Replacing core systems won’t solve your digital problems

Core banking systems pose an oft-discussed predicament for institutions across the banking industry. The chorus for replacing them has grown louder over the past few years. Increasingly, it’s becoming difficult for banks to keep up with new digital innovations, such as forecasting bank balances, while relying on these older systems that fail to process data in real time. But focusing on replacing back-end systems, before developing a sophisticated channel-first strategy, has its own problems. It’s like the tail wagging the dog.

There is no doubt core systems are causing problems for banks. In a survey of 100 financial institutions last year, 70% of the respondents said they were frustrated with their core systems. Many of the issues reported in the survey — the complexity of integrating other systems with the core, high product development costs and struggles with improving the user experiences — illustrate the many ways that core systems hamstring banks’ digital efforts.

However, banks won’t likely solve these issues by replacing their core systems because of the lack of differentiation among traditional core systems.

Indeed, the monopolization of most of the U.S. market by the top four core vendors gives the companies little incentive to offer revolutionary solutions. The U.S. is home to a homogenous market where the top vendors’ solutions all perform the same primary functions — data processing and storage as well as channel and product support — on relative par with each other. In other words, core systems can’t really help banks differentiate their products and services from their competitors’ offerings. The competition, after all, is running on systems with similar capabilities.

So instead of replacing their core systems for something that will do the same thing, banks need to develop a channel-first strategy that overcomes obstacles stemming from their core systems. For example, legacy core systems are often criticized for complicating banks’ ability to provide real-time information to clients. But often, banks can provide better access to real-time transaction information if they extract data from their core system and move the data to an in-house or cloud-based data integration layer. They can then open that layer up via application programming interfaces to deliver the data to mobile and online banking applications, or even to marketing systems that can use it to help generate real-time personalized offers.

In fact, banks can leverage many tools to overcome obstacles stemming from their core systems as they execute these strategies. In addition to cloud-based systems and APIs, the industry trend toward “componentization” — breaking up traditional core systems into smaller, standalone pieces of software — can give banks better options in building the right tools for their customers.

Developing such a channel-first strategy, however, must start with a keen understanding of customers’ banking needs and what channels they use to fulfill those needs. From there, banks can find ways to make their critical banking activities as painless as possible in customers’ preferred channels. In this, banks need to recognize that channel-first doesn’t mean mobile-first, even though the smartphone is becoming increasingly the epicenter of consumers’ digital lives. For now, online is still the primary digital channel for retail banking, according to a Gallup survey released late last year. Mobile is well suited for quick tasks like checking balances or money transfers, but the small screen size of smartphones limits their utility in complex tasks like opening an account or researching a transaction. Furthermore, Gallup’s survey found that customers are more engaged with their bank if it both allows them to perform tasks in their preferred channel and provides satisfying experiences both online and in-store.

Once banks figure out their customers’ banking needs in specific channels, they can then determine how to modify back-end systems to help customers fulfill those needs more easily.

These back-end renovations will need to provide each channel with different access to data depending on the end-client’s needs. A corporate client may want a simple mobile update when a transaction clears, but will likely use a desktop to access sophisticated forecasting tools that also need to be updated with new transactions, for instance. Ultimately, these moves could also ease the path to an eventual core replacement when more modern core systems gain further traction. However, these decisions need to be made with a strong understanding of customers’ channel preferences and expectations in order to serve strategic and business goals.