With the increase of digital-only banks entering the market, all promising beautiful apps to users who demand the best user experiences delivered with the newest technologies; a common question we get as a core banking software provider is; how vital is it to have a non-legacy core banking system?
All a bank needs a beautiful front-end, right? This is what their customer sees and it is on the front-end where they will be ultimately judged.
However, when it comes to creating delightful user experiences, does the back-end matter?
The answer is…..of course it does.
The banking experience
Today’s banking customer demands the same experience they get from Airbnb, Spotify and Google.
They have come to expect great services at their fingertips. Whether it’s ordering food, applying for a job, finding accommodation or even looking for love, they’re used to doing so at the touch of a button.
So shouldn’t a pretty major activity in their life – like managing finances – be that easy too?
The problem is that banks can only deliver the user experiences the backend allows it to. And if that backend is a legacy system, the limitations are huge.
banks can only deliver the user experiences the backend allows Click To Tweet
If a bank wants to deliver real-time, highly contextual, highly customisable beautiful user experiences, then having a modern banking core matters. It matters a whole lot.
Traditional banks seem to be getting by with what they have just fine. They invest in digital channels, purchase some middleware solution to help them tidy up the spaghetti junction of systems, while the core, the legacy system dating back to the 1970s, remains in place.
They have added as much functionality as they can by adding layer after layer of new customised systems on top. A practice they call ‘wrapping‘. Frances Coppola explains it well,
“Basically you treat your legacy system as a “black box” which remains untouched at the core of your system: around it you create a “shell” of additional applications that provide your customer interface, your straight-through settlement processing, your point-of-sale functionality and your real-time updates (yes, this functionality can be added even if the “black box” is a batch system). This is akin to the way in which off-the-shelf package applications are typically customised, but it is of course on a much larger scale.”
What they end up with is a core system made up of 100’s of sub-systems all held together with sticky tape that delivers bad user experiences and costs $100’s of millions of dollars to maintain each year.
Oh, and if you want to make a change or test a new product or feature in a test environment; forget about it. Banks have no way of replicating their systems in a test environment. So to make improvements to the customer product, they have to test it in their live environment. They just can’t do it. And those that have tried, have learned a very expensive lesson.
The Core is NOT a Commodity
No front-end, no matter how cutting-edge, is any good without a modern back-end core system with real-time capabilities that can adequately support it.
In the UK, some challenger banks have picked traditional off-the-shelf core banking solutions from the usual players.
One prominent COO recently stated, “core banking software is a commodity…….as long as it supports the required functionality and the vendor commit to delivering on time and to the agreed specifications – age is not a problem”.
We categorically disagree with this way of thinking. And from talking to many neo-banks from the UK, these commodity systems just can’t do what they want them to do.
Choosing to build your bank on a legacy core system or a legacy core dressed up like a modern platform is like building your house on quicksand.
When the winds and rain come, in the form of competitor banks built with new technology or niche players attacking a certain banking product line, that house will come crashing down and be washed away into history.
If a bank is to last, it has to be built on solid foundations.
You build a bank from the ground up. Not from the top down.
You build a bank from the ground up. Not from the top down. Click To Tweet
Most of the problems in the banking world today are due to the challenges created by legacy systems. So many new products and features have been bolted on to these Frankenstein core platforms that they have become impossible to manage, impossible to improve and very expensive to operate.
Peter Olynick, a senior retail banking analyst with NTT DATA Consulting, says modernising core deposit systems should be a top priority for banks.
“Banks need to satisfy rising consumer expectations, achieve a myriad of operational efficiencies, and improve their time-to-market for innovation products. Antiquated legacy systems are hindering banks’ ability to pursue growth opportunities and improve the customer experience.”
3 of the biggest challenges for banks today can be contributed to a legacy core. There are of course other external challenges but most banks have the same issues. Those issues are (i) technology, (ii) cost and (iii) revenue.
Years and years of software upgrades and middleware solutions hide the symptoms but don’t address the problem. There’s only so much lipstick you can slap on a pig before you start to realise that enough is enough.
The cost to run and maintain these old legacy systems can cost between €500m – €1b a year. That’s just to keep the lights on. No innovation. No new products. No access to data. Simply to keep the bank going on a daily basis.
Ability to grow with the current business model is very difficult. This is due to multiple reasons some of which are bad user experiences, stale products and new players entering the market with better alternatives.
So what are the options for a bank? Is seems quite obvious, doesn’t it?
Use a core system that is built using modern open source technology. One that allows a bank do what it wants, when it wants, and at speed. It’s got to be cheaper. A hell of a lot cheaper. And last but not least it has to generate revenue. After all, banks need to make money.
Today, the role of a core banking system is not just that of a transaction processing engine; it is the key component to being a better and more efficient bank. A bank that can deliver the user experiences it’s customers demand.
A bank that thrives in the future is one built on a modern banking core. Because not only does it provide the technology to do banking better, it enables banks to access their valuable data. Data that up until now has been siloed away in some inaccessible database.
Accessing this data will be the number priority for nearly every bank and new banking platforms will be the enabler.
Banking platforms will be the linchpin to a new banking business model. Business models that go beyond banking and banking products.
Do you agree? Have I missed anything? I am wrong? I’d love to hear your thoughts below.