By Niloy Sengupta, Financial Services Consulting Partner, Kyndryl
US banks over the past 15 years have made significant investments in digital banking. According to a recent survey conducted by American Banker and Kyndryl, 70% of banks are advancing digital banking capabilities through IT modernization initiatives.
But many banks still encounter transformation headwinds, despite significant investments in front-office technologies to provide superior customer experience. The same American Banker and Kyndryl study referenced above found that just 36% of banks have made meaningful progress in modernizing their internal IT systems, a critical enabler of digital banking.
Bank CIOs have often de-prioritized back-office IT modernization, and core banking modernization in particular, due to the high complexity, cost and risks associated with such endeavors. However, as customer expectations and business conditions have changed significantly in recent years and cloud technologies have matured, modernization of core systems has become a necessity for banks to remain competitive.
The need for business agility and resilience
In recent years, banking customers' behavior has changed, demanding hyper-personalized products, superior onboarding and service experience, competitive pricing and offers. Neo-banks and fintechs have established themselves and have been chipping away at banks' market share, with their product innovation and speed to market. These shifts have occurred while new revenue streams have opened through open and embedded banking.
The challenge for established banks is that the architecture and design of traditional core banking systems constrain their ability to accelerate speed-to-solution, easy configuration, and hyper-parameterization. It is also challenging to quickly update these systems to support new regulatory and compliance needs. This is in addition to the on-going attrition of the expert workforce needed to maintain core banking systems, causing significant risk to business resilience.
Core banking systems are past due for modernization
If the front-office channels are the face of the bank, core banking systems are the heart. Core banking systems are the engine of the banking back office and integrate with customer-facing channels, money movement, general ledger, and reporting and analytics applications. Even with such a significant role, core banking systems have yet to be on the priority list for modernization. Banks have been operating on the premise of fixing only what is broken. That position is increasingly untenable.
Many early core banking systems, designed and developed on mainframes or N-tier technologies and deployed on-prem, are still operational. These systems are transaction centric and process large transaction volumes reliably thanks to their strongly intertwined business and data access logic. Such batch-based systems with monolithic architecture come with a significant trade-off. On the one hand, they support robust and secure processing of high volumes of transactions with very high reliability and low latency. On the other hand, these systems are not easily configurable, do not support fast time-to-market requirements for new products and services, or natively support APIs, thus hindering business agility and customer centricity that banks need today.
Over the years, banks have heavily customized their core banking systems and, to support the modernization of customer touchpoints, have elevated some of the business logic from the core to the channel applications. Such band-aid fixes have resulted in new challenges such as complex integration, data redundancy, increased technical debt, and roadblocks to omnichannel capabilities.
Cloud adoption offers several advantages
As cloud technology has matured, it has become a good alternative for on-prem core banking systems. Cloud migration unlocks several advantages: capacity and price elasticity, measured and managed services, easy conversion from batch to real-time processing, and data externalization through APIs. Other benefits include agility and flexibility, more transparent TCO, and the ability to benefit from DevSecOps. During the pandemic, as remote working became necessary, banks found it easier to maintain and operate their cloud-based systems than those deployed on-prem.
APIs are the preferred method for platform integration in the digital age. However, many traditional core banking systems continue to use file feeds, message queues, and other SOA-based integrations and are not natively ready for APIs. Migrating data from mainframe data stores to cloud databases can accelerate API adoption. Alternatively, some utility tools can API-enable data that resides within mainframes. Such initiatives require a good amount of effort, cost, and time as data migration is always a high-risk activity.
Practical options to modernize core systems
"Big bang" core banking modernization efforts of the past have a mixed track record of success. In large banks, such efforts have required significant commitment at the C-suite level, supported by hundreds of million dollars of investment and several years to plan and implement. With cloud technologies, there are now additional options to modernize mainframe-based core banking systems at potentially lower cost and reduced time to market in a risk mitigated manner.
Banks with mainframe-based cores have several journey options to the cloud. One option is to re-platform mainframe core banking systems to Kyndryl's zCloud, for example, allowing for a low-risk modernization option. Banks following this path retain the mainframe code-base while unlocking the capacity and price-elasticity of the cloud, enabling cost optimization in the near term. It also allows banks to incrementally and iteratively pursue other journey options.
Banks looking to accelerate a more significant transformation should explore the option of rearchitecting their core systems to a microservices-based cloud-native architecture. Rewriting a full-featured core banking system can be viable when used as part of a progressive modernization journey. In this approach, banks "hollow-out" their core banking system through functional decomposition, then progressively move off the existing core using both "build" and "buy" techniques. Rewriting some functional modules, such as notifications and alerts, statement processing, document generation, etc., becomes very practical. Buying and integrating vendor-packaged solutions such as Customer master, Product and Pricing master, Payments hub, and the like fit neatly into this approach.
The allure of next generation core banking vendor platforms
A new breed of core banking systems has emerged in the last few years. Established core banking vendors like FIS, Fiserv, Jack Henry, Temenos, Finastra and Oracle have refactored and rewritten some of their popular on-prem core banking platforms to offer new cloud-based offerings.
Further, a new generation of core banking vendors, such as Thought Machine, Finxact, Mambu, Technisys, and 10X have brought next-gen cloud-native core banking applications to the market. These applications are a set of "headless" API-based microservices. This architectural pattern makes these core systems "composable," allowing banks to mix and match services from multiple vendors and integrate them through an API gateway. Banks can choose from a broader ecosystem of applications, combine build and buy options, and reduce vendor concentration risk. However, while these next-gen platforms have proven attractive for smaller and digital banks, the jury is still out on whether these applications can handle the large volumes of low-latency transactions required by top-tier banks without any noticeable performance degradation.
Business and technology goals determine the path forward
When developing a solution blueprint for core banking modernization, banks need to assess the gaps and limitations of their current systems against their strategic future business needs, including business agility, fast speed-to-solution, resiliency, scalability and TCO. The blueprint should set clear and practical design directions for platform modernization through cloud adoption, API led integration, conversions from batch to real time, optimization of business rules and data migration. To manage the risks of migration, banks should consider the trade-offs between migrating all customers simultaneously or incrementally migrating small segments of customers based on geography and/or product usage. Banks should avoid cookie cutter approaches and tailor their approach to market and customer needs. Banks must also complement technology modernization with operating model changes that improve business processes and meet workforce transformation needs.
Core modernization is a challenging venture. But to succeed in the future, inaction is no longer an option. The time to act is now and banks should find support from a trusted advisor who has deep experience in managing and simplifying complex environments.
Kyndryl is the world's largest IT infrastructure services provider, serving thousands of enterprise customers in more than 60 countries. The company designs, builds, manages and modernizes the complex, mission-critical information systems that the world depends on every day. For more information, visit
