Core banking transformation: Key considerations for success

The banking industry is going through significant transformation across its various business domains and core banking has been one of the key areas of focus for many banks in recent years. Most traditional and global banks run their core banking systems on legacy platforms which need modernisation.

Icon’s recent blog on Core banking transformation: Key drivers for change highlights why core banking transformation is a necessity. Many banks that have attempted to transform their core banking systems have struggled for various reasons. This blog highlights what the key considerations are, and how to successfully navigate core banking transformation.

Clearly defined business outcomes and stakeholder alignment

Core banking transformation is typically a technology initiative rather than a business-driven initiative because the underlying technology is not sustainable in the long run. However, core banking transformation also needs to involve business process optimisations and the streamlining of various end-to-end customer journeys (eg: account opening).

This requires huge efforts from business SMEs and a long-term commitment to support the transformation. Therefore, engaging with business always helps to ensure alignment with business strategy, vision, and priorities.

As this is a multi-year programme requiring huge investment, the executive sponsors are always looking to evaluate Return on Investment, so delivering business value throughout the transformation journey is more important than just the target outcomes which could take many years to achieve.

Core banking capability model

Core banking traditionally encompasses different capabilities, and it varies from bank to bank depending on their legacy platforms and their organisational structure. It is an opportunity to revisit this considering the emerging industry trends such as coreless banking. Key capabilities to consider when defining a target model are:

• Customer: Some core banking systems are customer centric and rely on Customer being the key entity. There are benefits with this model, but it also creates challenges in having a single customer view, especially in global banks.
• Currency: Most banks operate separate core banking systems for domestic and international currencies, but a lot of recent platforms support multi-currency, therefore it is key to align this with the business operating model.
• Payments initiation, payments mandate management, corporate limits (complex) management and statements production are other capabilities, if currently provided by core banking, worth divesting to other domains.

Defining the target capability model and agreeing with technology and business stakeholders first gives the opportunity to evaluate the target solution and products against your agreed capabilities.

Target architecture

Banks must define a target architecture that supports agility, innovation, and continuous improvement. API-first architecture should be at the heart of the target state to support a Banking as a Service model.

Many large banks still run core banking systems on mainframes which host the core data and provide high security and reliability. In such cases, a hybrid architecture is worth considering where you may still host the data and certain processes on mainframes but migrate other capabilities incrementally.

Segregating various capabilities such as product management, pricing, interest, and charges processing from the monolith core enables the organisation to move towards coreless banking, which is modular and composable.

BIAN (Banking Industry Architecture Network) is one of the industry standards that can be adopted for a coreless banking model. BIAN provides a standard framework including semantic APIs and Business Object Models that helps to define service domains and their interaction with each other. Most of the third-party products also support BIAN which improves interoperability with partner ecosystems.

Engage with employees and partners

Permanent bank staff are the subject matter experts who have the depth of knowledge on existing systems, so engage with them upfront, highlight the objectives and the benefits of transformation to the wider bank. Upskill them in required technologies and bring them along the transformation journey to promote the growth mindset and remove any resistance to change.

The incumbent team will have the expertise in the current system and technology but may sometimes lack experience in delivering modern architecture solutions. Ensure the right partners, who have vested interest, are engaged to develop the target architecture, and execute the programme.

Modernisation approach

Defining the best approach for modernisation is a critical decision and there is no one-size fits all approach as every bank’s business needs, capabilities, risk appetite and current technology landscape are different. Key factors that influence the buy vs build approach are:

• The underlying infrastructure and technology currency – are they still supported and is it sustainable to run the systems on these technologies in the long run?
• The nature of existing systems – is this an in-house build using legacy technology or a third-party product that still offers upgrade opportunity?
• The risk appetite of the bank – determines how aggressive the bank wants to progress with the transformation.
• The technology expertise – does the incumbent team have the necessary skill sets on the technologies required to build and run the new system?
• The business strategy and expectations – does the business need advanced capabilities, market-leading products, and innovative features in the new system?

Customer accounts migration strategy

Core banking systems are at the heart of the bank and cannot afford the luxury of downtime as they need to be available to apply credits and debits and maintain balances throughout the migration.

One retail bank who divested from a major UK bank in the past has suffered a significant outage after the account migration affecting the majority of their customer base. Considering this, it is generally recommended to avoid a ‘big bang’ migration and instead consider incremental implementations with minimal disruption to the BAU operations. There are two broad approaches:

• New system: Implementing a new system in parallel, with its own channels and interfaces offering innovative products and features for new customers; migrating the existing accounts on to the new system, once this is well established.
• Shared system: A new or enhanced back-end system using the existing channels and interfaces with incremental migrations of accounts to the enhanced system.

Regardless of the approach, the incremental migrations could be based on a number of different parameters such as business lines (retail, corporate), product types (savings, current accounts, loans), or customer types (high value, low value).

Decommissioning legacy system

Last but not least, many banks who migrated accounts from one system to another still have their legacy systems running, either because of some complex products and functionalities which were harder to migrate, or due to other operational complexities that were not fully understood.

Performing a gap analysis and understanding the challenges upfront helps create a clear plan of action to address them. Consider write-offs, account closures and recreations, manual migrations for those residual accounts that could not be migrated. If the legacy systems are not fully decommissioned, not only does the total cost of ownership increase but also the overall complexity of the IT landscape. As a result, this restricts realisation of many of the business outcomes.

These are some of the key considerations but there are several others in driving such a complex core banking transformation programme. This may seem a highly challenging task, but regardless of where you are in the transformation journey, we believe we can help you navigate the journey successfully. We have the capabilities, expertise and a well-established architecture practice to develop a core banking target blueprint and put forward the right transformation approach and design optimal solutions for your transformation.