How legacy banking systems can be modernised to meet consumer needs

Change, progress and evolution are always challenging, and that’s no truer than for the banking sector. As banks move away from traditionally inflexible pricing and billing models to value management of the customer lifecycle, a key strategic priority for banks of the future, they must be ready to adapt.

Modernising the banking core is now a business imperative that can no longer be ignored

Right now, banks are in a transitional phase, and the wave of global digital transformation happening across all industries is also taking place in banking. A significant challenge for the innovation and the seismic shifts that are required, though, is the continued reliance on legacy core banking systems. This reliance is affecting banks’ ability to innovate digitally, and that is critical if banks are going to be able to provide their customers with what they want and what they need.

Banks must recognise that their customers are looking for more personalisation. Because consumers are exposed to so much convenience and accessibility in their day-to-day lives in every interaction, whether it’s with retail, telecom, or other kinds of utility providers, banks need to create a more personalised experience for them. Their remit must extend beyond interest-based income to value-based products and services, and value-based engagement providing individualised benefits to customers.

While banks already have a digital core, innovation gives flexibility to bring products and services into the customers’ engagement layer. New systems will take care of that part of the problem, but you can’t rip out and replace everything. Banks have to start with one part of their system which will give them a certain capability, but even then they will need an architecture or framework giving a functional capability to account management, ledger management, and transaction integrity which continue to be valuable.

In terms of customer engagement, banks must move to an intelligent digital layer which can manage the interaction from various channels, those which are closer to the customer, and which can orchestrate hyper personal customer experience, prices, and services. This key strategic approach has become increasingly relevant and commonplace.

The bottom line is that banks have a lot of information and a lot of data. They know a lot but by and large they don’t realise they know it, and even if they do, they’re not leveraging it in an effective way. Much of the data and insight they have is linked to transactions, so banks are increasingly assessing this data, and they are ‘liberating it’.

Future trends

Banks need to create more for the customer. The trends that we are seeing right now is that banks are looking at more enhanced levels of customer engagement, bringing in capabilities, improving enterprise and service provision, and developing an overall holistic offering. With a mortgage product, for example, banks must look at the whole journey to house ownership, helping to finance it and helping in the planning for it, going beyond what a traditional bank or ‘needs-based’ bank provides and thereby initiating a higher level of engagement.

Customer-facing solutions are the future of banking, but for banks to appeal more to their customers, they must streamline their internal processes to become more efficient and better at doing what they need to be doing in the middle and back office. This needs to take place in order to drive any change with customer value management, interaction, and satisfaction at the frontline of banking.

The journey must begin with an in-depth analysis of their objectives, expected outcomes, risks involved, mitigation strategies, and more. The next step is to consider the way they want to execute it. The first option of course is a full replacement of the legacy core. But this is time consuming, expensive, and extremely risky. The second option is progressive replacement, in which core functionalities are slowly transferred from the legacy system to a modernised architecture. The third option is to hollow out the core. This involves keeping the core intact as a system of records and posting ledgers and building the required modern functionalities outside it. This is cost-effective, less risky, and less disruptive for ongoing banking activities. The modern technology stack that is built on top of the core includes sophisticated middleware, digital channels, and a marketing platform for a more agile operating model.

To decide which option works best for them, banks must understand the capabilities and gaps in the existing platform, consider their business strategy and objectives, their risk appetite, innovation objectives, and complexity of their data management strategy. Any modernisation effort must also keep in mind that the future of business involves being part of an ecosystem or becoming an ecosystem provider themselves. It must help the business move in this direction.

Open banking needs state-of-the-art systems that support user experience-based banking models. This calls for a cloud-native platform that can leverage microservices-based architecture and a robust application programming interface (API) framework that can ensure easy integration with various internal and external services. Cloud-native platforms can support a pay-per-use subscription model and will be easy to maintain and upgrade in future. Banks embarking on the core modernisation journey are also looking at deploying advanced technologies like artificial intelligence, machine learning, natural language processing, and IoT to improve processes and facilitate innovation and drive growth. The core modernisation approach must be able to support these technologies.

The banks of the future shouldn’t be just financial institutions when they have the opportunity to be both bank and service provider. Moreover, they should become a trusted partner providing holistic services and products to customers. The good news is that banks are realising this and recognise the importance of modernising their core.

Modern banking is being shaped by evolving customer expectations, disruptive market events, and a move to a new relationship-driven, user experience-focused business model. Legacy banking cores have constraints in delivering any of these requirements, therefore modernising the banking core is now a business imperative that can no longer be ignored. It is now time for the banking sector to focus on understanding the modernising approach that works best for them.

About the author

Nanda Kumar is founder and CEO of SunTec.

A technology evangelist with over 26 years in the industry, he has delivered numerous talks across global forums such as Sibos, 3G Mobile Forum, and Indian Banking Summit.

He holds a master’s degree in management and physics.