Now that the banking industry is on a journey to digital metamorphosis, it requires a fresh approach to operations. Threatened by innovative newcomers, financial institutions continue to accelerate their path to streamline technology, employ new digital strategies and decrease the time it takes to bring products to market. By the same token, consumers are calling for tailored services and seamless experiences – which startups, challenger banks or upstarts spun out of incumbent banks are meeting this demand.

While lower fees and automated processes are attractive benefits to consumers, banks that are developing new business models must meet regulatory requirements, reporting and risk analysis. This is what could tip the balance for traditional financial players: if banks migrate to the cloud, evaluate their core systems, and modernise their technology stack they could become viable competitors in today’s banking ecosystem.

Core modernisation helps banks:

• Increase operational agility, flexibility and scalability while meeting security, compliance and regulatory requirements; 
• Improve customer relationships through improved digital engagement tools, increased personalisation, and decreased friction;
• Optimise application environments, enable real-time transaction processing, and produce APIs for embedded banking experiences at partners;
• Unlock insights with data lakes, advanced analytics, artificial intelligence and machine learning.

Finextra spoke to John Kain, worldwide business and market development for banking and capital markets, Amazon Web Services (AWS) and Dieter Botha, chief technology and operations officer, TymeBank about the growing pressure to modernise technology, the increased need for digital channels, responding and re-examining the technology agenda and how banks should approach core modernisation.

Click here to read the AWS report on ‘Modernising Core Banking on AWS’.

The growing pressure to modernise technology

As financial institutions look to evolve, Kain highlighted that “fundamentally, it’s all about the customer experience” and how customers are “expecting more personalised and customised services delivered in real-time.” Using Capital One as an example, Kain explored how the bank started with leveraging their core as an initial step in their cloud migration: “it felt the need to operate more like a tech company than just a financial institution.”

He added that this trend has been ongoing for the last few years and the two drivers that have emerged for this to be possible are regulatory changes and the availability of digital banking licenses. Regulatory shifts that began in Europe and are now occurring in Asia and Latin America continue to bolster open banking and provide customers with greater control and access over their financial data. This, in turn, permits a new fintech ecosystem to come to the fore, one that is focused on offering net new services at different price points. Kain went on to say that these new players are “working with a cleaner technology stack to become a richer ecosystem and are building formidable competitors to the incumbents.”

Considering the impact of the Covid-19 pandemic, Kain explained that “the last 18 months has accelerated the need for banks to serve their customers digitally, particularly when the branch network was inaccessible. There was a big push across the board to do more digitally-native, omnichannel, personalised – because that was the only way to serve customers.”

According to Botha, Tymebank partnered with a major retailer to open financial services to the underserved. He added that simplification is key: “We built physical kiosks to facilitate easy access to open bank accounts and print a personalised Visa debit card, all in under five minutes. Although we started off in the underbanked segment, we’re finding our solutions are applicable more broadly, including segments like small business banking.”

The increased need for digital channels

Digital channels, personalised products, and simple user experiences can only be competitive differentiators for banks if the technology stack is built on a flexible and efficient architecture. Increasingly, as Kain explored, the architecture of choice is the cloud, from a cost and scale perspective in addition to flexibility and efficiency.

“We have such a rich ecosystem from a partner perspective as well, with many software vendors and system integrators offering compelling propositions that enable our banking customers to get world-class infrastructure on the cloud without building it themselves,” Kain said. For example, Standard Chartered worked with GFT to develop the cloud-first, mobile-only bank Mox using Thought Machine’s core banking system. It acquired 35,000 customers in the first month and today, customers can be onboarded in under three minutes through an event-driven architecture on the cloud.

Another example would be Nubank, a financial services startup based in Brazil which offers customers a no-fee, low-interest credit card that they can manage with their mobile devices. Nubank has rapidly scaled its services on the cloud to manage over 40 million customers, providing credit cards and digital accounts in Latin America and enabling them to test new business ideas while continuing to grow their business on a flexible, scalable, and reliable platform.

