational efficiency. Moreover, AI-driven risk management tools enable banks to analyze vast datasets, predict market trends, and identify potential frauds, thereby fortifying their legacy systems against contemporary challenges.
As banks modernize their legacy systems, data security and regulatory compliance become even more important factors to consider.
Data security must be at the forefront when updating legacy systems. Banks must implement advanced encryption, multi-factor authentication, and consistent monitoring to protect sensitive information. For example, Citibank's adoption of robust cybersecurity measures showcases the importance of protecting data integrity in a modern banking environment.
Banks should adopt a proactive approach to compliance, staying abreast of regulatory changes and integrating them into their systems. Regular audits and staff training in compliance are essential. Additionally, involving legal and compliance experts and having a team with experience in the banking framework in the modernization project ensures adherence to regulatory requirements.
RegTech, short for regulatory technology, emerges as a trend. It leverages technology to simplify compliance processes, ensuring banks adhere to regulatory standards efficiently.
Regulatory compliance is a complex and important aspect of modernization, because lack of compliance with the current legislation can attract penalties that can interrupt a bank’s activity.
Banks need to ensure their updated systems comply with regulations like GDPR, PSD2 and EU AI Act.
There are plenty of options to choose from when looking to adopt a RegTech solution, however most of the banks because they want to avoid working with third parties and exposing their data, might want to build a RegTech solution in-house that’s tailored specifically for their organization’s needs. However, if you are looking for a quick solution that’s already available on the market, here are some examples of some of the best RegTech solutions out there, according to Fintech Magazine: Chainanalysis, ComplyAdvantage, Ascent.
When going through a core system modernization, there will be a certain amount of disruption that might affect your operations for a while. Modernization is all about making changes and improving efficiency for your company and employees in the long term.
However, it is up to you and your team to develop a good plan that minimizes disruption while the new system is implemented. When assessing the system change, we highly recommend looking for a team that has the experience and resources to deliver a modernization project as efficiently as possible. You already know how important a modern core system is for your organization, so it is crucial to ensure that the team you choose for your project has a thorough understanding of the task.
Here are some elements to consider when going through a modernization project:
Modernization is a significant change in how employees interact with systems.
Invest in comprehensive training programs to familiarize your team with new technologies and processes. Continuous support mechanisms, like helpdesks or peer-to-peer mentoring, can ease the transition, ensuring staff feel confident and competent in using the new system.
Encourage a culture of adaptability and continuous learning within the organization.
Communicate the benefits of the new system effectively to build enthusiasm and reduce resistance to change. Engage employees at all levels in the process, making them feel valued and part of the transformation journey.
Implement the modernization in phases.
This approach allows for testing and refining in real-time, reducing the risk of widespread system failures. Start with less critical functions and gradually scale up, ensuring core banking services remain uninterrupted.
Develop robust contingency plans to handle potential downtimes or system failures.
This should include clear protocols for switching back to legacy systems if necessary, ensuring continuous service availability for customers.
The biggest challenges you can encounter during a core system modernization project can be overcome with a good contingency plan in place. A contingency plan should be covering multiple areas of your organization to make sure that while the technical team and your technology partner are working on the modernization, your operations run smoothly.
Here are a few plans that you can include in your contingency strategy:
Keep customers informed about the changes and how they might be affected.
Use multiple channels - emails, social media, website updates - to communicate the benefits of the new system and any potential temporary disruptions.
Enhance customer support services during the transition.
Be prepared to handle increased inquiries and provide prompt, clear responses. Additionally, gather customer feedback on their experience with the new system, which could be invaluable for further improvements.
Stay flexible and be prepared to adjust your strategy in response to unforeseen challenges.
Regular monitoring and feedback loops can help identify issues early, allowing for timely interventions.
Continuously assess risks at every stage of the modernization process.
This involves not just technical risks but also operational and reputational risks. Having a proactive risk management strategy can mitigate potential problems before they escalate.
To ensure the long-term adaptability and sustainability of the modernization efforts you should start collecting feedback and add new functionalities inside your new system to test how it performs and how you can improve it.
Continuous improvement is mandatory when looking to retain current clients and onboard new ones. Clients are demanding new functionalities that make their banking experience remote, fast and easy. Having your system upgraded, now would be a good time to start adding those customer-centric functionalities.
