Digital-First Banking

FIs Need To Renovate – And Relocate – The Core

To meet consumers where they want to bank — across mobile devices wherever they may be — financial institutions (FIs) must focus on re-tooling their core services in the digital age.

To that end, in an interview with PYMNTS, Vincent Caldeira, chief technologist, Financial Services, APAC at Red Hat, said that moving to the digital age will require banks to renovate their suite of core banking functions (checking and savings, for example) by moving to the cloud — and to microservices in particular.

 

The shift is increasingly necessary as the digitization of payments and commerce continues to accelerate, especially with the tailwind of the pandemic in place. Traditional FIs may be left scrambling to transform in a way that can meet customers’ expectations.

“In the digital banking world, the customer expects a ‘customer-centric’ experience across channels,” Caldeira told PYMNTS. “From their point of view, they want to be able to access their banking information and services anywhere and anytime.”

The technology challenge that confronts incumbent FIs is one where they must create a customer experience that is integrated across channels, which touches on everything from how the FI supports the customer, the data that is made accessible, and ultimately how that data is used (and even how banks personalize their services).

At the same time, FIs must develop relationships with customers that move beyond the realm of simply transactional interactions, and develop and leverage deep knowledge of those clients.

That’s not easy to do when a “rip and replace” of core banking systems and processes is too time-consuming and costly. Caldeira noted that such overhauls can take years and can stretch into the hundreds of millions of dollars (and that’s just for a mid-sized bank).

“The risk associated with it is just too high for any financial organization to undertake,” said Caldeira — and yet keeping the core stable is a cost center, consuming as much as one-third of FIs’ technology budgets.

Although not every core function needs to be moved to a modern infrastructure at once — in this case, the cloud — payments can be modernized as banks identify “which of the customer journeys are most important to the digital services those banks want to provide to their customers.”

In a nod to what Caldeira termed the “strangler pattern,” FIs can build new, digital versions of services that gain adoption from some customer segments — and then roll out that digital offering more aggressively at scale.

“The previous functionality in your core is eventually replaced,” he noted, while banks are able to maintain existing relationships with their key solutions providers.

FIs have also increasingly adopted other strategies, which hinge on adopting a “greenfield” core banking platform that is inherently digital — a separate and distinct unit managed internally by the firm. Customers are then migrated to this unit over time, Caldeira said.

“This is done as a totally separate business unit for banking and segments within banking, and it selects the best [digital] platforms for the job — and it’s also the place for innovation within digital banking services,” he said.

Looking at the initial steps that an FI can take to modernize its core and move to the cloud, Caldeira said it is critical to employ technology across multiple types of infrastructures that can test and automate security standards and speed up software development cycles.

“You must focus on this because it enables everything else down the line,” said Caldeira.

As FIs embrace container technology from a software vendor, they become enablers of microservices architecture, as the FIs are able to break their systems into multiple components that can function independently. Assuming that banks have modernized their core sufficiently, they can scale services up (or down) based on end user demand — a huge improvement over traditional systems, which operate in batch processes and require large engineering and software teams to keep everything up and running.

Said Caldeira of the movement toward digital banking, microservices and the cloud: “As you manage to evolve and break down the system to drive and implement new features, you can also achieve significant savings … and that’s the benefit of undertaking the core banking modernization journey.”

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