Banking is a battlefield

Picture of Injured Piggy Bank WIth Crutches

For anyone who wasn’t around for the 80s, any karaoke bar experience virtually guarantees that the Pat Benatar tune “Love is a Battlefield” comes to mind when anything is called a “battlefield”: banking included.

Sad thing is, when it comes to core banking systems, legacy status means any claim of “we are young, we are strong, no one can tell us we’re wrong” is laughable at best, an utter lie at worst.

My recent post in American Banker’s BankThink argues that a legacy is something one leaves behind. And here, I assert that cleaving antiquated cores is the only sound strategy; keeping legacy core systems gives only a hollow and Pyrrhic victory at best.

Most banks are bound to legacy systems, where data is siloed and moving data between those silos obstructed. Data sticks together like any good battalion, and banks have built layers upon layers onto those legacy cores to support mobile and digital channels, but that data still remains rank and file, bound by business line silos. Result: no full view of customer needs, poor customer experiences, no champions for customer hearts and wallet share.

Taking aim at inflexible legacy systems

Guerrilla style market wars, though, are quickly becoming the norm. Going up against new challenger banks like Starling, Atom, Fidor and Secco requires a nimbleness on the battlefield, and a set of tools in the arsenal with names like innovation, flexibility, real-time, speed-to-market, all-digital. Modern core systems are architected to be open, flexible, and let data move instantly and ubiquitously. Traditionally siloed business lines now flood data that help the nimble neobanks build connections with customers through personalization, nuanced pricing, and faster customer service resolution.

Legacy systems are fundamentally incapable of keeping those tools sharp, let alone ready to wield.

Rallying the banking battle cry

To date, U.S. banks have had a regulatory moat protecting their territory, but the battle cry hasn’t gone ignored, and American customers are also demanding better services, products, and experiences from their banks. Here’s where a good offense is the best defense when it comes to encroaching digital challengers, and American banks should study the U.K. market for clues to drawing up attack plans.

The bastion of legacy technology invites problems: recent failures from Westpac, HSBC, NatWest, and SunGard prove this. When the entire foundation of the technology supporting the bank is old, creaking, prone to failure, inhibits innovation offerings, and leaks revenue, it’s time to stop debating the merit of upgrading or enhancing core systems; it’s time to act.

The high risk of a core replacement project is well documented; industry skepticism for replacement ROI is also high. But new strategies have emerged that address mitigating the risk of a rip-and-replace approach – all of which first and foremost address what the definition of a core system ought to be.

Reduced to its most basic functionality, a core system is a record keeper for transactions, updater of the General Ledger, and manager of balances. But industry and customer demands have put the onus on core systems to be all things to all people, and over the last 20 years core providers have tried, unsuccessfully, to meet that demand. In a recent post, banking systems analyst Martin Whybrow predicted that core solutions that componentise their systems will see those component markets invaded by new niche suppliers, because a single core panacea offering is, well, rather mind-bogglingly complex and unlikely.

One core upgrade risk mitigation strategy is to layer non-core API functionality onto the base core. The Open Bank Project and even regulation such as PSD2 have supported the adoption of alternatives to hard-coded (limited) core functionality, especially when those products and applications are in such demand by the end customer.

Challenger banks’ core systems are architected from scratch to componentise functionality outside of the traditional core system: no longer is every product managed and priced from the core where any product change requires a team of coders to make updates in multiple systems before the new attribute, term, or price can go into effect. Private comments from banks confirm the lengthy campaign: 500 days to make a single price change.

Due to the absence of silos, the magnified data aggregation also translates into a sharpened pricing. Pricing optimization becomes a rapier weapon, and mitigates the downward pressure on margins, both from diminishing fee returns (the new cap on interchange fees for card payments in Europe being the most recent example, and in the US continued pressure to revisit Dodd-Frank, and repeal the Durbin amendment), and competitive offerings from new entrants.

This componentized functionality means the core does what it does best: it credits or debits the General Ledger. The components do what they do best: manage products, facilitate pricing optimization, aggregate business intelligence, facilitate analytics, process payments, and support digital channels. It also means the operational, time-consuming burden of perpetual core updates is eliminated. The core battalion remains strong, but guerilla groups are responsive, flexible, nimble. Response to customer demand can be swift. Competitive relevance is restored.

Core modernization does not necessarily dictate a replacement, but it does demand extracting functionality – like pricing – outside of the legacy core. Even in full-fledged core replacements, American banks can approach a system overhaul by creating that external functionality as the first step in a core migration path, gaining flexibility right from the start.

The industry has recognized that the old definition of a core system should be just that: a legacy left behind. By re-scoping and redefining what a bank core system can and should be, harnessing technology as modern tools – even as weapons in the battle for wallet share and customer loyalty – banks can shed the mantel of antiquated, strengthen their services, and head in the right direction. It’s a battlefield out there. It’s time to revamp the arsenal.

This blog post was written by Ghela Boskovich, Director, Business Development at Zafin. You can email her directly at ghela.boskovich@zafin.com