Transforming core banking systems is a complex endeavor; it’s a journey that requires meticulous planning, the right partners, and a clear strategy. To ensure the success of these transformations, key factors such as a well-defined set of objectives, choosing an appropriate core banking product, and an effective change management strategy are essential. The capability of the modernization program to encompass all necessary banking components is critical, along with a robust governance structure to oversee the entire process.

Core transformations offer numerous advantages, but their scale and complexity present significant challenges and risks. These challenges fall into technical, business, project management, data and vendor-related, and regulatory categories. Let’s take a detailed look at each of these challenges and their impact:

Technical challenges: Integrating new core banking systems with existing infrastructure and third-party applications is complex, especially when ensuring compatibility. Data migration from legacy systems adds to the challenge, requiring data integrity, accuracy, and consistency. At the same time, the new systems must be scalable to handle increased transaction volumes while maintaining enhanced performance and responsiveness.

Business challenges: Managing change across employees, customers, and stakeholders requires clear communication and strategic process re-engineering to leverage new core banking system capabilities. Additionally, effective training and adoption are crucial for success, while conveying the changes and their benefits builds trust among all stakeholders.

Project management challenges: The challenges arise in managing scope, timelines, and resource allocation while mitigating risks and managing stakeholder expectations.

Data-related challenges: The data-related challenges include ensuring data quality, accuracy, governance, and security during migration. It also includes maintaining and improving data analytics capabilities.

Vendor-related challenges: The challenges involve selecting the right vendor, managing relationships, ensuring deliverables meet requirements, and securing post-migration support.

Regulatory challenges: The regulatory challenges focus on compliance with data protection, licensing, audit, and reporting requirements, alongside managing associated risks. Each of these areas demands careful attention for successful project execution.

The challenges must be managed and planned carefully; as often observed, they can derail the entire initiative and delay the bank's transformation agenda by several years. Given the critical nature of this initiative, banks need to launch it properly, utilizing the right resources and tools to ensure success. Selecting the appropriate team, strategy, systems integrator (SI) partner, and core banking system will firmly set the bank on its path to transformation.

Mitigating risks and choosing the right path to modernization

When selecting a modernization strategy, organizations must carefully consider several key factors, including scope, readiness, existing core status, budget availability, risk appetite, and business priorities. To successfully modernize, it’s critical to define clear objectives (why modernize), choose the right migration strategy, select the appropriate core product, and ensure readiness for implementation. These steps are critical for minimizing the risk of failure and successfully modernizing the core system.

Why modernize – The objective

The outcomes of modernization typically fall into two categories:

Functionality-driven: In this case, the key driver of change is the need to address the gaps in the existing core banking system to provide the desired features and functionalities. This approach is generally suitable in situations where:
- Business requirements are complex and demand customized solutions
- Compliance with regulatory requirements is warranted
- Legacy systems require modernization through a structured approach.

Although this approach can lead to higher costs, longer implementation times, and potential integration challenges, it often results in improved business outcomes, enhanced customer experience, and increased efficiencies. Tier 1 banks typically opt for a functionality-driven approach as their legacy systems cannot provide customer-centric products and services.

Technology-driven: Here, the key driver for change focuses on more non-functional aspects, such as scalability issues, poor system performance, high maintenance costs, or vendor support termination. Banks and financial institutions generally pursue quick fixes, such as retrofitting (code rewrite) or upgrading their current systems, assuming that their existing functionality is adequate.

A technology-driven approach can offer faster time to market and resolve system performance-related issues. Still, it may lead to a quick fix that does not address deeper functionality gaps, leading to long-term problems. This approach is common among Tier 2 and Tier 3 banks using relatively newer and off-the-shelf core banking products, often requiring upgrades or performance tuning.

