Strengthen Your Core or Suffer the Consequences
Core banking might not be the sexiest of subjects, but if you don’t get it right, your bank will suffer financially and lose its edge to the truly digital competitors coming your way. But how do you strengthen your core when you’re stuck with a Frankenstein legacy system? In episode 225 of FinTech Insider Insights, we break down what you need to do.
Here’s what to doThese days, few banks replace their entire core banking system at once. Rather, they start a new bank, with new people, and new systems, and then migrate existing customers over. “That’s a very easy way to start, with a minimum viable product and then build from there,” Ben says, offering Pepper and Equitable Bank as examples.
I think we’ll observe that all core banking replacements will be build and migrate over time…by line of business, by geography, by horizontal, that seems to be something where you can really reduce the risks, and also massively speed up the time to value.Conor agrees with the phased approach, saying you can put systems in place that solve segments of your business, for example students. “Run that, and test that in parallel to what you have, and then systematically migrate, or age out, what you already have.” Ben recommends starting with something simple like a deposits product and gradually building more capability, products, and lines of business on the new system. “Simplify the number of products you have, and try to do some exercise in cleaning up the data before engaging in a core banking replacement.” Cleaning up your stack is essential for a new bank to be functional. “If you want to serve a customer correctly, you’ve got to organise your data correctly,” Conor says, “That’s as much a business modelling factor as it is anything else. Talking about open architecture systems and plugging people in – no point in plugging them in if you’re not homogenising your data correctly.” According to Conor, no major new technology needs to be invented for core banking to deliver great next-gen solutions – it just needs to be best in class, which is well established. Fundamentally, Conor says, transforming your core system means:
- building on an SOA, which means you don’t have to regress through the entire system as you do upgrades
- being services oriented. It’s got to go through APIs – open your architecture
- business modelling. Architect your data models correctly so you can share the data across and have one single view of customer
- allowing for 99.9% straight through processing
- allowing for any products and services to be originated on any channel
- running in the cloud
- splitting middle and front office – in an open banking world, where your product catalogue includes other people’s products and services, that has to be separated from your middle and back office
What’s next for core bankingOpen banking is forcing architectural change – there’s no way most legacy systems can cope with their customers’ entire account history being queried two times a day, Ben says. And banks will have to move to the lowest cost of processing if they’re to compete with the market’s new entrants. “We’ve started to see large, domestic retail banks replacing core banking systems, and this was the part that they never wanted to touch because it’s such high volumes,” Ben says. “It’s so many customer numbers, so the risk is multiplied, but we are starting to see it. Nordea are doing it, Bank of Ireland are doing it, and I think we are now starting to see the proof points.” He adds, “The big area of investment for us is helping banks to make really good use of their data assets. We’re investing lots of money in helping them to have the tools to be able to offer up the right content, the right offers, at the right time, across the right device.” “Banks are sitting on perhaps the most valuable treasure trove of data on the planet,” Conor says. “Far more qualitatively valuable than what Google has. But they’re incapable of really leveraging it. One reason is because as a single bank, that data isn’t very compelling, but as a federated organism, this could be hugely compelling, and it’s our responsibility to be the builders of the bank in the future to bring that to bear.”
Final thought“It costs to change, but you can innovate rapidly. We know architectures can do that, because non-bank architectures can do that, and the associated cost/income ratios of organisms that look very like banks are vastly superior,” Conor says. “Banks are operating in the 80s and 90s, many of the others are operating in the 50s and 60s. That’s a pretty easy argument to make.”
***Digital banking is only 1% finished. Do you need help with your bank’s transformation? We can help. Contact us at firstname.lastname@example.org