Can core modernisation give your bank new legs?
It’s fair to say that I’ve written a fair bit about core banking.
Core replacement is not the only game in town, with core modernisation being a far less risky option
I’ve discussed the pros and cons of new versus legacy core banking solution providers, whether indeed you should be thinking about replacing your core, and many other aspects.
Over my career, I’ve spoken to a number of incumbent banks and neobanks. One area that I am hearing about more and more is “core modernisation”. This seems to be a generic term describing how banks can improve their core banking without actually changing their core.
What is especially interesting is how broad this space is in terms of the options available to improve your core without “disturbing” it too much. I’m going to describe four categories here, although I’m sure others will have more:
- Digital core
- Product core
- Functional modernisation
- Technical modernisation
The first category I have covered extensively in previous articles, so I will only mention it briefly here. The digital core approach essentially separates customer management, allowing banks to have a real-time single customer view. This kind of modernisation initially generally focuses on enabling banks to provide modern channels like internet and mobile banking and chatbots. Think players such as BackBase, Temenos Infinity, Personetics, and so on. This kind of approach essentially masks the core to provide a new, richer customer experience, but also has other benefits like enabling digital engagement.
The product core approach involves using a third-party solution to manage the product lifecycle from product definition to onboarding. Executing the product requires some integration with the core, so the original core essentially manages the “ledger” and the third-party solution manages the product behaviours (e.g. managing charges, rewards, or other features).
This kind of approach has massive advantages for the bank and can greatly reduce pressure to replace a legacy core system. Banks can not only have a single product catalogue for all their products sitting above multiple core systems, but they can also then use the same platform to define and onboard customers using one system rather than different ones based on their old core. This not only improves time to market and reduces costs, but also enables the bank to innovate on their products, which they have typically struggled to do previously due to various constraints. There are fewer players in this space, but Zafin is one of the front runners here.
Next is functional modernisation. Here, capabilities outside the product/ledger are replaced with third-party solutions that specialise in those capabilities. For example, this could include better KYC, compliance, credit risk management or fraud detection. Sometimes these capabilities come from a number of individual specialist companies and sometimes they come as a set of capabilities from a single Banking-as-a-Service (BaaS) provider.
As technology and banking continue to evolve, banks that adopt a composable approach can more easily swap functionality in or out. The advantages here are that you’re no longer tied to a single vendor and reliant on them to be the best at everything, and it takes weight/pressure off having to enhance your legacy core with new capabilities.
The last approach is not something I have considered much in the past, and that is technology modernisation. My initial view was that you only get a modern core by buying one. However, recently I’ve seen banks looking to enhance their legacy cores by adopting a technology solution that solves specific issues like security, scalability, performance, and cost of ownership: things that used to be non-functional requirements of a system.
For example, as processing requests from new channels (internet, mobile, chat, and APIs) and new business models such as BaaS increase, handling this load will put huge pressure on older cores. Now there are vendors like Diffusion Data that help reduce the impact of increasing real-time data requests/transactions on core banking systems. Security is another great example here.
This week, I’m not saying that banks shouldn’t replace their core banking systems. I’m just saying that core replacement is not the only game in town, and that core modernisation is a far less risky option with significant benefits.
For bank execs, the blunt question really is: “Are you willing to bet your career/reputation on core replacement?”
About the author
Dharmesh Mistry has been in banking for more than 30 years both in senior positions at Tier 1 banks and as a serial entrepreneur. He has been at the forefront of banking technology and innovation, from the very first internet and mobile banking apps to artificial intelligence (AI) and virtual reality (VR).
He has been on both sides of the fence and he’s not afraid to share his opinions.
He founded proptech start-up AskHomey (sold to a private investor in spring 2023) and is an investor and mentor in proptech and fintech. He also co-hosts the Demystify Podcast.
Follow Dharmesh on Twitter @dharmeshmistry and LinkedIn.
Read all his “I’m just saying” musings here.
