I recently met with the senior team of a large bank that is evaluating a conversion to a modern core banking system. They articulated an interesting perspective of how they viewed their “core processing”. This in turn resulted in us discussing what “core processing” really means to their bank.
Asking what “core processing” really means is a new way of thinking. The core banking world today reminds me of my 1980s stereo with a built-in turntable, 8-track and hardwired speakers. Asking what “listening to music” means has led to some painful disruption for industries that were cannibalized. The same is true of the core banking industry when we ask what “core processing” really means.
Delivering something “as a service” (as in core as a service), implies the disaggregation of that service across technologies and even across players and industries. The value to customers is that disaggregation permits rapid integration of best of breed capabilities, versus being locked into a mediocre silo. It is the difference between keeping contacts in iCloud versus needing your phone company to manually transfer your contacts each time you changed phones. And it is the difference between having to physically buy a twelve-song album and being able to instantaneously listen to any song (or watch any video), ever created for a fraction of the cost.
In our recent meeting with the bank, their perspective was that “core processing” is “only” 1/5 of their entire IT functionality. While technically this may be true, it is like saying that my heart is only a fraction of what makes my body function. The question is how do you want to function? I remember my first marathon, and distinctly thinking as I approached the finish line that if not for my strong heart, the rest of my body would have been useless carrying me forward. Of course, one does not value a strong heart if all one does is sit on the couch. But what bank wants to be known for just sitting on the couch?
In 1906 the Italian economist Vilfredo Pareto published what led to the Pareto principle which generally states that 80% of the effects of something comes from 20% of its causes. This principle has been the driving force which separates leaders who accelerate, and those who lay comfortably on the couch.
Attributing “only” 20% of a bank’s IT and customer experience to “core processing” implies this bank is not getting value out of its core processing - and this is actually the very point of needing to modernize. Many studies suggest that 80%+ of a bank’s budget is spent care and feeding its complex IT stack. This is due in large part to core processing systems that despite repeated upgrades, remain outdated in their design and are complex to operate. Even some of the most modern core systems are not on par with the most modern approaches. Perhaps this is by design by vendors. The core banking industry is a bit like the music industry was pre-Apple, not wanting to cannibalize the 80% of its revenues it gets from the non-core processing stack.
By upgrading to a core processing system with a truly modern native cloud design, delivered commercially and technically “as a service", the entire IT stack becomes more valuable. Of course the modern core system will provide an order of magnitude cost savings relative to its 20%, but there will also be material cost savings for the other 80% of the stack. More importantly, the other 4/5s of the stack will benefit from
easier/faster/cheaper integration. And finally, the technical and commercial extensibility of modern core processing will allow banks and their best of breed partners to exploit new capabilities not available to competitors with outdated cores.
For banks looking to drive more value from the 20% of their banking stack represented by their core, the objective must be more than just an "upgrade”. An upgrade is like going from a flip phone to the Blackberry. The Blackberry works fine until you see the ever-increasing expansive capabilities of the iPhone. It is an entirely different platform in much the same way a modern core offers banks more than “just an upgrade".
Banks need to focus on a vendor's openness, extensibility, and elastic scalability. The best way to do this is through a side-by-side proof of concept or pilot program. With this approach banks can compare alternative cores by thoroughly testing the depth and breadth of a vendor’s “Three Pillars” of
- Elastic scalability
Each of these three pillars should be evaluated from three angles.
The first angle is a technical perspective, which includes time/cost/risk as it relates to data, integration, risk management, training, recruiting/retention, and maintenance.
The second angle is evaluating these pillars from a commercial perspective meaning not just each pillar’s economic impact to the bank, but also the vendor’s commercial terms around each. What are the terms, cost of negotiating, and willingness to modify terms around things like data access, third party integration, and scaling up (or down) an operation.
And finally, banks should assess each pillar with a time to market analysis, which includes the time, and cost to negotiate with vendors and a risk assessment of a vendor's ability and willingness to support a bank’s need to add new functionality.
Converting to a new platform, and new vendor, is daunting. But so is trying to make 80% of an IT stack stay current when just 20% of the stack is dragging everything else down.