Continuing from our exploration of the evolution and challenges of core banking technology in my previous article, this second part focuses on the strategic approaches banks should take to modernize their systems and the emerging trends that will define the future of banking.

The importance of a bank-driven core modernization strategy

Banks and credit unions must develop their own core modernization strategies to ensure their systems align with their unique business goals and customer needs. Relying solely on vendors like FIS, Fiserv, or Jack Henry to update older generation cores is often inadequate and can hinder long-term success. Here’s why:

Limitations of vendor-driven updates

• Limited control and customization: Outsourcing core systems to vendors limits banks’ control over features and functions, particularly for smaller institutions that rely heavily on vendors for IT and product offerings. Larger banks with in-house capabilities can customize systems, but smaller banks may be stuck with generic solutions.
  
  
• Vendor responsiveness issues: Major core providers have been criticized for lacking responsiveness, especially to smaller banks, which can hinder competitiveness.
  
  
• Gap between legacy systems and modern needs: Updating first- or second-generation cores often fails to meet modern customer expectations for personalized, multi-channel experiences or integration with external partners.
  
  
• Increasing maintenance costs: The cost of maintaining legacy systems is rising, making them financially unsustainable.
  
  
• Hidden and opportunity costs: Legacy systems require expensive workarounds, increase regulatory compliance costs due to manual processes, and raise merger and acquisition costs due to integration challenges. Delaying modernization also means missing opportunities to innovate.
  
  

Benefits of a bank-driven strategy

By developing a core modernization strategy, a bank can:

• Tailor solutions: Create systems that meet specific customer and operational needs, ensuring better alignment with business objectives.
  
  
• Manage costs effectively: Avoid high vendor switching costs and reduce long-term maintenance expenses through scalable, modern architectures.
  
  
• Future-proof operations: Adopt modular, cloud-native systems that support emerging technologies like AI, cloud computing, and open banking.
  
  
• Enhance competitiveness: Innovate faster to keep pace with neobanks and other fintechs, which operate at lower costs and offer advanced services.
  
  

Many banks realize they need to update their infrastructure — in fact, only 3% of respondents to CCG Catalyst’s US Banking Study in 2023 said they had no plans to make changes to their core systems. However, taking control of that need is another story. It is those who understand the importance of driving forward strategically that will be best positioned for the future.

Ways to approach bank-driven core modernization

Banks can choose from several strategies to modernize their core systems:

• Full replacement: Replace the entire system with a new one, offering a clean slate but carrying high risks.
  
  
• Progressive modernization: Move specific functions, areas of the business to a new technology stack in a gradual migration.
  
  
• Abstraction approach: Build modern architecture around legacy systems (e.g., using the “strangler pattern” with microservices).
  
  
• Greenfield proposition: Launch new services on a modern platform without affecting existing customers until proven.
  
  

These strategies require a clear roadmap that considers the bank’s current capabilities, future goals, and resource constraints. Collaboration with vendors can be part of the process, but banks must retain control to ensure the strategy aligns with their vision.

As mentioned in Part I of this series, while a full replacement or “rip and replace” is an option, CCG Catalyst recommends banks adopt gradual strategies to reduce risk and make it more feasible to consider modern or “next-generation” platforms. These approaches balance innovation with stability but require significant planning and investment.

Benefits of modern platforms

While each institution will need to determine a path for itself, transitioning to a next-generation core banking platform offers substantial benefits to be aware of. (For a breakdown of core banking systems by generation, refer to Part I in this series.) These include:

• Cost reduction: Modern platforms reduce IT costs through higher developer productivity and cloud-based services. Automation via DevSecOps further lowers operational expenses.
  
  
• Faster speed to market: Modular architecture and automated testing enable rapid deployment of new products, helping banks stay competitive.
  
  
• Enhanced personalization: Integrated data sets provide a single source of truth, enabling real-time personalized experiences and advanced analytics.
  
  
• Improved ecosystem connectivity: Open architectures facilitate integration with third-party services, fostering innovation and expanding offerings.
  
  

As financial institutions contemplate their strategies, it is important to keep these benefits in mind. While not every institution may be ready for the bleeding edge of technology, understanding that bleeding edge is critical to charting a path forward.

Current trends and the future of bank technology

Any modernization effort needs to occur in the wider context of the industry and where it is headed. To that end, there are several trends shaping the future of bank technology to consider. These are reflected in today’s latest generation of core banking systems:

• AI and machine learning: AI is transforming operations, from fraud detection to personalized customer experiences. Based on our analysis, generative AI could reduce costs by up to 60% in the coming years by automating tasks like compliance testing.
  
  
• Cloud computing: The shift to cloud-based core banking systems offers scalability and cost savings. The market is projected to grow from $19.67 billion in 2025 to $64.96 billion by 2032.
  
  
• Open banking: Standardized, open APIs enable third-party developers to create innovative services, enhancing customer offerings.
  
  
• Sustainability: Banks are leveraging technology for ESG reporting and compliance, reflecting growing societal demands.
  
  

As we progress through 2025, the integration of AI, cloud computing, and open banking will increasingly redefine core banking. This will require banks to take charge of their modernization journey to remain competitive in the digital age. Overall, these trends underscore the importance of flexible, scalable core systems that can adapt to emerging technologies and customer expectations.

A final note

The evolution of core banking technology from monolithic batch-processing systems to modular, cloud-native platforms reflects the industry’s adaptation to technology advancements and changing customer needs. Modernizing these systems is a complex journey that cannot be fully entrusted to the traditional vendors, who may focus on updating outdated cores rather than providing transformative solutions. The transition from first generation to fourth generation systems is particularly challenging due to the incompatibility of workflows, which must shift from batch-oriented, manual processes to real-time, automated, and integrated ones. Banks and Credit Unions need to develop their own core modernization strategy to ensure greater control, cost efficiency, and alignment with future needs.