Banks by and large recognize the need to adapt their legacy systems to the demands of today's digital technology. But the problem they encounter is that making enhancements to a core system with ingrained inefficiency is like the expression popularized in modern times by the 2008 U.S. presidential campaign: putting "lipstick on a pig."
Most banks are bound to legacy core banking systems, where data is obstructed from moving between silos, thus inhibiting a number of possibilities. Take pricing, for instance. In legacy core systems, all pricing is hard-coded inside the system. To change a price or offer a discount, an IT team has to go in and manually recode the price in the core and the multiple systems that the core connects to, including the customer relationship management and billing systems. Translation: seemingly simple updates take months to complete.
Several U.S. bankers have told me in private that making a single change to a product can take more than 400 consecutive days to complete, with some taking well over 500 days, because products are hard-coded inside the core system and various silos.
That's just one example — there are plenty of other reasons — of why it's time for banks to pull the trigger on modernizing the ancient core system.
When the very system that administers the entire bank is old, creaking and breaking can occur. That was the case in recent system failures at Westpac, HSBC, NatWest and SunGard. And sticking with a legacy system can hamper an institution's efforts to innovate its product offerings. Trying to add digital channels on to the aging core just magnifies the defects of a legacy system.
To support digital channels, banks have built layers upon layers onto their legacy cores. But that data still remains bound by business line silos. The result? There is no clear view of customer need, no enhanced customer experience and no new way to win customer hearts and wallet share.
The need for traditional banks to change their foundational technology is only increasing as guerrilla-style market wars between incumbent institutions and disruptors are quickly becoming the norm. In the U.K., for instance, new digital banks like Starling, Atom, Fidor and Secco are emerging. Modern core systems, which the challenger banks are using, are created to be open and flexible so data can move quickly and ubiquitously, and optimize price on the fly.
To date, U.S. banks have had a regulatory moat protecting their territory. But American customers are demanding better services, products and experiences from their banks. Since a good offense is the best defense when it comes to battling digital challengers, American banks should study the U.K. market for clues to drawing up attack plans that should include overhauling their core systems.
To be sure, the high risk of a core replacement project is well documented. Industry skepticism about the return on such an investment is also high. Yet the payoff in achieving greater efficiency through replacing or modernizing a legacy core is also high. One other alternative is to enable noncore application programming interfaces — known as APIs — outside of the base core. The Open Bank Project and even regulations, such as a recent European Commission directive, have supported the adoption of alternatives to hard-coded core functionality, for instance.
If the challenger bank model is a blueprint, with API adoption as the battle plan strategy, American banks can augment their current core systems with a middle-layer blueprint where silos are breached, functionality is flexible and APIs can be easily integrated.
Banks must face the fact that their disruptor competitors are not slowed down by the question of what to do with an old core system. Already, challenger banks — mobile-based platforms emerging in the U.K. that have sought banking licenses — are operating with new core systems from scratch that provide functionality out of the box.
By redefining what a bank core system can and should be, banks can harness modern technology in the battle for wallet share and customer loyalty, and shed the mantle of antiquated systems. It's time to revamp the arsenal, not put lipstick on a pig.
After all, a legacy is something one leaves behind.
Ghela Boskovich is the director of global business development for Zafin. She can be reached on Twitter at @Ghela_Boskovich.