In this new era of radical technological advances, the banking industry faces a number of challenges; for example, their customers now expect a modernised banking experience, including the digitisation of services such as online banking and mobile banking. This has led to an increased sense of competition across the banking sector, cost pressures and the need to proliferate product environments. However, most banking systems solutions are over 30 years old. Although these systems have proven to be robust in the past, continuous improvement is required to exist in such a competitive technology market.

The idea of achieving a simplified and modernised IT architecture sounds very appealing; however, for these banks the biggest obstacle is in understanding the key challenges and how to make sure such changes drive agility and competitive differentiation.

What are core systems and what is wrong with them?

Core banking systems, referred now as legacy systems, were initially developed in the 1970s and 1980s. These systems were created so that companies could manage information across the enterprise. As companies grew so did the number of systems needed and the lack of synchronisation between all these isolated systems became the main bottleneck. This issue was overcome through the development and implementation of system-to-system communication, which was then called point-to-point integration. However, maintaining these single point connections became very difficult, especially since these systems were not unified, instead, each system had its own communication protocol. Lack of adequate documentation meant it was hard to keep track of the objective of each system and so users started creating duplicate behaviour within different systems, further increasing the complexity.

These core systems have been continuously modified in order to cope with changes in business practices and almost 30 years of technological evolvement mean these systems have been saturated with extra layers of functionality, making them even more complicated and harder to manage. As mentioned earlier, these isolated systems can become impractical and the lack of system interconnectivity could inhibit business growth.

We can think about modernisation in terms of an engine failure in an old car due to a road bump. In banking, the analogue of the road bump is the increase of digital competitors and rapidly changing customer needs—and the engine decision faced by banks is whether to endeavour to swap out the core banking system for a more up to date customer experience. The alternative is to try to scramble along in the hope that you don’t have to explain to your stakeholders why you are sticking with a clunky engine when your customers jump ship to a competitor that has upgraded their engines and are driving smoothly.

What are the key drivers for legacy system modernisation?

These outdated systems used by banks are expensive to run, often leading to redundant tasks, including excessive processing and slow system response times. In addition, technological advances mean customers now want to purchase products and view accounts using applications as well as being able to use their information interchangeably – which legacy systems do not have the capacity to do.  Banks have realised that information has become the foundation of many financial products. This requires banks to develop more customer centric strategies. However, silos that exist between core accounting systems and new applications are leading to a fragmented view of the customer. The lack of interconnectivity between systems is affecting the creation of new revenue. These interconnections between potential products are only achieved when data is easily accessible from core systems to all departmental applications, allowing the bank to quickly adapt to market needs.

What are the possible solutions?

This seemingly simple question does not have a simple answer. It all depends on the type of business issue that the bank wants to address as this will define the areas of functionality that must be included as part of the solution. But the issue for most banks isn’t the knowing they need to modernise, it’s the doing. The digital ‘road bump’ may have damaged the current engines, but the car is still in motion, and the concern that many banks have is that if you start making tiny changes with the core parts of the bank it could be very expensive or could lead to damage. Fortunately, there are good options available – however, the first step is to assess what capabilities are vital to enable the banks new business strategy. It may be that a completely new engine is required or a new core is created to work in hand with the old engine.

A possible option could be the implementation of cloud computing, more specifically Infrastructure as a Service (IaaS). In this case, the bank moves from a traditional in-house IT infrastructure to a utility style one based on public cloud. A more risk adverse approach that banks are opting for is to have hybrid systems, where some level of their IT infrastructure is maintained, such as the retention of some company servers, whilst also choosing to use the hardware, software and off-site server storage capacity offered by public cloud providers. This allows banks to maintain and support legacy systems alongside cloud enabled ones, keeping older technology up and running without committing to additional data centre build out. Furthermore, with the responsibility of maintaining these services is transferred to such specialised companies, operational expenses are lowered and the end users of these systems can focus on expanding their product further and in doing so drive innovation.

Even as these IaaS options and hybrid options exist, there are constantly new entrants in the financial services technology market introducing new improvements and ideas. Therefore, banks need to be aware that technology is about continuous improvement and in the road bump of digital innovation is causing a bank’s engine to fail; they need to grab a wrench and develop a calm and measured approach. The modernisation of these legacy systems has an impact not only the bank, but more importantly the customer. In today’s world, banking revolves around the customer, so making the customer’s life easier and more personalised is a necessity. Having a more streamlined digital landscape means banks can access and report back data in a more efficient manner and can focus their work on driving innovation as opposed to maintaining systems.