As financial services rapidly shift toward a digital-first paradigm, established banks are facing mounting pressure to provide the contextual, seamless, convenient financial experiences today’s consumers have come to expect. 

However, many of these institutions are limited by legacy core banking technology that can’t effectively support the development, deployment and scaling of these modern offerings–putting banks at a distinct competitive disadvantage to newer, digital-native providers powered by modern, cloud-based tech platforms.

For such banks to remain competitive in this fast-changing landscape, the picture is clear: they simply must upgrade their underlying banking technology to be able to provide robust digital services, lest they risk losing customers and eventually becoming obsolete. 

Despite the urgency of the situation, many banks remain hesitant to begin the process of tech modernization–whether daunted by the size of the task, mired in institutional inertia, simply unable to decide where to start, or some combination of those factors. Instead, they remain stuck at an impasse that’s rapidly becoming unsustainable. 

How to Start Your Journey Toward Core Banking Modernization

The good news for such banks is that there is a manageable way forward. By taking a strategic, considered approach to a technological overhaul, these institutions can achieve this crucial transformation in a way that’s sustainable, cost-effective and minimally disruptive to their business. 

For banks seeking to remain competitive and future-ready by modernizing their underlying technology, here are three tips to overcoming some key hurdles and remaining on the right path during this critical journey. 

1. Understand the cost of doing nothing

Adopting new core banking technology does require an upfront investment of money and time–a potentially significant outlay that is a common factor causing banks to put off much-needed upgrades in favor of a patchwork of short-term workarounds and quick fixes. 

However, this viewpoint omits another critical financial consideration; the cost of doing nothing. 

Simply put, legacy core banking systems are costing banks money–and lots of it. Outdated technology is projected to cost banks a total of $57.1 billion globally in 2028, up from $36.7 billion in 2022, according to a 2023 report by IDC. And beyond higher costs to maintain, these legacy cores also limit banks’ ability to earn revenue from digital financial services such as real-time payment (RTP) processing and buy now, pay later (BNPL), as well as next-generation distribution models such as banking-as-a-service (BaaS) and embedded finance. 

These opportunities are widely considered to be among the highest-potential drivers of engagement and growth for financial services providers, but banks can’t capitalize without the technological capabilities to support these offerings. 

2. Start with a Greenfield and scale strategically 

Traditionally, upgrading a banking core often took place on a wholesale basis–swapping out an institution’s legacy core for an entirely new system in one fell swoop. However, this “rip-and-replace” approach entails significant risk of service disruptions and potential failures that could jeopardize the security of customers’ funds and data. 

Fortunately, there are alternative approaches that enable this transition to be accomplished via more gradual, less risky processes. One such strategy is a sidecar core. In this model, an institution establishes a separate core banking system that coexists alongside its legacy core, with the new core only responsible for servicing a limited subset of specific services, products or customer segments, while the bulk of the bank’s operations continue to run on its primary, legacy core. 

This approach mitigates the effects of any unforeseen disruptions that may take place during implementation of the sidecar core, which remains fully separated from the primary core. Once the sidecar core is up and running, the bank can assess the impact, effectiveness and ROI of the sidecar before gradually migrating more customers and products to the modern core. 

Given these advantages, it’s little surprise that a September 2023 report by IDC projected that 40 percent of global banks will be pursuing a sidecar banking core modernization strategy by 2026.

Along with a sidecar core, there are other greenfield approaches to core modernization. For instance, a bank can build a new, digital-forward tech stack to support expansion into a new geographic market, new product rollouts–for instance, BNPL–and new business models, including BaaS. 

3. Find the right partners

Banks facing the need for a technological overhaul should realize they don’t have to go it alone. Fintech partners can provide valuable guidance on the path to tech modernization and enable connectivity to next-gen, cloud-based core banking systems with application programming interfaces (APIs) and open ecosystems. 

Start Your Bank’s Tech Modernization Journey With This API

Linking to these modern infrastructures gives banks access to advanced technologies that enable them to quickly develop and deploy digital services and innovative banking solutions–enhancing customer experiences, driving increased revenue and reaching new audience segments. 

By meeting evolving customer expectations for robust digital offerings, banks can beat back challenges from digital-native upstarts, maintaining market share and ensuring they’re in position to succeed well into the future of the banking and financial services landscape.

Contact us to learn how Galieo can help guide your bank’s tech modernization journey.