After you finished up with your core system modernization project, there are a few best practices that you can take into consideration right before starting to introduce any new functionality.
Now it is the moment to collect data on your new system performance, receive feedback and add new policies inside your organization to make sure that everyone is aligned to your long-term goals.
There are a few best practices you can use as examples of what your next step is after you modernized your banking system. Here are some of them:
Define clear, measurable KPIs (Key Performance Indicators) to evaluate the performance of the new system.
These metrics should encompass technical aspects like system uptime and response time, as well as business outcomes like customer satisfaction and operational efficiency. Regular monitoring helps in identifying areas for improvement.
However, as a note here I would suggest having a joint meeting with your management and technical team and discussing which are the KPIs that are useful to you. Each implementation is different, and each organization has its own needs, so you should always appreciate your KPIs based on your current use case.
Implement mechanisms to gather ongoing feedback from both employees and customers.
This feedback is crucial for understanding how the new system impacts daily operations and customer experiences, providing insights for further refinement. You need to understand how the new system is impacting your organization. Are there any features lacking? Are there any bugs or security concerns? How our employees respond to this change?
Sometimes your system might not end up like what you had in mind, and your team might need to introduce new features that would make your employees happy and would allow you to conquer new markets with your new digital products.
Foster an environment where experimentation and innovative thinking are encouraged.
This could involve setting up dedicated teams or labs focused on exploring new technologies and approaches, or even by introducing a programme in which the employees are rewarded for coming up with new ideas that are improving your bank’s products and operations.
There are multiple ways in which you can encourage your employees to be proactive and participate in your bank’s growth. However, you should always consider rewarding them, especially when by applying their ideas, you also improve the efficiency of the new system. Your most proactive employees will usually have the most valuable feedback – don't miss this opportunity to listen to them.
Invest in continuous learning and development programs for employees.
As technology evolves, so should the skills of those who manage and operate banking systems. The new system might have a new interface and might also have new features that would make the work of your employees easier, but they might not be aware of them.
By introducing a comprehensive training program, you make sure that everyone is aware of all the features and functionalities of your new system. Yes, it can be costly, but this can save you lots of headaches and money in the longer term.
Stay informed about emerging trends and technologies in the financial sector.
This involves not just understanding current technologies but also anticipating future developments. Participation in industry forums such as Money 20/20, collaborations with fintech companies, and engaging with thought leaders can provide valuable insights.
Be proactive in testing new technologies through pilot projects or proof-of-concept initiatives.
This approach allows you to assess the viability and impact of new technologies without the risks associated with full-scale implementation.
Choose solutions that are scalable, enabling the bank to handle increased loads and expansions seamlessly.
Scalability is usually determined by introducing modern technologies such as cloud solutions to organize data and access it quickly. Introducing cloud capabilities also adds a layer of flexibility due to the fact that your bank is now capable to analyze large amounts of data in a very short time span allowing you dive into new offerings such as having open banking capabilities, offering banking products to non-financial companies, or even building a ai-based automated underwriting engine.
The chosen technology architecture should allow for easy integration with new systems and technologies.
Going for a modular banking core system will help you add or remove any integration you want. All the modules will then communicate with each other through APIs and will allow your new solutions to work.
The modularity of your system allows you to test new solutions and introduce them at will in an easy and cost-effective way. It also assures you that your system is future-proof and when a new product or technology appears you can be among the first to introduce them and maintain competitiveness.
The journey doesn't end with the implementation of new systems. The essence of true modernization lies in the continuous evolution and adaptation to emerging trends and technologies.
Remember, modernization is all about planning and executing the journey while keeping the bank’s customers’ best interest in mind, rather than only modernizing just for the sake of implementing the shiniest new technology advancement.
We encourage you to embrace the core system upgrade with open arms and a forward-thinking mindset. Seek out partners and experts who can guide you through this process, leverage their knowledge and experience, and start building a banking infrastructure that is robust, agile, and future-ready.
If you’re looking for more information about how to properly modernize the core system of your bank, get in touch with our team of experts to book a free consultation call. We work with American Express, BNP Paribas, Santander, Credit Agricole, and many others and we’re confident we’re able to help you achieve your goals and overcome your challenges.
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