For many years, U.S. banks have been reluctant to replace legacy core systems, largely due to the cost and risk involved and the sheer scope of the endeavor.
But signs abound that financial institutions increasingly view the risk of not replacing legacy systems as greater than any risk they may incur by doing it.
"I would say we are reaching a tipping point," said Peter Olynick, senior practice lead for retail banking at NTT Data Consulting. "Five or 10 years ago bankers would have probably said they have less risk staying where they are."
NTT surveyed more than 100 bank executives this year on the topic, and a majority said their current systems don't allow them to adapt to rapidly changing market landscape, Olynick said.
"Antiquated legacy systems are impeding the ability to pursue growth opportunities, improve customer experience and mitigate operating risks, as well as support digital banking needs," he added. "Legacy core platforms are an anchor on [banks'] ability to be innovative."
Still, while many bankers now acknowledge the need to replace legacy core systems, they are just getting to the "assessment" phase, and may not have the technology in place for several years, Olynick said. Financial institutions that were early on the curve of installing modern core systems will have a competitive advantage, he added.
"The handful of banks that have already made the investment are going to be in a much stronger position," he said.
That handful includes Birmingham, Ala.-based BBVA Compass, which underwent a core systems transformation in 2013, in part so it could better take advantage of newer technologies. The $56 billion-asset Zions Bancorp. is another large institution that in recent years rolled out a new core. Among the smaller players, Community Trust Bank in Ruston, La., took the plunge and replaced its core last year. And Bank of Prairie Village in Kansas did a core conversion last year so its chairman could leave a viable business for his sons, who are set to take over the bank eventually.
Vibrant Credit Union in Moline, Ill., replaced is legacy core on March 1 with a new Fiserv DNA platform. Fiserv, founded in 1984, began offering DNA when it acquired Open Solutions in 2013, seven years after that software was rewritten.
Vibrant is a small institution ($425 million in assets) to undertake such a major project. But the credit union decided that in order to stand out and grow in the future, it needed to take the risk, said its CEO, Matt McCombs.
"We looked and acted like that $4- to $500 million-asset institution," he said. "We did a good job, but were kind of stalling out. We were a little above peer level in terms of growth, but didn't see our ability to make a dent in the industry long-term"
McCombs said the institution was hindered by its legacy core platform, which took two full-time programmers to maintain just to get through the month.
"And our speed to make changes to products or services was virtually nonexistent," he added. "We knew there was no way we were going to survive unless we can make adjustments instantly."
So in late 2014, Vibrant decided to go to a new core, or as McCombs puts it, "We could have stayed where we are, and continued to perform all right, or we could rock the boat."
Vibrant began the core conversion process in early 2015. The executive team handpicked seven vice president-level executives to serve on the conversion committee. These executives were relieved of their normal duties for this time so they could focus on the conversion. McCombs said this was essential to creating a smooth process.
"We didn't want individuals who also had a day job on the core conversion team," he said. "We wanted it to be folks who were totally focused on it."
When Vibrant went live in March it was a relatively smooth process — there were a few hiccups, most notably with the online banking service, which was down for 48 hours; McCombs said that was the fault of the online banking vendor and Fiserv helped resolve the issue.
Now with the new infrastructure in place, Vibrant can adjust interest rates within an hour, a process that previously took 40 hours of programming under its legacy system. It is also in the process of revamping its credit card and checking account portfolio.
As a smaller institution it is essential to have these capabilities, as the big banks and super-regionals continue to eat up market share, explained McCombs.
"From a community financial institution perspective, we tout a lot of the things we do well, but when you peel back the onion there's also a lot things we struggle with. It's a risk [to do a core conversion] but something we felt we had to do."
NTT's Olynick says there will be more stories like Vibrant's, since many banks' strategy of adding application layers to old technology infrastructure will soon become untenable.
"It's like adding a Tesla engine to a Model T chassis," he said. "You can probably make it work but it's not going to be easy."
Another impetus to pursue core conversions is that new technology will allow faster access to data. This would enable banks to work more effectively with application programming interfaces (which let different pieces of software talk to each other) and get a better handle on customer behavior.
"Legacy systems are struggling to keep up with data flows; the ease of ability for data to move around is hindered," said Wes Wilhelm, a fraud and risk management expert with the tech and consulting firm NICE Actimize. "This affects everything from marketing [to] performance analytics [to] risk management systems. It's difficult for most [financial institutions] now that have data in so many different silos."
Wilhelm said stacking more functionality on old systems isn't a permanent solution.
"It makes everything run slower," he said. "I do believe banks are now finally looking at how they can get a core replacement done. It's a burgeoning trend we'll start to see more of."