Modernising and upgrading digital infrastructure is increasingly becoming a strategic imperative for many financial institutions, particularly as the banking landscape evolves rapidly.
More and more banks are starting to recognise this, with hundreds of financial firms currently in the midst of revamping their QA approach, or looking to do so.
In fact, 98% of all banks in the world’s key economies are planning to upgrade their core banking systems to accelerate digital transformation within the next three years, according to new data shared with QA Financial.
While close to three-quarters of banks globally continue to run on legacy core banking systems, IDC researchers found that the banking space is now fully aware of the need for a digital upgrade.
Michael Yeo, an associate research director at IDC Financial Insights examined core banking transformation and data migration strategies, sharing findings from a study of banking executives to understand their current core banking system challenges and priorities.
He defined the characteristics of fourth-generation cloud-native core banking systems, emphasized the imperative of a data migration strategy, and outlines implementation considerations for banks.
Yeo, while highlighting a number of challenges relating to legacy core banking systems, noted that most systems struggle to keep up with the demands of real-time, flexible, and innovative banking products and services.
In fact, just over half of all banks said that major restrictions continue to impact the delivery of new digital products and efficiencies in operations, necessitating major upgrades to their core banking systems before they can introduce a new product to market.
Meanwhile, 65% of banks identified the absence of real-time capabilities as a key challenge with their current core banking systems, while nearly half of the respondents pointed to “inflexibility to configure or customize existing products or create a new product” as a major issue.
Legacy core banking systems
Automating processes within banks’ digital infrastructure is a top priority when it comes to transforming their core banking systems, the researchers said.
To address these limitations, more than 9 out of ten banking executive teams indicated their core systems are in need of an upgrade
Moreover, banks also acknowledge the value of the cloud in realising their digital ambitions, with more than half of all large banks globally looking to deploy over 40% of total workloads to the cloud.
This puts the ‘fourth-generation cloud-nature banking systems’ on the radar of many banks, meaning a drive for flexibility and control, real-time processing capabilities, resilience and availability, as well as operational efficiency.
“These systems allow for the creation and modification of banking products, such as payments and accounts, with significantly reduced timelines,” the researchers wrote.
They also contain low-code product configuration, allowing for quick, independently-controlled changes, and offer elastic scalability to easily adjust resources based on demand.
Fourth-generation cloud-native core banking systems also enable real-time access to transaction data, facilitating immediate customization and pricing at the point-of-sale.
This means response times can be upped, fraud detection improved and potential threats be spotted earlier, thereby reducing potential losses as well as avoiding customer frustration.
But perhaps most importantly, according to the report, fourt-generation cloud-native core banking systems enable banks to decommission their legacy software, which means their associated fees and maintenance efforts can be dropped.
“This helps reallocate resources from core maintenance to value-creating product initiatives,” the report found.
“They also improve workflows with greater flexibility, reduce timelines, and enhance data segmentation and analytical capabilities,” the authors wrote.
Strategies
Finally, the researchers set out a software testing strategy that may help banks to speed up the modernisation of their core banking systems.
The first approach entails a gradual transition, with specific business function modules from legacy platforms to modern ones using an incremental approach.
“The advantage of this approach is that it allows the bank to modernize in a phased manner, reducing risk and disruption to operations. However, the disadvantage is that it can be a slower and may take several years to complete,” the researchers wrote.
The second strategy, the ‘greenfield digital bank approach’, involves creating a parallel new digital banking unit that operates independently of the bank’s core business and serves a new customer base.
“The advantage of this approach is that it allows the bank to rapidly create and test new products, services, and propositions that the legacy core cannot provide. The disadvantage is that it can be challenging to run two parallel cores,” according to the report.
Finally, banks could opt for a ‘big bang’ strategy, which involves a full core replacement of the legacy platform with a new, modern, cloud-native platform.
“The advantage of this approach is that it allows the bank to completely modernize its core system in one go, removing all legacy issues and starting fresh,” the report read.
However, “the disadvantage is that it carries a much a higher risk of disruption due to its complexity, limited testing and the possibility of delays to the entire project resulting from even a single glitch,” the researchers concluded.
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