How to transform core banking for the digital age



Today, incumbent banks are not only fending off a new era of challenger banks but big tech firms too. Equipped with deep pockets and large, loyal audiences, these new players have shown customers a new way of banking. Offering them products that truly address their needs while expertly using data to provide ever-improving services. As such, banking customers, both retail and business, now expect innovative products, seamless journeys and personalized offerings. However, most incumbent banks’ core banking systems struggle to accommodate those needs.

In this blog, we’ll examine the driving forces behind core banking modernization and how banks can execute on them to better compete in the digital age.

Drivers for change in core banking

1. The ability to connect and integrate

Today, many of the most innovative banks and financial services providers’ core banking has the ability to integrate with a variety of systems that sit outside of the core.

The key? APIs. Their use allows open design, providing banks with improved flexibility and scalability. It allows banks to better integrate with external systems and data, making it easier to adapt to evolving customer requirements.

Of the financial services organizations already using APIs 58% reported increased productivity and 48% reported increased innovation.

2. Modernizing legacy systems

Traditionally, banks have equated extensive customization with competitive advantage. However, this has left many older banks with a complex core and a huge amount of legacy code.

Over time, this legacy code became more and more complex and more costly to maintain and upgrade, as well as poorly optimized for new technologies. As such, more forward-thinking banks and businesses now favor standardized software from leading vendors and published APIs.

3. Ecosystem banking

Modern customers now expect organizations to provide ‘one stop shop’ experiences. This goes for banks too.

However, building those additional services can be expensive and time consuming. And, with the right core banking system, easier to achieve. With the right technology banks can build entire ecosystems of financial products by blending third-party services into their own.

According to a recent McKinsey survey, 65% of financial services businesses that made business-building a top-five priority saw revenue growth above that of their competitors.

4. Seamless omnichannel experiences

Although nearly all banks have implemented online and mobile banking, far fewer offer a seamless experience across on- and offline channels – or even on different digital platforms.

The minority of banks who have proven successful have followed the lead of the best digital retail companies. These organizations provide customers with an effortless blend of digital and face-to-face interactions, informed by an analytics engine determining the best form of contact.

The banks that follow suit will gain a proven competitive advantage. One bank surveyed by McKinsey saw a 30% sales increase when their sales processes included an appropriate and timely human response compared to a purely digital journey.

5. Customer centricity

For years, banking systems and processes were always shaped by the demands of the bank, not the needs of the customer. But challenger banks like Monzo and Revolut changed this and put customer experience at the heart of banking.

Many incumbent banks are still playing catch up to try and deliver products, services and experiences that delight across all touchpoints.

Having a modern and flexible core banking system is vital for succeeding in this. Only then can banks innovate fast enough, add new services and, as Strategy& puts it, respond “to customers as individuals, remembering their preferences, and meeting them where they are in their everyday lives.”

6. The move to the cloud

Some banks are well-versed in the cloud when it comes to customer relationship management, email and other non-critical systems. Less so when it comes to core banking, with many concerned about reliability, security and regulation.

However, hyperscalers now provide some of the highest available stability and security standards, and regulators are increasingly on board too.

Banks that invested early reaped the benefits. According to Accenture, the large banks it’s helped move to the cloud have experienced:

  • 10-20% cut in operational costs
  • 30-50% shorter time to market
  • 40-50% quicker provisioning speed.

7. Artificial intelligence, analytics and machine learning

Banks have always owned huge customer data sets. However, accessing them and putting them to work hasn’t always been easy. Artificial intelligence (AI) and machine learning (ML) are changing this. Now, financial institutions are able to use predictive analysis to drive models and forecasts and unlock new use cases.

In doing so, they’re able to keep up with their customers’ rising bar for personalization and prediction.

Transforming your core banking strategy

To address these core banking trends, banks require a modern, secure and reliable core banking system. One that is open and flexible to enhance and future-proof their offerings.

Using our deep banking and technology capabilities, we’ve designed a four-pillar core banking strategy to enable banks to achieve this.

1. An open and modular core

The first step for banks to truly thrive in the digital era must be to ‘clean up’ the core. This means removing customizations and replacing them with standard software and APIs.

But a modern core offering shouldn’t end there. Core providers should also be able to offer functionalities end-to-end, including business logic, core functions and pre-configured banking platforms including plug-and-play third-party services.

2. A two-platform approach

The ability to react to changing business requirements is a key differentiator for banks. To support this, we recommend a two-platform approach for the overall core architecture.

Platform 1: The business platform

Connected to the core should be a cloud-based platform for business functionality. By keeping all business services within the business platform, banks can rapidly innovate, creating customer-focused, cloud-native, end-to-end business processes. This way, they can deploy them independently from the core and without impacting its operations.

Platform 2: The digital core

Core functionality should be separated into a second ‘digital core’ platform. This ensures reliability, performance and security of the core. Moreover, it allows banks to consume innovation, provided by the core vendor, without having to worry about their business.

3. Cloud enablement

By transitioning to the cloud, banks can dramatically reduce costs and inspire innovation. Via cloud deployment, they can consume third-party tools without major integration projects. Plus, using expert external players to fulfill specific parts of customer experiences enables banks to offer customers a bigger and better portfolio of products and services – and to land them more quickly.

However, different industries, business models and regulatory requirements can contribute to a lengthy and costly cloud journey.

On this basis, core banking providers should offer banks the full range of deployment options, while supporting current or future ambitions to move to the cloud.

It should be provider-agnostic to avoid vendor lock-in and be possible to deploy either on-premise and in the private or public cloud, or in a hybrid model of both.

4. Smart data and analytics

Modern customers expect their bank to anticipate what they need at the right moment and communicate it via their preferred channel.

In practice, this requires a financial institution to capture and hold centralized data and make it available in real-time. But achieving this requires banks to run their core on a database that’s fit for purpose.

Our core banking, for example, runs on the most modern platform in the market: SAP S/4 HANA. Its in-memory database has been designed to hold combined transactional and analytical data in one database, providing banks with a real-time and improved customer view.

The time to invest is now

Customers today demand better and broader products and services – and fast. The ability to meet that demand rests on bringing your core banking into the digital age.

We understand that this can seem like a daunting task. But it doesn’t need to be.

By applying these four pillars to the trends mentioned above, change can happen fast.

By partnering with a vendor with both deep banking and technical expertise to execute the strategy, change can happen even faster.

Keen to know more? Download the Core Banking whitepaper here!

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