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.
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.
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.
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.
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.
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.
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.
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.
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?