A legacy left to you by a rich benefactor most people would view positively. The term applied to a core banking system today, seems to have negative connotations. The legacy system is a bit like the phone everyone purchased just over a decade ago. It calls as well as any phone of today, however, we want to be able to take high definition pictures and videos, listen to music, surf the internet and go shopping. The telephony infrastructure required for making calls for either phone is the same, the main differentiator for today’s phone are the value adds. We only need to look at Motorola to see what happens when you don’t adapt to consumer demands.

The robust trusted and tested core solution that has been the lifeblood of every banks infrastructure for decades, we might compare to this telephony infrastructure and as such, depending on requirements and budgets, we can choose between enhancing or replacing to meet evolving needs.

If you are phoning an organisation for assistance they will be judged on many things but it doesn’t matter, nor can you tell if they are using the latest smartphone or an antiquated desktop handset.

The driving factors for change

There are many driving factors behind the evolution of core systems such as cost, risk, regulation, consumer expectations and technological changes to name a few. Banking and finance is continually changing as a result of these factors. Customers and regulators are demanding more and technology is raising expectations on what institutions should be able to do. Artificial Intelligence and automation is a must in order to provide cost effective innovation, but can only achieve their full potential if an organisation has a sound infrastructure backbone that is easily extensible.

An Accenture sponsored report ‘Escaping Legacy’ in 2016 found that up to 40-50 percent of all IT assets are in urgent need of modernisation. Legacy systems lack flexibility, are costly to maintain and are not purpose built for the digitally demanding banking experience consumers are after. They slow the time it takes to bring new products to market and this according to 86% of respondents in Deloittes ‘Legacy Systems and Modernisation report’ was very or extremely influential in driving their company’s core system transformation. 

What to do?

Banks can rip and replace to completely overhaul the legacy system with a system fit for current and future demands. This is resource heavy and costly however it has been the approach of choice by a lot of banks such as Nordea and Santander. This approach has significant short/medium term costs but is likely to yield the longest benefits. In my experience, most organisations make very valued decisions when choosing to replace a core system, but they never really know what they have until the solution is implemented and this normally means there are many unforeseen changes that increase costs and extend deadlines. Only the very brave will pull the plug on a project that is going badly. Most will soldier on to the bitter end and eventually may possibly regret not being braver.

3rd Party Vendors specialise in modernising systems, their products are developed to enhance functionality and fill the gaps that the core systems cannot provide. This approach is suitable to those whose current core systems can fill the requirements of future objectives with only incremental enhancements required. Soft coded, open software and off the shelf service company offerings can have the advantages of cost effectiveness and flexibility needed to evolve with the banking industry’s digital demands. 

Challenger banks are already taking advantage of the lower infrastructure costs by hosting their core systems in the cloud, however, the choice to go hosted can be as much as a necessity as it is a preference for the start-up banks with lower budgets. Deutsche bank, however, in 2015 signed a 10 year outsourcing deal to move their IT Infrastructure to a private cloud. Henry Ritchotte who was the Chief Operating Officer of Deutsche Bank at the time stated ‘Having a more modern and agile technology platform will further improve the bank’s ability to launch new products and services and lay the foundation for the next phase of its digital strategy’. The benefits of hosted solutions is echoed by industry leaders such as John Schlesinger when he predicts by 2020 most core banking initiatives will be in the cloud.

Conclusion

There is no universal answer on the best way to change. Each bank will have its own requirements and solutions and the choice of action will depend on numerous factors such as: budgets, resources, time and business objectives to name a few. There is, however, no doubt that action needs to be taken to future proof core systems in order to be reactive and proactive to consumer demands. If you are choosing a value add to enhance a core solution, if it is open and compatible with an alternative core solution that can be switched over with no loss of service or historic data then this is potentially a big bonus. The final thought is how many people do you know that are still using a Motorola phone?