Modernizing core technology, without breaking the bank

As they plan for a “next normal,” whenever the COVID-19 pandemic recedes, US banking CIOs are resetting their technology agenda. Examples we’ve seen across the industry include re-prioritizing 50 percent of technology investments to speed a digital-led recovery; accelerating the shift to digital channels to meet rapidly growing customer demand; improving IT productivity to boost cost efficiency by up to 30 percent; and modernizing the IT platform to address the scalability and reliability issues revealed by the crisis.

Ambitious goals of this kind require a modern core banking system (CBS) that can provide:

  • Faster access to core system data to support digitization
  • Flexibility and faster time to market for product and pricing
  • A low-cost way to scale and operate core systems
  • Agile and remote ways of working
  • New capabilities such as real-time payments and open banking

While these are pressing needs, mid-cap bank executives are understandably hesitant to undertake risky multi-year modernization efforts that could easily cost more than $100 million. In addition, such efforts are prone to failure and susceptible to significant cost overruns. Complicating things further, the CBS vendor landscape is in flux with no clear and obvious choices for CIOs. Established CBS platform providers are functionally rich, but many need to invest to improve their technology; meanwhile, new CBS vendors are technologically advanced but often lack a full suite of product offerings.

So, can a mid-cap bank spend a fraction of the required investment and complete a core modernization upgrade in two years that supports the ambitious goals described above? Surprisingly, the answer is yes.

Based on our experience, we believe that mid-cap banks can enable their digital agenda with investments of 20 to 30 percent of the typical investment for core banking modernization. The approach can be boiled down to three principal phases:

1. Develop a fit for purpose strategy: As a starting point, banks need to clearly define and codify the CBS strategy, business plan, and execution approach. Options range from a full CBS replacement to progressive modernization (that is, continuing with same CBS platform but selectively modernizing over time based on business and IT needs) to building a greenfield digital bank that operates in parallel to the legacy stack.

For most mid-cap banks, however, the latter two approaches are probably best. By opting for either progressive modernization or a greenfield digital bank, mid-caps can spend far less than $100 million and avoid getting stuck for several years in core platform replacement purgatory.

One mid-cap bank modernizing their aging core platform and technology stack provides a good example. The bank is removing complex customization in their current core platform, paving the way for an upgrade to the most current version of the core banking system, while assembling best-of-class capabilities outside of their core platform. They will add an off-the-shelf solution for product master management and pricing (product bundling, data management), and a real-time, modular payment solution to support different payment types and channels. The aim is to complete the project in two years at a cost of $15 million.

In another example, a mid-cap commercial bank launched a greenfield digital consumer bank after hollowing out their existing core platform and building a modern technology stack on top of it, including sophisticated middleware, digital channels, and marketing platforms. The new consumer bank has paved the way for the parent bank to adopt the modern technology stack and agile operating model over time. The greenfield bank, including marketing platforms, was built in roughly nine months for less than $20 million.

2. Adopt a planning and vendor selection approach that goes beyond the “usual.” The typical platform/vendor selection process involves a scorecard, requirements, costs, governance, etc. More successful selection processes instead use a set of factors that go beyond the usual. One bank ran a “concept sprint of the future,” with business and IT jointly taking a series of sprints to identify high-priority use cases that “made it real” for the business while also presenting clear implications for IT. Another bank took a look “under the hood” to assess their vendor’s capabilities across a structured set of criteria. This effort includes rapid prototyping and simulation in a digital native sandbox, and validating “non negotiable” items; for example, pricing changes through proofs of concept (POCs). The bank also built what it called an “IT talent/competence database”—to provide a clear view of the people they have to operate the current CBS as well as their associated skillsets related to CBS—this allowed them to know who they have, what they know, and how long they will stay and ensured that talent is available for the journey.

Finally, as they refine their CBS strategy, banks should address data quality (especially for customer and product domains) and improve their data architecture. These activities are worth the effort as they ensure all systems have access to consistent, high-quality data regardless of the chosen strategy.

3. Implement using “value assurance” approach used by major programs. Banks that have successfully completed CBS modernization often follow playbooks used by major programs (e.g., government system installations, mega-civil engineering projects, or NASA). These playbooks generally have three imperatives for mid-cap banks:

  • Create a fit-for-purpose governance structure that evolves over time: In the first phase, a governance structure should be more centralized, to ensure coordinated planning and future state design. In subsequent phases, the structure should be more “federated,” as teams are trained in change management and start acting and executing independently. Release/cut over to the new system will be centralized to manage risk and impact to customers and the bank, but change management should be decentralized after training, to individual units, such as the field and the call center.
  • Think horizontal as well as vertical: The core modernization should not be seen narrowly as an “IT project”—rather, it is a full transformation that should involve all stakeholders and processes (e.g., process redesign, risk policy updates/refinements). Thus, experts in different disciplines (e.g., data, risk, customer experience etc.) should be embedded in teams.
  • Have an “owner’s rep” to streamline execution management: An owner’s representative is a third party that is not the software vendor or systems integrator, but an independent party representing the interests of the bank in the planning and execution. Having someone in this role helps with the development of a clearly defined strategy, business plan, and execution approach (including testing and preparation) before the first line of code is written. The owner’s rep can apply a problem-solving lens to process-heavy PMOs, and will be invested in addressing immediate issues, while also taking a longer-term lens to ensure the solutions to issues are not temporary and do not lead to new issues down the road. They’ll also have a stake in tightly controlling vendor deliverables, resourcing, and outcomes.

To meet the challenges of the next normal, banks need to assess their current core banking platform and determine how it needs to change, and how they should approach the transformation. There are proven strategies that mid-cap banks in particular can follow that will enable them to meet business needs at a lower cost, and greatly increase their odds of success.

The authors would like to thank Vik Sohoni, Ondrej Dusek, Supratim Ghose and Alexandra Shraybman for their contributions to this article.