Core Modernization Is No Longer Optional

April 28, 2021

By: Kate Drew

Core modernization is top of mind for banks today. With legacy systems struggling to support new capabilities, or even being retired completely, institutions are now forced to reckon with what comes next and how their decisions will influence their business in the future. By this point, a majority of banks are at least exploring how they can modernize their core technology — 68% of respondents to an Everest Group report said they were either on their way to upgrading their core systems or employing a mix of modern and legacy technology. This is good news, as it suggests that banks are largely aware of the importance of upgrading their infrastructure to support a digital-first and constantly evolving environment. Of cause for concern, however, is that more than a quarter see an immediate need to modernize their core system but have yet to make a move.

This could be in part because of the gargantuan undertaking modernizing the core can be and the many options out there, resulting in a kind of analysis paralysis that leaves these institutions in the past while their peers move ahead. Today, if you are on a core that is slow or unable to serve your needs — or maybe it’s stopped receiving support from your vendor altogether — balancing the sense of urgency with this uncertainty can be difficult. The first step is to get a clear understanding of the potential paths available. We generally see banks pursuing core modernization falling into four main buckets:

1. Full core conversion. This is exactly what it sounds like — many call it “rip and replace” — and it brings to mind the act of ripping off a Band Aid. Banks pursuing this strategy will replace their existing core entirely. This kind of modernization is cumbersome, risky, and expensive. It’s also sometimes necessary, depending on whether or not your current system is capable of continuing to underpin the bank. The key for banks pursuing this path is to evaluate all of the options, new and old, while also considering core processes you have offloaded to subsystems that can influence a core replacement strategy.
2. Layering up. Instead of going through the painful process of a full core conversion, many banks today are reducing the activities the core is responsible for and building their own modern architecture around it. In particular, we’ve seen a number of progressive institutions creating their own integration layers that sit on top of their existing core technology, making it easier to pursue a best of breed strategy that isn’t dependent on legacy systems. This path requires the bank to actively engage in the management and oversight of its infrastructure.
3. Follow your vendor. Those taking this option embrace the innovation path dictated by their existing vendor. Of course, this strategy relies on the bank already operating on a core that is a priority for their provider. In addition, it means there is quite a lot of emphasis on contract negotiations to ensure that your business is future-proofed effectively. Things like product adoption language, for example, are critical to ensuring a favorable position.
4. The side gig. Banks today may also opt to build a greenfield bank on modern technology and slowly migrate over. This reduces a lot of the risk associated with core modernization by allowing the bank to test the waters before fully committing its operations to a new platform. It’s also a way to get a feel for the capabilities of a next-gen system; newer entrants like Finxact or Mambu are popular choices for this strategy because, while their propositions do not have the penetration of the vanguard vendorsthe flexibility they offer is very attractive.