6 minute read 2 Mar 2020
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Seven rules consumer banks must apply to modernize their core platforms

By

Ryan Battles

EY Americas Financial Services Banking & Capital Markets Principal

Advisory Banking & Capital Markets Technology Delivery Leader. Based in Boston. Enjoy watching sports and spending time with my family.

6 minute read 2 Mar 2020

By understanding the new rules of platform modernization, banks can increase the likelihood of achieving breakthrough performance gains.

For years, consumer banks have recognized the need to modernize their core platforms. The conventional wisdom held that such initiatives were the only way to enhance offerings and keep up with ever-rising customer expectations for intuitive and personalized digital experiences.

Today, however, the rules of core platform modernization have fundamentally changed due to shifting market dynamics and the promise of new technologies. Even the concept of a core platform — what it is, what it does and how it interacts with other technology — has evolved. Forward-looking banks are now aiming to create more flexible technology ecosystems that are less dependent on traditional core platforms. These “headless cores” are designed using common integration standards for shared experiences, process orchestration and data platforms. By breaking down the monolithic aspects of the current platforms and isolating the transaction management functions of the core, banks will remove technology constraints so they can innovate at a faster pace and on a larger scale.

1. The objectives are agility and ease of integration.

Today, the rationale for standardizing technology has evolved and pivoted horizontally. That is to say that the main concern is no longer at the level of business applications, but rather on cross-functional platforms that preserve a consistent experience across all points on the customer journey. Common integration standards are a critical aspect to support this strategy. Such standards are important because they make it faster and easier to “snap on” new tools that can benefit customers or “plug in” to external data sources or marketplaces.

Such an approach gives banks smoother and faster access to a wide range of new technologies and valuable data sources. It also promotes business agility by increasing the speed to deliver new products or channels and deliver new services to customers based on new technology and data.

2. Competition has always counted, but the competitors have changed.

Competitive factors used to play a secondary role in core platform modernization as geographic boundaries, economies of scale and regulatory moats provided banks with protection from competition. Those protections reduced the urgency of IT projects.

Today, those competitive barriers are quickly eroding. New and nontraditional competitors — ranging from FinTech startups to tech giants — are encroaching on banks’ established lines of business and attracting key segments of their customer bases. Convergence across financial services sectors has also raised the competitive stakes.

As a result, the need to differentiate is now a primary driver of tech innovation — and, therefore, of core platform modernization. Because the competition is different, banks must take a different approach and rethink the role of the core.

3. Goodbye monolithic platforms and “big-dig” implementations. Hello open platforms and smart integrations.

Yesterday, banks wanted the biggest and most fully featured software packages they could get. They were typically configured and customized to meet the internal needs of the business, aligning to existing product sets, functional processes and organizational boundaries whether that made sense from customers’ viewpoints. Big-dig implementations and rip-and-replace upgrades were the rule.

Today, banks should define their IT needs, including the optimal design of core structures, based on their product and customer growth strategies. They should avoid the trap of letting their existing cores determine which products can be developed and launched. That will give banks a range of options, from several cores within the same product line to multiple adjacent cores to offer unique product attributes, and in a way that eliminates the traditional silos within financial services.

The ideas should be to design core platforms to enable operational agility across the business and eliminate the constraints of legacy architectures centered on monolithic platforms. Smart integrations hold the key, no matter whether banks have individual cores supporting multiple products or individual products supported by multiple cores.

4. Flexibility is critical because new technologies typically need updated cores.

Today’s most powerful enabling technologies didn’t exist when most banks implemented their last core platforms. Many banks have been deploying artificial intelligence (AI) and cognitive services, and managing them in an ad hoc fashion or via targeted pilot programs. The use of native cloud technology has largely been pushed to lower-priority applications, traditional web applications and data platforms.

To generate maximum value from investments in these and other disruptive technologies, banks must learn to embed them across more parts of the business more efficiently. Deploying powerful technologies successfully requires thinking beyond boundaries to enable accessibility and scalability. They must also manage them more robustly as part of everyday IT operations and not as standalone science projects. A modernized core platform must be able to orchestrate all of these multiple powerful technologies, even as they become more powerful in the future.

Banks will need to be flexible and willing to manage constantly evolving hybrid environments.

5. Experiences and open ecosystems trump applications and infrastructure.

In the past, core platforms supported limited third-party services, using them to enrich internal applications and data repositories, most of which were managed on-site or through corporate data centers. Banking was essentially a closed ecosystem and banks were in full control.

The current drive to open banking standards started with a focus on transparency and data portability. However, it also enables ecosystem experiences by streamlining data sharing with third parties and diverse infrastructures, typically via the cloud. Such external connections — including potential collaborations with FinTechs — represent the shortest path for banks to produce innovation and deliver attractive services and experiences like those offered by Uber, Netflix or other digital leaders. That means core systems are only as good as the tools, data and experiences they enable banks to deliver via open ecosystems.

Core systems are only as good as the tools, data and experiences they enable banks to deliver.

6. Your data wants to be accessible and useful.

Historically, banks have tried to capture as much data as possible and keep it locked down. They wanted it all to be internal or “first-party” data. Even though data volumes were tiny compared with today, they weren’t analyzed as fully or sophisticatedly as possible. Just having the data seemed to be enough.

Today, everyone understands the massive power of data. That’s why they seek as much as possible and in as many forms as possible. But they also recognize that data must be actively used. Indeed, there is a widespread consensus that tomorrow’s most successful banks will be those that most effectively unlock the value of diverse data — not only their own, but third-party data too. Unstructured external data can greatly enhance analytics and lead to powerful insights, which are among the scarcest and most sought-after commodities in the industry.

The most valuable insights are those that are actionable and can be monetized.

7. Trust and security are built into platforms, rather than being barriers to accessing them.

Banks have always prided themselves on being trustworthy brands and companies. But in the digital age, trust has taken on entirely new dimensions, thanks partly to cybercrime. Strict security is needed, but banks can’t afford to lock down key processes. Instead, they should look to instill trust and strong security principles directly into their ecosystems, experiences and products.

Modernized platforms help ensure banks can instill trust as they share data and integrate with more players and more systems. Beyond a consumer focus, future business models and high-performing ecosystems will be based on such fast and widespread data sharing, even as the volumes of data being shared increase dramatically. The right approach to commercialization requires robust security.

Banks should look to instill trust and strong security principles directly into their ecosystems, experiences and products.

Summary

The core's role has been reduced, thought it's still important. To a large extend, the main job of a core today is to get out of the way - that is, not prevent business from launching new products quickly and delivering the experiences customers expect. The new rules of core modernization reflect that banks must move to futureproof their operations and aproach to IT. It's imperative because customer expectations will only rise, the pace of change will only accelerate and the competition will only grow more intense.

About this article

By

Ryan Battles

EY Americas Financial Services Banking & Capital Markets Principal

Advisory Banking & Capital Markets Technology Delivery Leader. Based in Boston. Enjoy watching sports and spending time with my family.