Digital is stressing out decades old core banking systems says Celent

photo courtesy of iStockphoto

The core banking system (CBS) platform is the primary system of record for the accounts of a bank, and is the technological foundation on which an entire bank operates. The process of switching out a core system has been likened to changing the engine on an aircraft in flight. These transformations can be costly and risky. The choice of solution is therefore never lightly.

The resistance to change has resulted in a situation where many banks are running systems that are decades old. In the last 10 years, the rise of digital and the evolution of delivery channels have added stress to these platforms.

As customer needs continue to evolve, many financial institutions are finding their core systems are ill-equipped to meet today’s requirements.

James O'Neill, senior banking analyst, Celent“The fundamental challenge of keeping older CBS platforms up to date is a primary reason why back office functionality relating to new services like mobile banking have been implemented in these external back office systems rather than in the CBS platform itself,” commented James O’Neill (photo left), a Senior Banking Analyst.

The modernization challenge is not limited to the North American market. In 2012, IDC predicted that at least 32 of the top 120 banks in Asia Pacific (excluding Japan) would undertake significant upgrades of core banking systems bu 2015.

Eiichiro Yanagawa, senior analyst at Celent’s Asian Financial Services PracticeIn present day Japan, a Japanese megabank faces daunting challenges. “They need to reshape their banking operations and service functionality into components and rebuild them harnessing the latest software engineering methods,” said Eiichiro Yanagawa (photo right), senior analyst at Celent’s Asian Financial Services Practice.

According to Celent, there’s no “best” core banking system. Each platform has strengths and weaknesses, but all of them generally play to specific markets or segments.

Stephen Greer, banking analyst, Celent“Banks are undoubtedly finding their CBS platforms represent an impediment to agility in creating new banking services, but through the technological adaptation of middleware and other system workarounds, banks have generally been able to stave off full-blown core replacement,” added Stephen Greer (photo left), a Banking Analyst.

The decision to go with one system over another will depend largely on the needs of the institution. Nowhere are the hard economics of CBS transformation more relevant than in the large bank market, where the cost of licensing and maintaining a CBS platform pales in comparison with the investment in customized functionality, workflows, and interfaces made by the large banks to ensure that the CBS platform continues to work within their existing IT ecosystems.

“In order not to fall into the dilemma of recreating existing legacy issues, of greatest importance for Japan’s megabank in undertaking legacy system renewal projects will be putting in place an architecture design allows coexists the present (or past) banking operations to coexist in harmony with the digital banking services of today’s brave Fintech new world,” said Yanagawa.

Core Banking Systems for Large Banks

Source: Core Banking Systems for Large Banks: North American Version, 2016

Feature photo courtesy of iStockPhoto.