Heart attack or life saving surgery - Will the banking industry survive the ailment of aging technology stack?

Would a person suffering from heart disease and at risk of a heart attack refuse the life-saving bypass surgery? Probably not! Yet, financial institutions do this every day, by refusing to address the business risks posed by aging core systems.

Instead of opting to save long standing customer relationships and revenues by upgrading the heart of their technology stack – the core banking system, financial institutions often bolt on new software on top of the legacy core to keep pace with modern needs, such as mobile banking. One bank CEO shared a sentiment with me that I had heard before in different variations: “A core replacement is like a bypass heart surgery, we don’t want to take that risk!” However, if your heart is not fully functioning and pumping blood to the other organs, how can those function optimally? Another analogy is like running a marathon with clogged arteries. At some point, the strain becomes too much and the heart gives out.

We’ve already seen this happen in the UK, where banking IT failures have risen in recent years, resulting in customer outages and an inability to access financial institution services. For twenty percent of banks, the underlying cause was traced back to IT changes,ⁱ such as adding products from third-party suppliers, bolted onto the core in order to deliver the digital capabilities that customers are demanding.

The UK, however, is not alone. Forty-three percent of U.S. banks are reliant on core systems built on the nearly defunct COBOL language.ⁱⁱ Not only are these systems costly to maintain, but they are incompatible with modern technologies and current software solutions.

By continuing to add new capabilities on top of these slow-beating cores, financial institutions are failing to treat the cause of past and imminent failures, opening the organization and its customers to increased risks over time.

“The banking sector is particularly affected by glitches because of the amount of legacy systems. Banks have software piling on top of software,” said Lev Lesokhin, Senior Vice-President, Strategy and Analytics at Cast, a company that tests software quality in a statement to Computer Weekly.ⁱⁱⁱ

The way to avoid a heart attack when you have an ailing heart is to perform the vital, life-saving surgery now. In this case, that means replacing the outdated legacy core. Fortunately, the once-dreaded procedure is now significantly faster, simpler, and carries far less risk than ever before, thanks to cloud-based platforms and open application programming interfaces (APIs).

The Life-Saving, Cloud-Based Core

No matter how vital the need to replace core systems, it’s a procedure that most financial institutions would rather avoid. Integrating new cores with existing customer relationship management systems, channels, data architecture, risk systems and middleware are all concerns, according to McKinsey.^iv

However, it is hard to ignore the benefits associated with replacing cores systems. According to Morgan Stanley, upgrading to a new core offers efficiency gains, reducing cost-income ratios by nine percent.^v The advantages of straight-through processing, access to real-time information and automation, all contribute to the gains.

Of course, there is more to core replacements than shaving costs. Core system replacements can also aid in customer acquisition by providing the types of modern tools and capabilities consumers and commercial customers want to use.

According to an American Banker survey, the number one complaint that financial institutions have with their current core provider is an inability to customize solutions to the needs of the bank or credit union.^vi As a result, only fourteen percent of financial institutions responding to the survey were very satisfied with their current provider, and eighty percent were looking to migrate to new cloud-based cores.^vii

Cloud-based cores offer computing capabilities and resources, and products and services are delivered as a service to financial institutions. Open APIs act as a connection layer, integrating banking data and other capabilities with the services contained in the cloud, allowing financial institutions to consume – rather than own and run – core applications.

This approach reduces resource costs and provides a more flexible and agile way of operating, while eliminating the concern of potential heart failure. Cloud-based cores also future proof the financial institutions using them by providing simple access to a broad range of innovative products and services. In best-case scenarios, banks and credit unions can even connect multiple banking operations, offering access to consumer and business accounts from a single portal.

In the end, it all adds up to increased customer or member satisfaction, resulting in long-term relationships that increase wallet share and improve acquisition efforts. In fact, financial institutions have realized revenue growth of fifty percent,^viii while reducing IT costs by twenty percent,^ix simply by migrating to cloud-based cores and services.

In the age of ailing core systems, financial institutions can no longer refuse to treat the deadly symptoms impacting their revenues and operations, not when cloud-based cores can simply and easily support migrations and provide the bank or credit union with the modern products vital to compete in the digital age.

_{ⁱ  Karl Flinders. “FCA Deeply Concerned as no End in Sight for IT Failures in Banking.” ComputerWeekly.com, Nov. 28, 2018. Web.
ⁱⁱ  “Dear COBOL, Happy Birthday! You Are Immortal.” Financial Express, Sep. 17, 2019. Web.
ⁱⁱⁱ  Karl Flinders. “Why Do UK Banks Suffer More Software Failures than Those in Other Countries?” ComputerWeekly.com, Oct. 3, 2018. Web.
^iv  Vishal Dalal, et al. “Core System Strategy for Banks.” McKinsey & Company, May 4, 2020. Web.
^v  Bruce Hamilton. “As Banks Go Digital, It’s What’s Inside That Counts.” Morgan Stanley, Mar. 19, 2018. Web.
^vi  “ABA 2020 Core Processor Survey.” American Bankers Association. Retrieved from https://www.aba.com/-/media/documents/reports-and-surveys/aba-2020-core-processor-survey-results.pdf?rev=e64eda696ca34c5f8a22690b26f026e0.
^vii  “ABA 2020 Core Processor Survey.” American Bankers Association. Retrieved from https://www.aba.com/-/media/documents/reports-and-surveys/aba-2020-core-processor-survey-results.pdf?rev=e64eda696ca34c5f8a22690b26f026e0.
^viii  “Fusion Essence: The Only Way Is Cloud.” Finastra. Retrieved from https://www.finastra.com/sites/default/files/2021-02/brochure_fusion-essence-cloud-proposition.pdf.
^ix  “The Only Way Is the Cloud.” Finastra. Finastra infographic. Retrieved from https://www.finastra.com/sites/default/files/2019-09/infographic_only-way-is-cloud-uk.pdf.}