Beyond the Core: Rethinking the Path to Modernization for Banks

Why banks today must think outside the core and adopt a new approach to transformation initiatives

For much of the last decade, banking technology modernization has been viewed through a single prism that continues to fall short of progress in keeping pace with evolving consumer expectations. Today, the industry has reached point where it can no longer afford missteps when allocating funds to technology research and development.

Insider Intelligence predicted that by the end of 2023, U.S. banks will have spent nearly $93 billon on IT and tech expenses, up from $85.5 billion in 2022. However, the majority of that spend is allocated to maintaining current systems and signals a plateau in ROI. The figure also fails to consider powerful market events that are forcing companies to rethink their strategies. Many banks today are adjusting to new economic realities, and cutting spending across the board – which includes pausing major technology initiatives such as core conversions. But that doesn’t necessarily mean the path to technology modernization is lost. Instead, financial institutions can pivot strategies.

Some banks believe core transformation to be a viable path to digital modernization. Certainly, cores have advanced over the years and replacement may be a necessity for some. But core conversion alone is a narrow approach that fails to take the full picture into account – a reality that is critical for banks to grasp lest a history of technological constraints, inefficiency, and diminishing ROI repeat itself.

What has happened over the years, particularly in the last decade, is that banks have implemented a variety of siloed systems to introduce new products and keep pace with growing consumer digital demand. While necessary at the time, these disjointed solutions have caused mounting operational chaos behind the scenes as banks stretched themselves thin to maintain them. Banks are now left spinning their wheels, and there is a growing belief that the core is the culprit. A recent survey from the American Banking Association found that less than half (47%) of banks were satisfied (to varying degrees) with their core providers in 2022, down from 59% in 2020.

However, the blame placed on core providers is not entirely deserved. Tracing back steps taken by banks to adapt and survive in a period of explosive technological change – cores were cleverly augmented with external systems and point solutions that served as stopgaps but were never well integrated with each other. To put it simply, the role of the core has been extended well beyond its intended purpose, resulting in siloes and manual process requirements - a challenge no core was designed to address.

The starting point to digital modernization begins inside the bank. While the front-end experience is important for customers (and the employees that assist them), how the bank tackles bringing together various processes between the core and customer channels is vital. Without a common platform to manage this, true automation will remain elusive and never come to fruition. The implementation of an orchestration layer, and not necessarily core transformation, will give banks that level of operational efficiency and ultimately enhance the customer experience. If a bank’s operations is in constant flux because of disjointed systems, the bank must continue to rely on error prone, manual processes on the backend.

For example, a customer enters the branch with a loan offer letter they recently received in the mail. When a bank employee attempts to find the specifics mentioned in the letter, they are unable to find the details in the various front-end systems used for customer service. It’s only when that employee goes into back-office systems that they’re able to find the loan offer details. The overall process creates a dismal customer experience. In turn, that experience could lead to a missed revenue opportunity at a time when banks are fighting to drive more value out of the deposit relationship they have with their customers.

Another example, which I often cite in my conversations with banks, is how a simple customer address change can turn into a logistical nightmare. The myriad of disjointed systems behind the scenes requires middle and back-office bank employees bouncing between multiple open tabs and screens to service the request.

Traditionally, banking cores did provide some of the unification, but most are now running near or at their limitations – finessed beyond their primary mandate by banks endeavoring to meet customer expectations.

This may also be why we’re seeing some of the next-generation cores that have come along in the last several years simplify their offering and do the basics well. But if that is the case, what will support the rest of the bank? How will banks be able to truly modernize and deliver an exceptional, seamless experience for their customers?

It requires a major shift in focus. The industry can solve the technology problem and drive innovation, but it must be done from within the operational framework of the bank. Banks must view their institutions in three layers: transactional, operational, and customer-facing. Focusing on operational orchestration will help to eliminate the siloes  brought on by disparate systems, and empower the people that drive the bank to leverage the full potential of the innovations banks have invested in over the last two decades. The chasm that exists between the back-office systems (and the employees that run them) and the customer-facing channels has grown to become the biggest obstacle for banks to deliver a truly modern banking experience.