Nearly three-quarters of banks worldwide continue to use legacy core banking systems that are not enabling them to achieve their transformation goals. But a new report from International Data Corporation (IDC) commissioned by Thought Machine reveals that 98% of banks plan to upgrade their core banking systems within the next three years to accelerate their digital transformation.
The report states: Produced In May 2024, we explore banks’ core banking system transformation and data migration strategies and share survey results of bank executives to understand the challenges and priorities of current bank core banking systems. We define the characteristics of fourth-generation cloud-native core banking systems, highlight the need for a data migration strategy, and outline implementation considerations for banks.
The report highlights many challenges associated with traditional core banking systems, noting that these systems are struggling to keep up with the demands of today’s digital-savvy customers for real-time, flexible and innovative banking products and services. 52% of banks surveyed by IDC said significant constraints continue to impact their ability to offer new digital products or improve operational efficiency, requiring them to significantly upgrade their core banking systems before they can bring new products to market.
65% of banks cited a lack of real-time capabilities as a major challenge with their current core banking systems, while almost half of respondents (49%) cited “lack of flexibility to configure or customize existing products or create new products” as a major issue. Difficulties in automating processes and decision-making were also cited as the top issue associated with legacy core banking systems.
To address these limitations, nearly all banking executive teams (93%) say they are willing or fully committed to changing their core systems. In parallel with this transformation, banks are also recognizing the importance of cloud in expanding their digitalization ambitions, with 53% of the world’s largest banks aiming to deploy more than 40% of their total workloads in the cloud.
4th Generation Cloud Native Core Banking System
The report highlights the need for banks to adopt “fourth generation cloud-based banking systems”, highlighting their flexibility and control, real-time processing capabilities, resilience and availability, and operational efficiency.
These systems dramatically speed up the creation and modification of banking products such as payments and accounts, the report said. They also feature low-code product configuration, allowing for rapid, independently controlled changes, and offer flexible scalability to easily adjust resources according to demand.
A fourth-generation cloud-native core banking system also provides real-time access to transaction data, facilitating instant customization and pricing at the point of sale, which increases customer satisfaction with more responsive service and improves fraud and threat management, reducing potential losses.
Additionally, core infrastructure is anchored in multiple availability zones across many geographic regions, reducing vulnerability to on-premise hardware failures. These systems also offer robust security with advanced access controls and encryption, and self-healing containerization capabilities optimize overall operations and resiliency.
Finally, a fourth-generation cloud-native core banking system enables the retirement of legacy software and the elimination of associated fees and maintenance efforts, allowing reallocation of resources from core maintenance to value-driving product initiatives, while providing greater flexibility to improve workflows, shorten timelines, and enhance data segmentation and analytics capabilities.
The evolution of core banking systems, Source: Core Banking Transformation 2024: Driving Innovation with a Cloud-Native Core Banking PlatformIDC/Thought Machine, May 2024
Data migration as part of core banking modernization
As banks upgrade from older systems to modern platforms, they need to strategically leverage data to drive business growth and innovation. Therefore, it is essential for this modernization process to focus on data strategy and embrace “enterprise intelligence,” the report said.
Enterprise intelligence is defined as an organization’s overall ability to foster a data culture, learn collectively, synthesize information, and ultimately apply the resulting insights at scale to gain competitive advantage or fulfill the organizational mission.
Achieving enterprise intelligence has many benefits: it improves customer experience by enabling personalization, and it improves operational efficiency by identifying inefficiencies and automating and streamlining operations, resulting in reduced costs and faster time to market for new products and services.
Additionally, this strategy helps you manage risk more effectively by analyzing transaction data, detecting anomalies, and implementing proactive risk management. Finally, it drives innovation by uncovering new market opportunities and developing innovative products and services.
Survey results show that financial institutions are making progress in implementing an enterprise intelligence strategy: 20% of survey respondents are in the process of developing an enterprise intelligence strategy, 32% have begun implementing enterprise intelligence capabilities in one or two business or IT areas, 25% have significantly matured enterprise intelligence across their business units, and 12% have permeated enterprise intelligence throughout their organization.
Three main strategies
The two reports conclude by presenting three main transition paths banks can take to modernize their core banking systems, comparing the benefits of each approach and factors to consider.
Incremental transformation uses a phased approach to gradually migrate specific business functional modules from a legacy platform to a modern platform. The advantage of this approach is that it allows banks to modernize incrementally, reducing risk and business disruption. However, the disadvantage is that it takes time and can take years to complete.
A greenfield digital bank approach involves creating a new digital banking unit in parallel that operates independently from the bank’s core business and caters to a new customer base. The advantage of this approach is that it allows the bank to quickly create and test new products, services and propositions that the traditional core cannot offer. The disadvantage is that it can be difficult to run two cores in parallel.
Finally, a “big bang” strategy involves replacing the entire core of the legacy platform with a new, modern, cloud-native platform. The advantage of this approach is that it allows the bank to completely modernize its core systems in one go, removing all legacy issues and starting from scratch. The disadvantages are the complexity, limited testing, and a much higher risk of disruption, as a single glitch can delay the entire project.
Three main migration strategies, source: Transforming Core Banking 2024: Driving Innovation with a Cloud-Native Core Banking PlatformIDC/Thought Machine, May 2024
For more information, please visit and download the report. here.
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