Download the latest Embedded Finance Tracker®, a Galileo and PYMNTS collaboration about why FIs must upgrade their banking cores to compete

Traditional banks are facing a major challenge from digital-native fintechs–and the competitive pressure to upgrade is growing fast; 60 percent of banking leaders tabbed these upstarts as a significant threat to their business in a February 2024 Cornerstone Advisors study, a significant increase from 47 percent a year earlier.

But despite being well-aware of the rising existential threat, banks often find themselves restricted from upgrading and deploying digital products and services of their own due to outdated banking cores. Often decades old, these legacy systems tend to be siloed, clunky to operate and difficult to upgrade.

However, a whole-sale renovation or replacement of an entire banking core is simply a non-starter for most FIs, due to the high cost, time, complexity and operational risk inherent to such a “rip-and-replace” upgrade.

How to Start Your Journey Toward Core Banking Modernization

The good news for banks is that there’s an alternative approach to tech modernization–one that’s more cost-effective and less risky than rip-and-replace. By supplementing legacy technology with application programming interfaces (APIs) on an incremental basis, FIs can accomplish a strategically phased technological transition–forging a steady, safe path into banking’s digital future.

How big is the fintech threat to banks?

As recent statistics have shown, fintechs are steadily encroaching upon financial institutions’ traditional turf. In the first half of 2023, digital banks and other fintechs accounted for a whopping 47 percent of new checking account openings, up from 36 percent in 2020, according to an April 2024 Cornerstone report.

Consumers also are showing a willingness to abandon traditional FIs altogether. A November 2023 PYMNTS Intelligence survey found that 41 percent of respondents who held their primary bank account at a digital-only bank also held their primary credit card through that same bank. Those results indicate that a large percentage of consumers are comfortable using a digital bank to fulfill two mainstay financial functionalities that traditionally were dominated by established banks.

What’s more, the personalized, mobile-centric services offered by fintechs and digital banks are highly desired by younger consumers, PYMNTS research has shown. And members of those demographics are very willing to switch financial services providers to obtain these capabilities; Forty-four percent of Generation Z consumers that bank with traditional FIs reported changing their banking relationships in the previous month, according to a March 2024 PYMNTS Intelligence study.

How can banks respond by upgrading their cores?

Given the technical shortcomings holding banks back from effectively competing with digital upstarts–and the business risk that competitive disadvantage presents–it’s clear such FIs must upgrade their core tech in order to remain viable over the long term.

On the other hand, the short-term cost, complexity and risk of swapping out an entire banking core for an upgraded system is daunting, and too much to bear for many banks.

But banks have a way out from this proverbial rock-and-a-hard-place situation: the progressive modernization of core systems by supplementing legacy technology with APIs. This phased upgrade approach is being leveraged by a significant number of banks, including 87 percent of FIs surveys in an April 2024 study by Endava, compared to just 13 percent of respondents that opted for a full-scale core replacement.

By leveraging APIs to significantly augment their core systems, banks can finally offer competitive digital services and specific functionalities to customers, without necessitating extensive infrastructure changes. In this way, FIs can reap the benefits of innovation while avoiding the risks and complexities associated with a complete overhaul, ultimately driving better outcomes for customers–and a brighter future for their business.

Want to learn more?

For more on how banks are leveraging phased tech upgrades to meet the competitive challenge presented by fintechs, download the latest Embedded Finance Tracker®, a Galileo and PYMNTS collaboration.