Why Banks with Legacy Cores Are at a Tipping Point for Modernization

Core banking platforms are the backbone of financial institutions, managing essential functions such as account management, transactions, loans, and customer data. These systems support a wide range of processes, including deposit and withdrawal processing, loan disbursement and repayment, interest and fee calculation, and customer relationship management. They also handle regulatory reporting, fraud detection, and compliance monitoring. Despite their importance, many institutions still rely on outdated and costly legacy systems.

Economic pressures, technological disruption, regulatory burdens, and evolving customer demands are squeezing profit margins and hindering competitiveness. Legacy systems and manual processes further impede the ability to meet customer expectations and adapt to change. Modernizing core banking systems is no longer a luxury; it’s now essential for banks in this evolving environment. Modernization provides greater control, enhances operational efficiency, improves the customer experience, and offers the flexibility needed to innovate.

Financial institutions face immense economic pressure to reduce costs and improve efficiency. Legacy systems are expensive to maintain and lack the scalability needed for modern data processing demands. For example, Wells Fargo experienced a significant system failure in February 2019 due to issues with its legacy infrastructure, causing widespread disruptions and preventing customers from accessing online banking, ATMs, and mobile banking services.

Migrating to cloud-based solutions offers a pathway to cost optimization, enabling institutions to leverage AI and machine learning for improved data processing, innovation, and decision-making.

The regulatory environment is unpredictable, with evolving requirements for data privacy, fee transparency, and open banking standards. Legacy systems struggle to adapt to new demands, resulting in compliance risks and potential penalties.

Even with the changing regulatory landscape, modern architectures and solutions allow banks to integrate with modern Governance, Risk, and Compliance (GRC) systems, which, in turn, help identify and realize automation opportunities. GRC systems are crucial for managing various risks, ensuring regulatory compliance, and maintaining operational integrity. They encompass governance (establishing policies and controls), risk management (identifying and mitigating risks), and compliance (adhering to laws and regulations). By leveraging advanced technologies, GRC systems offer benefits such as automation, real-time monitoring, and data analytics.

TSB Bank faced severe repercussions following its disastrous IT migration in 2018, which left nearly 2 million customers unable to access cash or use online accounts for weeks. The failure resulted in a £48.65 million fine from U.K. regulators due to operational risk management and governance failures. To address these issues and prevent future disruptions, TSB adopted advanced GRC systems.

Ensuring flexibility in operations requires rethinking reliance on batch processes, manual data transfers, outdated interfaces, and product experimentation.

Cloud migration and modern architecture offer a solution by enabling institutions to scale operations dynamically. This scalability allows banks to handle increased transaction volumes and data processing demands without compromising performance. Additionally, modern architectures facilitate integration with third-party services, such as fintech solutions and payment processors, enhancing the bank's ability to offer innovative financial products and services.

Implementing modern architecture also simplifies operations and integration. By automating manual processes, banks can reduce operational costs and improve efficiency. Automation minimizes human error, speeds up transaction processing, and frees up staff to focus on more strategic tasks. Additionally, legacy cores built on outdated technology or coding languages face challenges in attracting and retaining tech talent.

Legacy cores may also hinder time-to-market with new rates and products, making it difficult for banks to respond swiftly to market changes and customer demands. Typically, it can take about a year for a traditional bank to roll out a new product line to customers from updating the legacy core systems to support the product, integrating with vendors, and completing necessary regulatory approvals. While regulatory compliance is still required for digital-first banks, leveraging cloud-native or SaaS core banking platforms could reduce the end-to-end process of launching a new product by several months.

The trend towards modernization is gaining momentum. According to market research, the global core banking software market is projected to grow significantly, reaching over $59 billion by 2032. This growth is driven by the increasing adoption of cloud-based solutions and advanced technologies like AI and machine learning, which enable banks to offer innovative financial products and services. Financial institutions are recognizing the need to upgrade their core systems to meet evolving customer demands and regulatory requirements.

In our next article in the series, we will explore how modernization benefits financial institutions, focusing on the tangible advantages such as increased agility, enhanced security, and the ability to leverage advanced technologies to drive growth and innovation.