Banks warned against failed core strategies as time runs out to modernise

Banks around the world are rushing to upgrade legacy systems that are placing them at a significant disadvantage in a time when they are already challenged by neo banks that have none of the same infrastructural baggage. But as RFPs mount up, the C-suites have been warned not to adopt a core migration strategy that could come back to bite them. 

The IDC says global Financial Institution (FI) spending on legacy payments technology is expected to grow 7.8% from $36.7 billion in 2022 to $57.1 billion in 2028. However, this increased spending on outdated systems is contributing to technology budget constraints and mounting technical debt, all of which hinders innovation and risks the banks’ relevance to an already fickle consumer. 

Nonetheless, FI leaders are coming under growing pressure to take action. Research from McKinsey found that operating costs for banks still running outdated cores averaged 10 times higher than those with next-generation core systems. And there is no time to lose, with IDC cautioning that the cost of delaying migration is also increasing, saying banks that fail to migrate to a future-ready platform can potentially miss out on a 42% increase in additional payments revenue and savings on legacy costs of up to 21% annually. 

“There are a growing number of RFPs focussed on core migration at the moment with banks looking to migrate off their legacy infrastructure. There are currently only three options open to CTOs: Rip and replace, which almost never works; co-existence; and then what the industry refers to as an at-the-edge solution. We believe, no matter the size of the bank, there is only one solution that will work, and has a proven track record of working, and that is co-existence,” says Sergio Barbosa, CIO of enterprise software development house, Global Kinetic, and CEO of its open banking platform, FutureBank. 

Big bang could spell big trouble 

The rip-and-replace methodology of migration has been the primary option for replacement and upgrades to core banking systems for many years. However, migration delays and failures with this big bang method have given most technology leaders pause for thought. 

Industry specialists liken switching a bank’s entire customer base to a new banking core to swapping out a plane’s engine mid-flight; a risky process with the danger of highly disruptive errors, and even catastrophic failure.

“In our experience, rip and replace has never worked well in practice. These types of large-scale, big-bang migrations often end up being very lengthy projects that require banks to completely shut down their existing core systems before migrating. There are too many technical challenges and integration points all of which make a full rip-and-replace very difficult to execute successfully,” Barbosa says. 

Greenfields are attractive but come with big Caveat Emptors 

Building a new platform at the edge involves building an additional, new core banking platform that sits separately from the bank's existing legacy core system. The new at-the-edge or greenfield platform operates in parallel with the old legacy core, but it is not directly integrated or connected to the legacy system. The idea is that over time, the bank would migrate customers from the legacy core to the new edge platform. The expectation is the old legacy core would be deprecated and phased out as the new platform takes over.

This approach aims to limit the implementation risks of full core migration or rip and replace and can even be more cost effective. However, not all banks can justify launching an entirely new proposition, which comes with its own risks and carries high customer acquisition costs.

There have been many industry examples of successful at-the-edge approaches, including the often referenced Marcus by Goldman Sachs. This greenfields offering was built from the ground up on new technology and positioned as a digital-first brand underneath the parent’s umbrella. The bank’s retail unit ended 2020 with $97 billion in deposits and has been used as proof point for this methodology. But it is not without its pitfalls. 

“Without direct integration between the new and old cores, the customer experience suffers as they have to manage accounts across two separate systems. The new edge platform often fails to gain enough momentum and traction to successfully replace the entrenched legacy core. What’s more, in many cases, the old legacy core ends up never being properly deprecated, as the new platform fails to fully replace it,” Barbosa explains. 

An incremental and integrated approach, where two is better than one

An incremental approach to core banking modernisation is quickly gaining industry traction.  Co-existence, described by some as the ‘sidecar’ approach to core banking modernisation, allows FIs to establish a separate core banking system that coexists alongside its legacy core. And the new core is only responsible for servicing a limited subset of specific services, products or customer segments. 

Integrating the new and old systems through integration software and platforms like FutureBank gives banks a single view of the customer across both the new and legacy core systems. The bank can then deploy strategies to gradually migrate products, accounts, and customers from the legacy core to the new core. This could involve deprecating old products as they expire and moving customers over, or using tactical solutions to migrate small parts of the business incrementally. 

“We see the co-existence option as the superior one. A phased approach means the bulk of the bank’s operations would continue to run on its legacy core, mitigating disruptions that may take place when implementing the new core. It also means businesses can de-risk their efforts with a phased tech transition, allowing leaders to assess the efficacy and ROI of the new core before gradually migrating more customers and products to the new one,” Barbosa shares. 

Industry research bears his assertions out, with more than half of mid-market banks (those with $10 billion to $100 billion in assets) across six countries saying they favoured a progressive transformation to gradually reduce their dependence on legacy core banking systems. In fact, the IDC has said that 40% of global banks will be pursuing a sidecar or co-existence core modernisation strategy by 2026. 

“We know of so many banks in the throes of migration initiatives and the problem for many will be that they have been kicking the can down the road, delaying things because it is a big scary thing. Shareholders are expecting strong returns and legacy cores are draining, and for many, there can’t be any more stalling. But now is not the time to be prioritising the cheapest solution. CTOs must take a prudent approach that will still allow rapid innovation, keep customers happy, but that won’t risk the entire bank. That’s co-existence. And a trusted partner that has the experience to guide you through the process,” Barbosa says.