Banking is reaching a pivotal moment. The digital revolution has to a large degree leapfrogged the legacy technology that most financial institutions use, putting them seriously behind the curve.
This has forced banks and credit unions — and the technology suppliers they rely on — to bolt on new software applications to keep up with the online and mobile banking features demanded by customers.
For a time the industry has kept pace, but now more modern technology platforms are needed to reach the next level to meet customer expectations, put data to use more effectively, and embrace new business models including embedded banking.
Such platforms are now offered by the major bank technology companies as well as several specialized companies. But adopting a “modern technology platform” is fraught with complexity, expense and considerable risk. It’s no wonder few financial institutions have attempted it.
Yet taking the plunge now looks to be inevitable within a relatively short timeframe.
Both banks and their primary tech providers increasingly believe the entire banking industry will move to modern, cloud-based core systems within ten years.
The Financial Brand spoke with senior bank technology executive Andrew Beatty, Head of Enterprise Banking for FIS, to get his insights on the impending technology migration within banking — including timing, scope, importance and the right approach to take.
Beatty, a former banker, is a 24-year veteran at FIS, where he is responsible for both the P&L and strategy of the group that serves larger financial institutions as well as fintechs worldwide. Regional and community banks come under a different executive, but Beatty works closely with that group as well as the payments and capital markets divisions. Some of the comments below are from a Banking Transformed podcast interview with Beatty, conducted by Jim Marous, Co-Publisher of The Financial Brand.
How Quickly Will Banks Move Their Core to the Cloud?
As noted, only a handful of banks have replaced their legacy core systems with a modern, cloud-based system. But more are taking steps to do so. Regions Bank, for one, has announced a plan to move its primary deposit and loan systems to the cloud over a five-year period.
Beatty believes the core transformation journey in banking will run a little longer — more like five to ten years. Nevertheless, FIS has had a cloud native, API-first core banking platform — what it calls its Modern Banking Platform — available since 2019. The company had its best-ever sales quarter for the system in Q1 2022. However, Beatty would say only that the number of clients for MBP to date is “greater than ten” in various stages of implementation.
The system, which has been rolled out as a series of components over time, is targeted mainly at larger banks. MBP clients identified so far include Fifth Third Bank, BMO Harris, ANZ New Zealand and Tacoma, Wash.-based Columbia Bank (which is acquiring Umpqua Bank).
The timeline for industry conversion to a modern core varies, Beatty believes. “Not everyone will go at the pace that we want them to as an industry, or that they have to,” the exec states, “because there are some conservative organizations that want to see what happens. They want to map out their journey very methodically.”
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The Necessity for Bank Core System Transformation
Even though the timeframe may stretch for a decade, the need for banks and credit unions to modernize their primary technology system is moving rapidly from “important” to “crucial.”
“Certainly most institutions are going to have to make a change to remain competitive — to drive differentiation,” Beatty maintains. That’s mainly because the technology currently in use is outdated, he says. “One of the biggest challenges is how to find people that actually know these [legacy] platforms to work on them.”
The differentiation he speaks of is increasingly about nonbank competitors — fintechs and big tech companies that have technology geared to advanced use of data and artificial intelligence to serve up what consumers want.
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Tech-forward companies — especially Amazon and Apple — have raised the bar of customer expectations for almost every business, banks included.
The ability to use data effectively, appropriately and often instantly is key to meeting customer expectations.
“Easy access to data in real time is one of the key challenges that legacy institutions and legacy core systems have,” Beatty states. The ability to recognize and drive events that happen around a customer is crucial to remain competitive, he adds. Examples include notifications and alerts as well as timely and personalized offers or insights.
This simply isn’t possible with end-of-day or next-day transaction data —”stale data,” as Beatty calls it. “Artificial intelligence and machine learning software need real-time data to work.”
That’s why the Modern Banking Platform uses what Beatty calls event-driven architecture, operating in real time to enable institutions to act based on events or actions impacting customers.
Beatty notes also that digital transformation in banking must go beyond simply increased use of digital channels — it must be end-to-end within the organization.
“If you want true digital transformation, you can’t just do it in one part of the organization. You really have to transform the core system, your channels and the connectivity layers you have.”
— Andrew Beatty, FIS
Changes In What Bank Technology Needs to Do
One of the long-running beefs of financial institutions about bank technology providers is that they are slow to respond with new applications, putting small and midsize institutions in particular at a disadvantage. At one time such applications would have meant a mobile banking app. Now it’s more likely to be banking-as-a-service capability or open banking.
Beatty responds that the intent is for modern banking technology to become more “self-service,” giving banks and credit unions the ability to configure and launch products, “rather than wait for us to do it.”
The exec states that for the many community banks and small regional institutions that are already using FIS platforms like IBS and Horizon, MBP may not be the right choice. However, he says the company will introduce components built for MBP that will run on these existing smaller-bank platforms, but still provide the kind of modern experiences both the institutions and their customers need.
Some Suggestions for Moving to a Modern Core System
The strategy of core transformation is something of an art, Beatty states, especially how to phase it in. “What actually gives you the greatest advantage, but at the same time doesn’t disrupt you?” he asks. “You need to do this methodically and carefully and de-risk it,” he adds.
Here are several steps and considerations that banks and credit unions should consider:
- There is more than one approach to a core modernization. The “traditional” one is the “Big Bang” — replacing everything all at once. That’s likely to take years. While it is not the most viable option for larger institutions, says Beatty, a “big bang” can be done for smaller banks.
- Another option is the runoff strategy, which applies to banking products with lifecycle. When it’s time for a product, like a CD, to renew, you do it on the new system.
- A third approach is to stand up a new bank — perhaps one targeting certain business processes or a digital-only national bank — using a new tech stack and run it in parallel with the legacy bank.
- Regarding moving some or most of your technology to the cloud, Beatty says it’s important for bankers to remember that the cloud isn’t the entire answer. There are still supporting operations that must be in place for it to be successful, along with staff expertise in how to operate in the cloud.
- With institutions having greater ability to make changes and implement new products on their own, they need to be sure they have adequate controls in place for who can make changes, and for testing the changes.
- Finally, technology transformation is as much a cultural change as a technology change. “It requires a different mindset to go from thinking about features and functions to how those features will be used by consumers,” says Beatty, adding that “just moving from non-real time to real time computing is a big shift.”