Nearly three-quarters of banks globally continue to run on legacy core banking systems, which fail to deliver on transformation goals. However, new reports by the International Data Corporation (IDC), commissioned by Thought Machine, reveal that 98% of banks are planning to upgrade their core banking systems to accelerate digital transformation within the next three years.
The reports, produced in May 2024, examine core banking transformation and data migration strategies, sharing findings from a study of banking executives to understand their current core banking system challenges and priorities. It defines the characteristics of fourth-generation cloud-native core banking systems, emphasizes the imperative of a data migration strategy, and outlines implementation considerations for banks.
The report highlights a number of challenges relating to legacy core banking systems, noting that these systems struggle to keep up with the demands of real-time, flexible, and innovative banking products and services required by today’s digitally-savvy customers. 52% of the banks surveyed by IDC said that major restrictions continue to impact the delivery of new digital products and efficiencies in operations, necessitating major upgrades to their core banking systems before they can introduce a new product to market.
65% of banks identified the absence of real-time capabilities as a key challenge with their current core banking systems, while nearly half (49%) of the respondents pointed to “inflexibility to configure or customize existing products or create a new product” as a major issue. The difficulty in automated processes and decisions was also cited as a top issue associated with their legacy core banking systems.
To address these limitations, nearly all (93%) of banking executive teams shared their willingness or full commitment to core system changes. In tandem with this transformation, banks also recognize the importance of cloud in scaling digital aspirations, with 53% of large banks globally aiming to deploy over 40% of total workloads to the cloud.
Fourth-generation cloud-native core banking systems
The report emphasizes the need for banks to adopt “fourth-generation cloud-nature banking systems”, highlighting their flexibility and control, real-time processing capabilities, resilience and availability, and operational efficiency.
These systems allow for the creation and modification of banking products, such as payments and accounts, with significantly reduced timelines, the report says. They also feature low-code product configuration, allowing for quick, independently-controlled changes, and offer elastic scalability to easily adjust resources based on demand.
Fourth-generation cloud-native core banking systems also enable real-time access to transaction data, facilitating immediate customization and pricing at the point-of-sale. This results in increased customer satisfaction with responsive services, and improved management of fraud and potential threats, thereby reducing potential losses.
Moreover, their core infrastructure is anchored in multiple availability zones across many geographic regions, thus reducing vulnerability to hardware failure on-premises. These systems also provide robust security with advanced access management and encryption, and feature self-healing containerization to optimize overall operation and resiliency.
Finally, fourth-generation cloud-native core banking systems allow for the decommissioning of legacy software and elimination of associated fees and maintenance tasks. This helps reallocate resources from core maintenance to value-creating product initiatives. They also improve workflows with greater flexibility, reduce timelines, and enhance data segmentation and analytical capabilities.
Data migration as part of core banking modernization efforts
As banks upgrade from old systems to modern platforms, they should use data strategically to fuel business growth and innovation. Therefore, focusing on their data strategy and embracing “enterprise intelligence” are essential during this modernization process, the report says.
It defines enterprise intelligence as an organization’s combined ability to foster a data culture, learn collectively, synthesize information, and ultimately apply the resulting insights at scale to gain a competitive advantage or fulfill the organizational mission.
Achieving enterprise intelligence brings numerous benefits. First, it enhances customer experience by enabling personalization. It also improves operational efficiency by identifying inefficiencies, and automating and streamlining operations. This results in cost savings and faster time-to-market for new products and services.
Furthermore, this strategy helps manage risk more effectively by analyzing transactional data, detecting anomalies, and implementing proactive risk management. Finally, it drives innovation by uncovering new market opportunities and developing innovative products and services.
Results from the study show that financial institutions are progressing in adopting enterprise intelligence strategies. 20% of the survey respondents said that they are setting an enterprise intelligence strategy, 32% are starting to implement enterprise intelligence capabilities across one or two business or IT areas, 25% are achieving significant maturity in enterprise intelligence across business units, and 12% have enterprise intelligence pervasive across the organization.
Three main strategies
The two reports then conclude by presenting three main migration methodologies for banks to modernize their core banking systems, comparing the advantages and factors to consider for each approach.
The progressive transformation involves gradually transitioning specific business function modules from legacy platforms to modern ones using an incremental approach. The advantage of this approach is that it allows the bank to modernize in a phased manner, reducing risk and disruption to operations. However, the disadvantage is that it can be a slower and may take several years to complete.
The greenfield digital bank approach involves creating a parallel new digital banking unit that operates independently of the bank’s core business and serves a new customer base. The advantage of this approach is that it allows the bank to rapidly create and test new products, services, and propositions that the legacy core cannot provide. The disadvantage is that it can be challenging to run two parallel cores.
Finally, a “big bang” strategy involves a full core replacement of the legacy platform with a new, modern, cloud-native platform. The advantage of this approach is that it allows the bank to completely modernize its core system in one go, removing all legacy issues and starting fresh. The disadvantage is that it carries a much a higher risk of disruption due to its complexity, limited testing and the possibility of delays to the entire project resulting from even a single glitch.
For more insights, access and download the report here.
Featured image credit: edited from freepik
