Some predict that banks that fail to evolve their internal systems to support remote customer interaction will fail to survive the COVID-19 crisis. Is this naysayer speak or a prediction worth heeding?
Many of us have used the current lockdown as a time for spring cleaning. Banks need to do the same. Core banking systems often end up in a state of “legacy spaghetti.” When banks reduce the volume of large core processing platforms, this is a prime opportunity to upgrade servers, clean the sprawl or decommission systems and streamline the business processes supported by the legacy technology. And though this is a powerful exercise, it is not always sufficient to ensure the core banking system has completely new plumbing – cleaning is not always thorough enough or deep enough to extend into the core banking sprawl supported by substantial technical debt.
Pre-COVID-19 lockdown we saw a number of notable challengers exploring “phigital” (physical + digital) operations with traditional banks like JP Morgan Chase launching an entirely new digital bank in the U.K. This was done on a greenfield basis, bypassing the traditional legacy spaghetti to target a new segment of customers. ISG knows of more than 40 examples of banks buying or developing new platforms in this way or via phased migration.
Yes, banks are more capitalized than before, but ISG research indicates that most are some distance away from fully digitizing the customer interface and the competing internal priorities typically lead to a model built on incremental change.
Today’s public health crisis proves the shortcomings of the legacy spaghetti model, and banks are quickly reassessing the need for sprawl. They must create strategies for both the short- and medium-term. In the short-term, all banks have initiated business continuity planning and will come out of this process facing a new reality. In the medium-term, the key to sustainable banking will be the ability to flex up and down with demand. It will be much easier to swap in and out core banking modules assuming the bank can modularize. After internet banking, this is the next step to ensure digitalization. But modularizing core banking with an in-house system is proving to be difficult in the current crisis.
ISG has observed that many core banking and financial module vendors are ramping up their social media messaging on this topic, encouraging banks to replace their core banking systems. There are several things to evaluate here. We have found a big-bang approach works only in a limited number of cases, e.g., when there is a greenfield site.
Banks need to consider whether an upgrade or replacement of the core banking platform offers the better value-to-risk ratio. In most cases, replacement is too risky, too time-consuming and too costly. A phased migration to the new core banking module is the more logical choice driving the need for modularity of the core banking platform to the forefront. Several vendors are pushing white-label “bank in a box” and “bank as a service” offerings, leveraging big data to deliver on the much-touted next gen-banking experience. An example is the new T24 core banking system from banking software maker Temenos.
How to Talk with Core Banking Vendors
Core banking vendors set a revenue target for each bank that implements their products. This requires banks to take a calculated approach that includes consideration of the following:
- The commercial model, including:
- Price and degree of incentive alignment between the vendor and the bank. For example, will the vendor give the bank a license maintenance holiday should the usage of a module go down?
- Futureproofing for scalability. Will the license cost remain the same even when the usage of the module increases?
- Alignment with outcomes wherever possible. Are banks able to return the licenses they do not want to use?
- The ability to integrate with existing or future systems/platforms.
- The use of artificial intelligence (AI), machine learning (ML) and other technology to drive measurable outcomes (specifically relating to customers) and build on the bank’s data and market insights. This is particularly important since it enhances correlation between back-office technology transformation and increasing revenues through more productive customer engagement.
- Relative level of difficulty/risk to implement.
An effective way to deal with vendors is to embed a specialist with your team who can bring a multiplying effect.
One way or another, a transformation from legacy to modular is necessary as banks come out of the pandemic-induced lockdown and begin to cater to corporate customers that need to rethink their current way of working. The cost of operating technology to support such customers must not exceed the revenue from such customers. To overcome the inevitable budgetary obstacles, modular transformation must be self-funded.
The next generation of core banking product vendors are creating ecosystems from which banks can pick and choose best-of-breed modules. An example of this can be seen in the Mambu marketplace, which is assembling a growing collection of partners that offer cloud-enabled best-of-breed apps, products and tools to help financial institutions build new architectures.
