Meeting the Technology Demands of Modern Banking

Approaches to modernizing core banking system front ends.

Analyst Perspective

Banks are struggling to meet customer expectations using their existing banking cores.

Banks are struggling to meet their customer’s expectations when it comes to online and digital products, services, and journeys. COVID-19 forced a sizeable portion of the bank’s customers to adopt online and digital banking. Once they had made the transition, they now don’t want to go back. Unfortunately, this migration of laggard customers has left core banking providers in a position where they are more behind than ever in delivering the products and services that customers demand. Many banks are in a position where a core banking system change is not feasible. They don’t have the time, budget, or employee bandwidth to take on such a meaningful transition. As a result, banks are searching for alternative approaches through which they can address their customer’s demands using the technology they already have. Over last few years, four common approaches have evolved. All are designed to bridge the gap that exists. The challenge then becomes selecting the approach best suited to your current situation while planning for your future needs. We propose a 12-part criteria and provide a multi-criteria selection tool to aid in the decision making. David Tomljenovic MBA, LL.M, CIM Head Of Financial Service Industry Research Info-Tech Research Group

Executive Summary

Info-Tech Insight

Banks need clearly defined strategies to address customer demands for better online and mobile products and services. Banks need to select from four common approaches to modernize their bank – APIs, IPaaS, Data Duplication, and Directly Connected Applications.

Banks are struggling with their banking cores

They are not delivering the new products, services, and experiences customers are expecting.

• Delivering high-quality customer experience requires modern connected systems, data, and automation. Legacy cores struggle with all of these key pieces.
• Traditional cores do not always make their APIs accessible or affordable to customers. Without robust API access, banks will struggle to enhance their customer’s experience.
• Banks are facing competition from a growing number of sources, many of which are not even banks. Customer experience is where the competition for customers is occurring.
• Banks are trying to move away from being strictly transaction focused. They are trying to deliver customers a modern “journey” that extends well beyond a simple transaction and existing cores still rely heavily on a transaction-based approach.
• The number of new financial products and services being offered is accelerating and they are increasingly being offered by specialized providers. Core platforms are not well designed to accommodate an “ecosystem” or a platform-based approach to banking.
• Core vendors are abandoning direct integrations with third party vendors. In place, they are forcing re-integration via APIs rather than directly to the core.

Core banking systems are at the heart of every bank. Without them, banks could not operate.

Rapid market changes are pressuring banking cores

70% of banks are currently reviewing core infrastructure1

42% of banks are either somewhat or extremely dissatisfied with their core banking systems2

Info-Tech Insight

The last five years have seen:

• Rapid and dramatic shifts in delivery of financial services occur from COVID-19
• Rapid shifts to mobile/ digital as manual and traditional in-branch processes converted to online
• Accelerating competition

These forces have led banks to review their core systems.

1 – Depth Fintech In. “Core Banking Systems Primer”

2 – American Bankers Association, “2022 Core Platforms Survey”

Smaller banks have unique core challenges

Banks with less than $5 billion in assets tend to be more affected by core challenges.

The smaller you are, the greater the challenges. Smaller banks ($1 billion to $5 billion in assets) seem to have the greatest challenges associated with core banking systems despite having positive satisfaction ratings.

Smaller banks are further challenged with on-premise core banking software. Many vendors have focused their modernization efforts on their cloud hosted versions. Small banks tend to have more on-premises cores.

Smaller IT teams rely more heavily on their vendors for product and service innovation.

Core banking vendors are aggressively trying to move their customers to their cloud-based offerings as they tend to be more profitable for the vendors and easier to support.

Moving to the cloud can present initial challenges for the resources required to support the transition, new expertise required, funding for the new model, and a dark period for changes to product and services that will keep your bank competitive

There are three main vendors servicing smaller banks, which include Fiserv, FIS, and Jack Henry. Each vendor has many versions of their software available, each of which have their own unique combination of features, benefits, challenges, and restrictions.

Migration to vendor-based cloud offerings can be slow and expensive. As vendors push their customers to use their cloud offering, long waits to transition are forming. Cloud offerings are also significantly more expensive than what a bank previously had.

• For larger banks, please see our mainframe modernization report.

Smaller banks with smaller IT teams have limited options beyond their existing core banking provider.

Download the Mainframe Modernization Report

Core banking providers are struggling to keep up

The pace of change in banking is so high that core providers are falling behind.

Banking is characterized by rapid innovation and intense competition that is becoming increasingly specialized. Core banking providers are lagging the market at an increasing rate.

Core banking vendors seem to follow a “fast follower” acquisition strategy. They wait for market leaders to emerge then they acquire the company. This is a safer strategy than trying to predict market trends and then develop them internally.

Core vendors with a fast follower acquisition-based modernization strategy can be less effective in a fast-evolving market. By the time a new capability emerges, a successful acquisition is made; the core vendor does their own integration and rolls it out can leave customers well behind the market.

The acquire, integrate, and roll out model may not be a viable alternative for core providers for much longer.

Not all core banking systems offer deep API accessibility. API access, when available, can be very expensive to license. Some core banking systems are closing down API access.

The banking industry increasingly moves toward platform or ecosystems-based composable architectures that are made up of best-in-breed solutions. Core banking systems vendors are under increasing pressure to remain relevant.

Most core providers acquire innovation rather than build it themselves. They must do their own integration and roll that out to customers which is complex and time consuming.

Banks and core providers have different perceptions of how well they are performing

Source: American Bankers Association, "2022 Core Platforms Survey"

Info-Tech Insight

Despite significant disparities, core banking providers do not seem to recognize the shortcomings of their products.

Smaller banks have additional unique challenges to consider

Beyond the limitations of their core, smaller banks also face other challenges.

Many smaller banks purchased their core banking software to try and minimize future software costs.

Purchased cores are becoming outdated. Many smaller banks have the added challenge of now having an older version of the core.

Maintenance agreements on purchased cores are limited. Annual maintenance agreements will only likely get the bank limited patches and some upgrades, but it will not get them the latest version of their core which places them at an even greater disadvantage.

Purchased cores that were modified present additional risks. Banks may have purchased to the source code to their core and heavily modified it over time leaving it in a non-standard state that may not be API accessible. This condition also limits the bank’s ability to accept significant upgrades from the vendor.

Point-to-point integrations present additional difficulties. These are often done by banks and may make future transformations more difficult because new approaches may make these integrations irrelevant.

There are many options to consider. Different versions and platforms are often available by the same vendor, as well as add-on options, creating a complex environment.

Banks have pursued different strategies regarding their banking core that can lead to unique challenges over time.

Bank satisfaction with core banking providers by asset size

Source: American Bankers Association (Aba.com), "2022 Core Platforms Survey"

Info-Tech Insight

The larger the bank, the lower the satisfaction with core providers. Their needs and requirements are greater and more complex than smaller banks which expose the shortcomings of the core providers.