Banks Not Ready for the Cloud: Six Steps to Prepare for a Core Move

Many believe a tipping point has been reached and banks will start migrating their core systems to the cloud. That would be premature. Most banks still need to modernize other parts of their technology, particularly customer-facing applications. Here's how to get that done.

Capital budgeting processes require that all sizable investments exceed a target return on investment, typically above a financial institution’s cost of capital. Why is it then that bank technology modernization projects seldom deliver the desired results? Because financial institutions often approach the process as if they were constructing a new headquarters building.

Rather than scoping out a massive IT-modernization effort with ill-defined goals, banks and credit unions need to follow a systematic, incremental approach to improving specific customer journeys. Each project must aim to achieve measurable improvements to relevant performance metrics quickly. In addition, smaller projects are quicker and easier to assess for cost, making ROI projections faster and less prone to error.

Many financial institutions have shifted enterprise and client-facing applications to the cloud. However, most have resisted moving the core operating systems that record customer transactions. Barriers to core-system migration have fallen as public cloud vendors have improved security and reliability. Regulators recognize these enhancements.

The cost of maintaining the status quo is also rising. Finding talent to support decades-old software code is becoming increasingly complex and expensive. Even banks and credit unions that have successfully updated front-end applications to improve digital customer experience must maintain custom connections to their aging core systems.

Why Core Moves to the Cloud Won’t Happen Overnight

Many in the banking IT-services industry believe that a tipping point has arrived and that banks and credit unions will begin to migrate their core systems to the cloud, either the public cloud or a hybrid of public and private clouds. We disagree.

The shift of bank core systems to the cloud will continue to be slow, in our view, because most financial institutions still need to modernize other layers of their technology stack, specifically those applications that touch the customer. Prospective homebuyers, for example, do not see the plumbing but expect to see modern fixtures and utilities that work.

First Things First:

Before financial institutions can transition their back-end systems fully to the cloud, they must update customer-facing technology.

In addition, many traditional institutions fear disruption to operations during a core migration because of gaps in their understanding of the aged underlying code. Finally, some legacy players are unprepared for the shift in mindset and culture required to transition from on-premise to cloud computing. According to a  February 2021 Deloitte survey of 100 banks, just 20% of the total IT workload and 3% of core-system workload has shifted to the cloud.

So, where should banks and credit unions begin their modernization journey? With their data. Your team must address its data quality issues to have the foundation needed for modernization (yes, another house analogy, sorry).

For instance, the most advanced data analytics applications and tools (a “smart” house, if you will) are of little use without a solid base.

However, a bank or credit union doesn’t need to move all its data centers to the cloud. Instead, hybrid architectures often work best — a mix of on-premise and public or private cloud deployments. It’s far more effective to keep your data where it is while deploying a data management and analytics platform in the cloud. In addition, data analytics hosted in the cloud speeds and improves decision outcomes across the financial institution.

Think of it as remodeling your kitchen. The underlying plumbing hasn’t changed, but your upgraded appliances and layout enable you to create better meals more quickly and efficiently. Similarly, applications deployed in the cloud allow banks and credit unions to develop differentiated new features and applications much faster.

Leverage your core to create a scalable digital banking platform UX layer API orchestration data stores

6 Steps to Effective Cloud Migration

However, more important than choosing which applications and processes to modernize, and in what order, is establishing best practices for the modernization process itself.

Here is a six-step roadmap to application modernization that has worked for financial institutions:

1. Business alignment and impact

Align your application modernization business case to your financial institution’s business objectives, priorities and future view. Define the business imperatives and plan the modernization to unlock value sooner rather than later.

2. Hybrid-cloud architectures

Leveraging a modern cloud platform as the foundation for modernization efforts is imperative to gain competitive advantages. However, a hybrid architecture often works best. In other words, you can maintain at least some of your critical systems on-premise while moving the applications that can benefit most from a cloud deployment. In addition, cloud platforms provide the scalability, availability, global distribution, security standards and ready-to-use managed services essential to any modern architecture.

3. Incremental modernization

Avoid the considerable risk of disruption resulting from wholesale approaches to modernization. Instead, the recommended strategy is to break down the migration efforts into waves and incrementally “strangle” the legacy architecture into smaller and most efficient microservices.

4. Product mindset

Customer-centric design, focus on outcomes (not outputs), and an analytics-first approach to enable data-driven decisions are at the center of any successful digital product. In addition, customer experience is critical to improving key performance indicators.

5. New operating model

Legacy applications are often maintained and evolved using legacy software development practices and outdated processes. Therefore, reviewing the operating model, which includes Cloud and DevSecOps components, is foundational to a modernization strategy.

6. People and culture

A modernization program requires new skills, processes and mindsets. Ensuring proper change management, closing knowledge gaps and providing safety for people are essential to landing all the latest digital capabilities.

Bank Technology Modernization Essentials

Here are some other factors to consider in bank technology modernization:

Value for the money. Focus on the total cost of ownership, not just the initial cost of a solution. For example, competing software often entails similar design, implementation and operation costs. On the other hand, open-source software typically doesn’t carry licensing fees. Further, your analysis should focus on business impact.

Your team should also seek ways to pay for legacy modernization with savings or efficiency gains in other technology areas.

Speed to value — show progress early and often. The days of multi-year technology upgrades are fading fast. Thus, a modernization program must deliver benefits early and then regularly after that to secure and maintain senior management support.

Multi-disciplinary teams. Modernization is a strategic imperative, not just a technology matter, so collaboration must occur across the institution.

Don’t just replace systems, fix processes. When modernizing legacy technologies, simultaneously improve your business processes. However, avoid losing business rules and in-house knowledge that provide competitive advantages.

Our overarching message is to plan carefully to achieve impactful, incremental modernization of technology and business processes, starting with customer-facing experiences and ending with your back office.

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