Migration strategy

Big Bang/replacement: This approach involves replacing the entire legacy core banking system with a new system in a single event. It is best suited for situations where there is a Greenfield implementation with no legacy to replace or banks with limited legacy systems. The Big Bang implementations were a part of the first-generation transformations, particularly from legacy mainframes to legacy core. Examples include systems from AS400/ main frame-based monolithic systems to core systems like Finacle, Flexcube, or Temenos. However, given the complexity, time, failure rate, costs, and risks involved, Tier 1 and Tier 2 banks are pivoting more to a progressive renewal approach with multiple alternatives as described below to minimize risks and have a faster time to market.
Progressive renewal/co-existence: The idea is to go with a gradual replacement rather than a Big Bang. The intention is to hollow out the existing core and replace it with a new one within a fixed timeframe. The progressive renewal approach helps reduce business, technology, people, and regulatory risks significantly. It can be further broken down into several alternatives, such as:
- API-based renewal – Banks integrate a third-party API with their existing core banking system to access cutting-edge fintech services without replacing the current core system. This strategy is ideal for banks with robust core systems but limited flexibility.
- Function-based renewal – This focuses on replacing specific components, such as payments or lending, rather than transforming the entire system. It helps in significantly mitigating the risk associated with a Big Bang approach, needs limited upfront investments, focuses on targeted improvements, and offers flexibility and stakeholder buy-in. The function-based approach is cost-effective and allows flexibility, making it suitable for banks with limited budgets.
- Hybrid – This approach combines old and new systems to create tailored solutions. It’s ideal for Tier 1 banks with complex legacy systems that need a customer-centric approach. The hybrid method helps save time and minimizes migration risks.

Core product selection

Choosing the right core product is crucial for successful modernization. The selection should align with the desired outcomes and depend on the bank’s experience and expertise of the product vendor and the system integrator. Across the spectrum, we see the following broader set of core banking systems to choose from:

Custom legacy – This is the first-generation core banking system, which is largely AS400 or mainframe. It is outdated and requires greater flexibility, agility, scalability, and customer experience improvements.
Traditional legacy – These are more established systems that have proven capabilities and functionalities. Some examples include Fiserv (Horizon), Jack Henry (Silverlake), Fiserv (Signature) and so on. While these have catered to the idea of a bank in a box, they are built on monolithic architectures and have been written using older programming languages.
Reimagined modern core – These are improved forms of a bank in a box with a configurable set of parameters and event-driven product configurations. Systems like Infosys Finacle, Temenos Transact, Oracle Flexcube, TCS BaNCS, Fiserv DNA, Finastra Essence etc.
Next-gen lite core systems – These are new breeds of coreless, headless, cloud-native, API-enabled systems that offer more flexibility to customize, integrate and use a plug-and-play approach. These are cloud-native, light core systems that hold the back-end functions within a ledger while allowing the front-end flexibility via APIs to integrate best-in-class solutions for CRM, lending, and payments. Examples include Mambu, Though Machine, 10x, Pizmo, Finxact etc.

While this system is still evolving across geographies and product suites, their modular, microservices-based architecture and low-code/no-code capabilities make them ideal for banks seeking operational efficiency and faster delivery of customer-centric, innovative solutions at scale.

Readiness to implement

This is a fourth dimension that influences the path that banks or FIs willingly pursue. Readiness refers to an organization’s ability to execute a modernization project, which includes business sponsorships, governance mechanisms, program management capabilities, skills, resources, and a supportive organizational culture. Tier 1 banks may have the ambition for modernization, but they often lack the readiness to execute large-scale projects. In contrast, Tier 2 or Tier 3 banks may have lower budgets but can be more agile in implementation.

From a practitioner’s point of view, readiness is the key, especially during large-scale legacy implementations, where strong leadership and a deep understanding of the product being implemented are necessary to ensure smooth adoption.

Core modernization is a complex and critical exercise. It is essential to evaluate all facets, including risk assessment, readiness, selecting the right product, and choosing an appropriate migration approach. A combination of these factors often leads one to a path of choice. Banks and FIs frequently try to take the more suitable path based on what they see with institutions of their size and scale, but they need to understand that there is no one-size-fits-all.

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