Modern core banking capabilities are a must for financial institutions that wish to remain competitive by offering the flexible, digital-centric services today’s consumers demand. And for the many FIs still operating off of outdated legacy banking cores, that means the pressure is on to upgrade their systems–lest they risk falling behind competitors that can provide these modern banking experiences. 

However, core modernization is a major undertaking, involving one of the bedrock elements of a bank’s operations–and bringing with it the risk of potential high costs, business interruptions and security failures if not carried out in a well-considered, highly strategic way.  

Why FIs Must Upgrade their Banking Cores to Compete

Given these high stakes, it’s crucial that a bank carefully plot out each step of its path to core modernization before setting out. To help guide this journey, here are three key factors to consider that will help an FI evaluate its readiness for core modernization and determine the best way forward toward accomplishing this business-critical goal. 

1. Define the need for core modernization 

Because of the significant scope of a banking core modernization initiative, it’s essential that the motivations and goals behind such a project are clearly defined and communicated to key stakeholders, including executives and business leaders, and shared throughout the institution as a whole. This organization-wide buy-in is key to avoid misaligned motivations that can derail the core modernization process. 

Fortunately, as banking’s inexorable shift to a digital-centric paradigm continues, the case for modernizing core capabilities as a competitive priority is growing ever-more apparent. Indeed, in a February 2024 Cornerstone Advisors survey, 60 percent of banking leaders polled cited digital-native fintechs as a significant threat to their business–a significant increase from 47 percent a year earlier. Meanwhile, 49 percent of c-suite and senior executive-level respondents in an American Banker and Galileo study said that implementing a next-gen core banking platform was a top priority in the immediate term. 

2. Account for the financial factors–and the cost of doing nothing

The prospect of revamping an entire banking core may seem daunting. Along with potential operational interruption, installing an entirely new core banking system all at once can involve a significant upfront financial cost. Further, the benefits of such an upgrade accrue mostly over the longer term–thereby extending the timeline to positive ROI. 

Create New Revenue Streams with a New Core Banking System

Taken together, these factors may cause banks to shy away from upgrades in favor of workarounds and band-aid approaches. However, this view is short-sighted, and omits perhaps the most important critical financial consideration of all: the monetary consequences of inaction–or the so-called “cost of doing nothing.” 

A 2023 study by research firm IDC found that using outdated technology cost banks more than $36 billion in 2022, and projected that figure to skyrocket to more than $57 billion by 2028. Meanwhile, research from McKinsey revealed that operating costs for banks still running off of outdated cores averaged 10 times higher than those with next-generation core systems. 

Simply put, legacy core banking systems are costing banks in a big way.

3. Consider the benefits of incremental core modernization 

Banks need not approach core modernization as an all-in-one shot. Instead, they can achieve critical upgrades through a strategic, phased technological transition–making incremental progress and then assessing the impact, effectiveness and ROI of each advance before progressing to the next step. 

The benefits of this phased approach are attracting a growing number of FIs; Industry research found that more than half of mid-market banks (those with $10 billion to $100 billion in assets) said they favored a progressive transformation to gradually reduce their dependence on legacy core banking systems. 

One particularly promising example of incremental banking tech modernization is a sidecar core–a strategy 40 percent of global banks will be pursuing by 2026, IDC projected. Under this model, an FI establishes a separate core banking system that runs parallel to its legacy core, but which is only responsible for servicing a limited subset of specific services, products or customer segments. 

Once the sidecar core has proven its value and reliability, the bank can move additional customers and products to it, gradually increasing the proportion of its offerings that are underpinned by cutting-edge digital-native technology. 

Want to learn more? 

Contact us to begin planning your journey to banking core modernization.