Go fast and smart: Hollowing out legacy core banking
Many financial institutions see the need to transition to modern digital environments. Most are already using more modern approaches to drive digital experiences. But looking more closely, the legacy core at too many banks looks the same as it did 30 years ago.
Many banks successfully avoided major migrations of core banking systems for years, but now customers expect more speed, innovation and agility.
You may be familiar with the saying “Slow is smooth and smooth is fast.” It’s a reminder that rushing creates problems and delays. Yet, when it comes to moving legacy core banking systems to modern environments, some financial services providers aren’t finding that saying to be true at all. Sometimes slow never quite gets to smooth or fast.
Why is that? Many banks and other financial institutions see the need to transition to modern digital environments. In fact, most are using more modern approaches to drive digital experiences like online and mobile banking. But looking more closely, the legacy core at too many banks looks like it did 10, 20, and even 30 years ago. Some of those legacy systems could be characterized as spaghetti code because they’re so unstructured and hard to maintain. Every little change must be tested extensively – or risk serious issues.
The cost of outdated core banking is high and getting higher. It takes too long to create the kinds of banking experiences people expect. This modernization priority became even more pressing due to the COVID-19 pandemic. More people turned to remote digital interactions. They came to expect a degree of hyper-personalization that’s hard to deliver with outdated core banking. And FinTech competitors don’t have the burden of outdated systems, meaning that they can deliver innovations to customers quickly.
At Amdocs, our experience with highly regulated companies, including banks, has taught us that there is a fast and smooth path to modernizing core banking systems. It’s one that lets banks stay ahead of FinTechs while reducing risk.
Risk aversion led to outdated core banking systems
Many banks successfully avoided major migrations of core banking systems for years – even decades – for good reason. The systems worked. They relied on batch processing, which was an efficient practice when these systems originated. Batch processing made less and less sense as time passed. For a time, banking customers were OK with transactions not posting quickly. But today, customers expect more speed.
Banks took a go-slow approach because adopting core banking systems based on more modern practices seemed too risky. What if something went wrong in the transition process? The cost of a major problem impacting critical systems seemed much larger than the loss of IT agility that came with sticking with legacy technology. For many years, that risk/reward equation was compelling. As time has passed, the agility cost of legacy technology has become higher – but the systems themselves now present risks. The people who designed them are long retired. It’s becoming harder and harder to maintain them reliably.
Hollowing out the core
Banks need to plan for moving away from as much of legacy systems as possible. A strategy known as hollowing out the core offers the smooth – but not slow – option banks need to catch up with FinTechs while also reducing risk.
When you hollow out the core, you methodically move processes from legacy core banking systems to a modern digital approach. You essentially replace the legacy core with a new core designed to deliver speed, redundancy, and security. For most banks, this will involve adopting a public, private, or hybrid cloud environment. Moving one or a few processes at a time reduces risk. When complete, you’re left with a “hollow” legacy environment that acts only as a ledger.
Hollowing out the core opens the door to approaches that make digital-first banking easier, including:
- API-driven microservices: With microservices, you divide applications into smaller services, such as account management or interest calculations. Dividing services into components makes it easier to enhance them individually without impacting the other services. You can think of microservices as the opposite of the monolithic approach of legacy systems. Application programming interfaces (APIs) let you connect the services so they can work in harmony.
- AI and machine learning: Artificial intelligence (AI) and machine learning enable customer-centric innovations and personalization. But they are compute-intensive and work better with modern architectures, such as microservices, making them difficult to incorporate into legacy environments.
- Automation: By automating route routine tasks, such as many aspects of product testing and security, you free your people to devote more energy to higher-value tasks. All but the simplest forms of automation can lead to issues within legacy environments.
With your core banking liberated from the constraints of spaghetti code, you can adopt project schedules that take you from idea to release in days or weeks – not months and years. Just as crucially, you can increase resiliency as you find it easier to meet the security standards of regulators.
Unleashing value
Banks like yours have the potential to propel themselves ahead of the competition by hollowing out the core. You already have a strong brand and a large base of customers. By moving away from outdated legacy systems, you can deliver the kind of banking experiences customers want. You keep your customers by offering great experiences with a trusted brand. You also have the potential to win new customers from banks that can’t keep pace.
At Amdocs, we’ve guided numerous rapid transformations of companies in highly regulated industries. By applying our compliance-savvy to projects, we help industry giants overcome constraints while avoiding risks. We’ve led projects at more than 40 banks. Those banks have seen some spectacular results including:
- Eliminating 250+ on-premise servers while adopting cloud at scale
- Increasing release cadence by 200%
- Boosting customer satisfaction scores by 50%
- Replacing a multi-month compliance backlog with real-time remediation
. Expect us to explore your needs with a focus on discovering the best path forward. We can help you make big changes without taking big chances. Our specialists work with financial service providers to build amazing customer experiences based on research, gain agility by embedding cloud banking compliance practices, and embrace ways of working that fuel innovation.
