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.
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.
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.
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.
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.
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:
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).
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.