Core Banking Systems

Data held by banks represents one of the world’s most valuable assets, but what use is that data if it is trapped in aging mainframe systems that are unable to meet the demand’s of today’s consumers?
Mainframe systems literally enabled the rise of modern commerce. Their robust batch processing capabilities have allowed unprecedented growth in the financial sector during the last 70 years but now cause challenges for banks trying to scale to meet the demands of a modern banking customer who requires 24/7 real-time access and control of accounts from any device. As fintech disrupters and digital-first banks experiment with blockchain and other innovations of the digital era, established banks are in danger of being left behind. Established banks must modernize their core banking systems if they are to compete in our new digital-first reality.

The promise of modernization

In the years since the original mainframe systems were developed, the landscape of the technology industry has changed dramatically. Hardware, once a competitive advantage for the world’s premier institutions, has become increasingly commoditized. The exponentially increasing pace of technological innovation means firms can no longer risk being locked into proprietary technologies. To leave firms prepared for the future, modernized core banking system must offer firms flexibility, agility, and scalability.

Flexibility

The world of fintech is a volatile one at the moment. Perhaps your organization has yet to decide what its vision of the “bank of tomorrow” looks like. No matter how it operates, we can be pretty sure this “bank of tomorrow” doesn’t run an IBM mainframe. A core banking system that is dependent on a specific hardware vendor leaves an organization far fewer options going forward; a core banking system based on open system leaves many more options.

Agility

Sure, you may be able to make your legacy core banking system work for the here and now, but want happens when the board demands you implement blockchain? What if your competitors offer to process payments in less than an hour? How will your legacy system adapt? Both your systems and your development teams need to be agile enough to adapt to the changing technological landscape.

Scalability

Traditional batch processing was extremely efficient in that it freed up the system during the day for use and processed transactions overnight when the system was in lower demand. Modern online banking requires the system be available 24 hours a day, straining the computing power of legacy systems. With highly variable demand on the system across the day, month, and year, legacy computing environments require a surplus of computing power to meet peak demand. Modernized systems make use of distributed environments and cloud elasticity to more efficiently allocate resources, minimizing cost and maximizing performance.

Modernization Roadblocks

Given the obvious benefits of modernizing core banking systems, it would be easy to question why legacy systems, and especially legacy mainframe systems, continue to exist. Perhaps this is why so many people are surprised when confronted with statistics saying that “nearly 100 percent of all credit card transactions and 90 percent of Fortune 500 companies all depend on the IBM mainframe.” It’s important to remember that as old as these dinosaurs may be, they still work. The complexity, cost, and risk associated with modernization projects continue to discourage even many forward-thinking banking executives from taking the next step in digital transformation.

Complexity

Core bank systems are often exceedingly complex. These systems are often several decades old, with decades worth of custom features and modifications there isn’t a shred of documentation for. Complex integrations with other critical systems only amplify the problems and the cascade of bank mergers have left many banks with redundant, incompatible systems.

Cost

Let no one tell you modernization is cheap, but, with maintenance, licensing fees, and increasing competition for disappearing legacy skill sets, neither is operating a legacy system. When comparing costs of various modernization options, make sure you take into account change management costs (often extensive) and integration costs (over 30% of a core banking system replacement cost is in hand coding legacy code for integration). Automated code transformation can decrease both reduce software costs and decrease the need for costly and disruptive change management through an incremental process of like-for-like transformation.

Risk

Cybersecurity is a top-of-mind issue for CIOs in every industry, but the specific privacy, data security, and regulatory compliance requirements in the banking industry pose an even greater challenge. It’s no wonder 46% of banks (and almost all large banks) report a high or very high risk with CBS replacement. As great as the risk of change may be, with the threat of fintech startups and digital-first banks ever growing and the near-constant disruption in the financial industry leaving the future uncertain, the risk of doing nothing may be even greater.

Progressive Modernization

Financial institutions are no strangers to balancing risk and reward. There exist many options from complete replacement to short-term integration solutions leaving the legacy mostly as-is; between these two lie various progressive modernization options that slowly replace the legacy with modern, digital systems. At Blu Age, we are strong proponents of incremental, iterative processes as a way of reducing the overall risk of a modernization project. Systems can be prioritized for migration and replacement, costly change management can be minimized, and a modern, digital-ready can be achieved without the risk of a big bang project.

Danger: Disruption ahead

There is no denying, technological disruption is coming for the banking industry. As mobile technologies redefine where a bank is, blockchain redefines how transactions are processed, machine learning and big data analytics redefines what it means to know your customer, and artificial intelligence redefines customer service, the bank of the future will come to look very different from the ones we are accustomed to. Before it is too late, banking executives must ask themselves: is our core banking system digital-ready?

Within a pre-defined and limited perimeter in terms of budget, time, source code, datasets and KPIs, we can demonstrate the capabilities of our solutions. Contact us for a Proof-of-Concept.