On these successes, Kain mentioned that “there is no way a startup can predict how successful they will be in any three- or five-year period, which is typically what you'd have to do with on-premises infrastructure. It really allowed [Mox and Nubank] to build their business model on the success of their customer base and scale their costs. This is a more effective way for startups to go to market, and it also reduces the cost of experimenting and reacting quickly to customer needs. I think the combination of the availability of core providers and the ability to deploy them into a scalable cloud-based environment is very powerful for that segment.”

How should banks approach core modernisation?

There are three common paths to bank modernisation: augmenting the core, migrating the core, and replacing the core.

Augmenting the core

Financial institutions that have made long-term commitments to legacy infrastructure may decide to build modern mobile and web customer experiences or omnichannel support applications as well as adding an abstraction layer that can interact with applications through an API interface. Kain suggested that given the complexity of some financial products that banks offer and the contractual obligations that are in place with core vendors, it often makes sense to bring modern functionality to existing core systems before modernising the entire core itself.

“We’re increasingly seeing banks and fintechs wrap APIs around their core systems to allow them to open up for more modern application development. They are also using those APIs to make data - that is typically stuck in the core system - available for analytics,” Kain posited. Transaction data that exists in the core system can be streamed into the cloud for real-time analytics, artificial intelligence, and machine learning applications, helping tailor the customer experience or improve customer targeting. What is derived from the analysis can then be communicated to customers in a targeted fashion and utilised for product engagement.

Migrating the core

Many financial institutions may also want to move away from on-premises data centres with a gradual approach to cloud adoption through lift-and-shift and targeted refactoring. This has proven to be successful for several banks because the cloud can still provide an advantage from a return-on-investment point of view. For instance, South Africa’s first digital bank Tymebank (referenced above) developed all core systems in local data centres and only received approval from South African regulators to move to cloud seven months before the bank went live in late 2018. However, as Botha said, “the reality is we realised quickly during our first month or two into cloud migration that we lacked the knowledge of how to live in the cloud and how to best manage the migration from a cost optimisation perspective. With help from AWS, we've made the changes necessary and have come a long way since. Our cloud costs have halved over the past two and a half years, and we’ve added 3.5 million customers during that time.” TymeBank now have 90% of their systems running in the cloud and plan to move the remaining 10% by the end of 2021.

Considering the modernisation of the core, Botha said that it starts with the foundational layer and understanding that “infrastructure as a service has far reaching consequences. Cloud services continue to evolve and grow in networking and looking at everything as code also has its benefits,” Botha mentioned, stating this is a foundational piece of the modernisation.

Ensuring the pipeline is working well so that continuous delivery can be delivered is how the cloud can also increase speed to market, which Botha explained is a “critical component” and taking that step is “brave.” He continued to say: “I personally don’t believe there are many organisations on the planet that can run data centres like AWS and the big cloud providers. As a young startup bank, we don’t have the ability to run a data centre, so by leveraging a capability that is elastic, we know we’re getting a better service than we can provide ourselves.”

Another such example would be Santander Group’s subsidiary Openbank, which needed reliable infrastructure to innovate and scale globally at a rapid pace so migrated its mission-critical data lake from on-premises to a cloud-based infrastructure. Solarisbank, European BaaS platform with a banking license, also took a gradual approach and put a plan in place with regulators so their customers would not be affected during the transition.

Kain said: “As their business was growing and they saw the need to support ever greater volumes of API calls by moving their existing infrastructure to the cloud, it gave them flexibility from a scale perspective. Even if financial institutions are leveraging existing infrastructure, they can still pull from their existing core platform, taking advantage of the cloud to provide additional benefits.”

Replacing the core

Replacing the core is a larger undertaking, but most appropriate for banks that are considering a migration to a cloud-native microservices architecture because their current platform is no longer servicing them well. TSYS, a Global Payments Company, which delivers innovative issuer technologies to financial institutions, retailers, fintechs, neobanks and startups, is working in collaboration with AWS to provide an industry leading, cloud-based issuer processing platform for customers to deliver innovative payment solutions at scale globally in a secure cloud environment, enabling best-in-class customer experiences.

Click here to read the AWS report on ‘Modernising Core Banking on AWS’.