Major Hurdles Core Banking Systems need to Overcome

Core Banking Systems were built for a different world - a world that gave precedence in banking systems to security, redundancy and reliability and were architected in a product-centric way. Today, those requirements are still present - but it is not enough to be secure - the core architecture must also be flexible, innovative, and agile.

Systems that were designed 30 years ago are not able to respond to customers needs with new banking products, flexible bundles, and relationship based pricing. These features, and many more, are what will separate the banks of tomorrow from the banks of today. Banks that embrace this customer-centric initiative will be the banks that outperform their peers in the 21st century. It is not enough to simply be a bank and offer banking products - you must deliver more value, more transparently, and core systems have to be enablers of that mindset, not hindrances.

The good news? Banks core systems work and work well. The recommendation?  Augment the Bank’s core systems with modern, Java-based technology enabling a customer-centric approach to relationship-based pricing, centralized billing, and enterprise loyalty.

Without a modern pricing and billing platform or product innovations layer, core banking systems remain saddled with major challenges to overcome. Chief among them are:

Revenue Leakage.

Revenue is an important driver across banks. However, keeping track of revenue earned that is not collected is a slippery concept. Depending on the banking vertical, Revenue Leakage could come in the form of unbilled services, concessions or discounts at the account level, poor data, and outdated pricing. The general feature of this revenue killer in banking is the bank does not have a global view of this customer on a revenue basis and thus cannot govern the agreed upon contract.  As an example, a bank agrees with a large corporate they will give exception pricing based upon keeping 100 million Euro in the corporates collective accounts globally.  The bank can’t see all of the global deposits and thus defaults to “exception based” pricing rather than argue with the customer about data the bank can’t substantiate. Multiplied by thousands of transactions and opportunities over the course of a year – the impact of revenue leakage is enormous. Based on multiple reports from banks and analysts alike, the total cost can be over 10% of total revenues - annually!

Product-centricity.

Every system needs elements to build upon, and Core Banking Systems were architected with products and lines of business in mind. Perhaps this made sense at the time. Today, customers expect to be treated as individuals, and banks that can treat customers as individuals will win business from those that cannot.

Banking product silos lead to inefficient decision-making. As one example, if a bank does not know the value of the relationship it will often make costly decisions - i.e., perhaps it might waive a NSF fee if it knows you are a valuable client, but it can only make that choice with the right information. A product centric environment makes this nearly impossible. A system that supports customer-centricity allows a bank to deliver more and better value to every one of its customers.

Non-standard billing and invoicing.

Corporate banking relationships are inherently complex. Multiple entities, multiple geographies, multiple currencies – not to mention different jurisdictions that often have distinct banking regulations. On top of that, you have an information design problem. Some clients want one bill and it goes to the CFO or Corporate Treasurer, the next customer wants every country manager to see only their bill.

If a bank lacks this kind of billing functionality, they can still perhaps create bills manually – but the associated costs of manual processing are the bane of many banks. Anything this is not automated costs a bank time and money. And with poor systems visibility and increasing account complexity, it becomes more difficult to know what you are to charge and why. When a bank cannot deliver billing information in the preferred hierarchy, or when it cannot answer questions about why a certain fee was charged - things can get ugly.

A recent report noted that more than 50% of all corporate banking customers would consider switching banks due to a lack of billing transparency. Standard core banking systems do not offer this kind of functionality. This is often like an ostrich problem for a bank - you just want to stick your head in the sand and hope the customer keeps paying you.

Conclusion

While these challenges all add up to a substantial hurdle for legacy core systems to overcome, there is an option at hand that does not involve replacing the core system but instead focuses on keeping what works and adding required functionality incrementally. This approach – call it ‘core renovation’ or ‘core renewal’ – means that banks can have the best of both worlds: the security and reliability they already have in the core while adding the modules that provide the necessary customer centricity tools such as relationship based pricing and open or flexible bundling. Core renewal allows modern architecture to deliver substantial ROI without all of the uncertainty and long timelines of core replacement. Watch for this to become a major plank of a core modernization strategy for banks going forward.