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 neobanks. 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.
Recent research from McKinsey found that operating costs for banks still running outdated cores averaged 10 times higher than those with next-generation core systems.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 International Data Corp (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 focused on core migration with banks looking to migrate off their legacy infrastructure. There are currently only three options open to chief technology officers: 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 coexistence,” 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 simply too many technical challenges and integration points,” Barbosa says.
Greenfields approach is attractive – but buyer beware
The at-the-edge or greenfields approach aims to limit the implementation risks of full core migration or rip and replace and can even be more cost effective.
There have been many industry examples of successful at-the-edge approaches, including the oft-referenced Marcus by Goldman Sachs, but it is not without its pitfalls.
“Without direct integration between the new and old cores, the customer experience suffers as they must 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.
Incremental and integrated approach
An incremental approach to core banking modernisation is quickly gaining industry traction. Coexistence, described by some as the “sidecar approach” to core banking modernisation, allows financial institutions 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 migrate products, accounts and customers gradually 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 coexistence 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 says.
Industry research bears his assertions out, with more than half of mid-market banks (those with US$10-billion to $100-billion in assets) across six countries saying they favoured a progressive transformation to reduce their dependence gradually on legacy core banking systems. In fact, IDC has said that 40% of global banks will be pursuing a sidecar or coexistence 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 coexistence. And a trusted partner that has the experience to guide you through the process,” Barbosa says.
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