Banking, Innovation

In core banking, the core is not a commodity

Aidan Lawlor
Aidan Lawlor

What’s this all about?

With a smartphone in nearly every pocket, today’s consumers are increasingly accustomed to  and demanding  apps that make life easier. While banks seem to be getting by continuing to implement patchwork solutions, this is not viable in the long-term. LEVERIS’ Head of Marketing, Aidan Lawlor, examines the importance of a modern core banking system in creating flawless user experiences and outlines why adding these experiences onto a system with a legacy back-end simply won’t cut it. 

Read on if you:

  • Want to know more about core banking
  • Are launching a bank
  • Have an interest in fintechs and the future of banking
  • Are tired of your outdated, Frankenstein-like legacy system

Beautiful apps that offer the best experience delivered with the newest technologies. It’s what the new digital-only banks entering the financial services market today are promising would-be customers in order to win business.

As a core banking system provider, a common question LEVERIS gets asked is: how vital is it to have a modern core at the heart of your bank?

All a bank needs is a beautiful front-end, right? That’s what the customer sees and it’s on the front-end where banks will ultimately be judged. It’s why the challenger banks are making these promises.

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 customers demand 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 important service like managing finances be that easy too?

The problem is that banks can only deliver user experiences that the back-end allows. And if that back-end is a legacy system, the limitations are huge.

Should a bank want to deliver real-time, highly contextual, highly customisable and beautiful user experiences, then having a modern banking core matters. It matters a whole lot.

Sure, traditional banks seem to be getting by just fine with what they have. 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.

These banks have added as much functionality as they can by attaching layer after layer of new customised systems on top, a practice they call ‘wrapping’. Think of it as the Frankenstein of banking technology.

Blogger Frances Coppola explains it well:

“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 hundreds of subsystems all held together with sticky tape that delivers bad user experiences and costs hundreds of millions of dollars to maintain each year.

Oh, and if you want to make a change, test a new product or feature in a test environment – forget about it! 

Banks have no way of replicating their systems in such circumstances. In order to make improvements to the customer product, they have to test it in their live environment, something they just can’t do. 

And those that have tried have learned a very expensive lesson.

Building your house on quicksand

No matter how cutting-edge a front-end appears to be, it is no 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 challenger bank COO has stated: “Core banking software is a commodity.” Their belief is that as long as it supports the required functionality and the vendor commits to delivering on time and to the agreed specifications – age is not a problem.

We categorically disagree. And from talking to many neobanks 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 as 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 certain banking product lines, that house will come crashing down and sink into history.

If a bank is to last, it must be built on solid foundations.

You build a bank from the ground up. Not from the top down.

Legacy issues

Most of the problems in the banking world today are the result of challenges created by legacy systems. That means many new products and features have been bolted on to these ‘Frankenstein-like’ core platforms and 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.”

The banking experience

Three of the biggest challenges for banks today can be contributed to a legacy core. They are: 

01. Technology

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 your true identity is revealed. 

02. Cost

The cost to run and maintain old legacy systems can amount to between €500 million and €1 billion per year. That’s just to keep the lights on. No innovation. No new products. No access to data. That’s simply to keep the bank going on a daily basis.

03. Revenue

Having the 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.

The antidote is core banking

So what are the options for a bank? It seems quite obvious, doesn’t it?

Use a core system that is built using modern, open-source technology; one that allows a bank to do what it wants, when it wants, and at speed. It has 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, one that can deliver the user experience its customers demand.

Banks of the future

A bank that thrives in the future is one built on a modern banking core. Not only does it provide the technology to do banking better, but it also enables banks to access their valuable data which has, up until now, been siloed away in some inaccessible database.

Accessing this data will be the number one priority for almost every bank and new banking platforms will be the enabler.

In essence, banking platforms will be the linchpin to new banking business models – ones that go beyond banking and banking products.

This post was originally published by LEVERIS in December 2016.

Aidan Lawlor
Aidan Lawlor

The all-in-one core banking platform.

A fully-integrated banking platform for better banking and smarter lending.

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