This goes well beyond the user experience to encompass systems that can patch and use AI/ML to rectify errors and identify patterns in data.
Planning for the New Future
Recovery will be patchy. Banks will emerge from this crisis one way or another. The banking platforms that will support them going forward will need to serve the customer in an easy, smooth and remote way without the internal overhead so common when managing “legacy spaghetti.”
In the medium term, a cold, hard look at the sprawl and a commitment to modularization will help mitigate current maintenance expenses, avoid future costs and control the license challenges that come with deploying off-the-shelf core banking platforms.
In the long term, this pandemic proves one thing: existing strategic investments cannot be taken for granted and can become redundant. If your workforce can’t access or service your banking systems remotely during a pandemic crisis, then you’ve become obsolete. The traditional mainframe-based systems have not kept up with the demands for remote work. To compartmentalize or decommission these systems, the core banking software modules will need to be ready and available to plug in either via a cloud or other secure on-premise interface.
A fully digital core banking module with robust underlying infrastructure will go a long way toward supporting banks in the “New Future.” This also will have implications for disaster recovery and business continuity planning.
As we know, it’s unhelpful to act without facts at hand. In today’s climate, we must look at the facts and attach the correct level of probability. ISG is here to help you dissect the facts and attach the correct level of probability. Contact us to discuss how we can help your organization prepare for the “New Future.”
About the authors
Bill Huber
Signature traits: Big picture systems thinker and sourcing expert. Transformation and cost optimization-focused. Pragmatic and experienced.
Bill works with the world’s leading companies to identify, implement, and accelerate improved capabilities and better ways of working, and to align and optimize the network of strategic suppliers and partners. These efforts have driven hundreds of millions in savings for his clients.
Recent projects include helping major manufacturers and healthcare companies to implement broad cost optimization strategies, assisting utilities and medical device companies with their SAP strategies, assisting a leading fashion brand with its IT transformation, eCommerce, and SAP implementation, and working with a global cruise line on negotiation of its reservation and loyalty platform. Prior projects include:
- Leading several global ITO and BPO projects for the leading cereal and snack food company
- Infrastructure outsourcing for a leading regional US Bank
- Implementation of an IT capabilities facility for a low-cost carrier
Prior to his current position, Bill lead ISG’s software advisory practice, lead ISG’s healthcare vertical, co-led ISG’s BPO practice and was a director in ISG’s strategy practice.
Owen Wheatley
What he does at ISG
To say Owen Wheatley comes prepared to work through your operational concerns and transformational needs is an understatement. As ISG’s Lead Partner of Banking and Financial Services, he treats his 25+ years of experience in this ever-evolving, customer-centric field as a replete lexicon of applicable knowledge, relevant learnings and potentially executable solutions. In doing so, he makes the ethereal and theoretical, actual and obtainable.
Past achievements for clients
Knowledge-sharing is second nature to Owen. He provides his clients with market insights and meaningful thought leadership and helps them understand what similar (or different) organizations in comparable situations have done regarding transformational change. Many of Owen’s clients have sought his expertise to strengthen their customer engagement on the digital front, enhance the employee experience to improve the customer one and navigate new ecosystems—like integrating emerging partnerships—endemic to the industry. He makes sure that untangling this complexity and harnessing your new relationships always lead to your number one goal: driving better results for your banking or financial institution. In fact, Owen:
- Led a consulting team to design a commercially groundbreaking and elaborate deal for one of the largest hedge funds in the world to reimagine its middle and back-office operations, lessen the bureaucratic demand on the front office and serve institutional clients better. The measures of success for this co-designed and collaborative project included defined stages of excellence and experience metrics, delivered in a commercial model which positions all parties for success.
- Managed a large team of advisors to provide market insight and an "outside-in" perspective to multiple major North American banks looking to transform their operations, including indirect auto lending, core banking, cheque processing and the entire cash ecosystem.
- Led a team of experts in helping to transform the HR technology and operations of a major European bank, including designing the right strategy, creating the roadmap and business case, selecting the right partners for a new ecosystem and ensuring expedited and effective implementation.
