The relevance of incumbent cores
As the banking landscape evolves, many incumbent core banking vendors are increasingly struggling to keep up with new requirements.
As the rate of change accelerates, banks must prioritise adaptability and innovation
These players, despite their long-standing presence and historical dominance, face several challenges that may limit their relevance and capability to meet modern demands.
Previously, I have shared a few good reasons why banks buy incumbent core banking solutions. Essentially, these are solutions based on old technology that are yet to be modernised. Then, in my previous article, I made a case for not buying legacy solutions.
This week, I’m spelling out the potential drawbacks of core solutions based on old technology, in my opinion:
Inability to innovate rapidly: Incumbent vendors may operate on outdated technology stacks, which can hamper their ability to innovate rapidly. This can make their development cycles longer, and their ability to integrate modern technologies, such as artificial intelligence (AI) and blockchain, may be limited compared to newer, more agile companies.
Monolithic architectures: Many traditional core systems are monolithic, making them difficult and expensive to modify. This rigidity prevents banks from quickly adapting to market changes, regulatory updates, and customer demands.
A monolithic solution does not have to be a single compiled solution. It could also be multiple solutions packaged and deployed in a single container. Such deployments are done infrequently because of the downtime required to install a large package – something that is avoided with truly cloud-native, microservices-based solutions.
Modern banking requires systems that can evolve effortlessly – a feature often lacking in legacy systems.
Costly upgrades and maintenance: The cost of upgrading and maintaining legacy systems can be prohibitive. Banks often find themselves spending more on keeping the lights on rather than investing in new, customer-centric functionalities. This is a significant disadvantage when competing with digital-first banks that can deploy updates and new features at a fraction of the cost and time. Newer core solutions with multi-tenant features can dramatically reduce cost of operation and eliminate upgrade responsibility.
Limited support for modern business models: Today’s banks are exploring new business models such as Banking-as-a-Service (BaaS), open banking, and embedded finance. Incumbent solutions, with their legacy infrastructures, may lack the flexibility to support these models effectively. This can limit a bank’s ability to innovate and offer new services.
Vendor lock-in: The use of old technology may result in vendor lock-in, which can make it difficult for banks to switch to newer, more innovative solutions. This can stifle innovation and restrict a bank’s ability to respond to market changes swiftly.
Security: As cyber threats become more sophisticated, relying on outdated technology can be a significant risk. Even with patches and upgrades, the fundamental architecture of legacy systems may lack the robust security features that modern systems are built upon.
Customer expectations: Today’s customers expect seamless, real-time, and personalised banking experiences. Legacy systems, which were not designed with these expectations in mind, often struggle to deliver the level of service that today’s customers demand. This can lead to customer dissatisfaction and attrition.
This week, I’m just saying (again) that as the rate of change accelerates, banks must prioritise adaptability and innovation. Relying on outdated solutions can hinder a bank’s progress. And the decision to choose a core banking system should consider not only the technology itself, but also the vendor’s ability to support a bank’s future growth and transformation.
Banks should evaluate new entrants and alternative providers that offer modern, flexible solutions designed to support continuous change. These newer players often bring fresh perspectives, advanced technologies, and a customer-centric approach that align better with the evolving demands of the banking sector.
While incumbent vendors may have the advantage of experience and historical stability, their relevance is waning in the face of rapid technological advancements and changing market dynamics. Banks that want to thrive in the future must be willing to look beyond traditional solutions and embrace innovative, adaptable core banking platforms.
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. All opinions are his own – feel free to debate and comment below!
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.
