Banks shouldn’t feel pressured into wholesale changes to their core banking systems, when the real battle for innovation and customer retention will be won with software and services sitting in the middle layer, says SunTec CEO Nanda Kumar.
“Humans have 70 different organs, and each has its own function. You don’t try to change the function of the cardiovascular system or ask it to suddenly operate the cells of the skin. You leave it to focus on what it is supposed to be doing. The core is perfect for the system of record, leave it there for that, as it is rock solid for that functionality.
“Old technology can co-exist with new technology, and you have to architect infrastructure in that way. When the infrastructure is created for the implementation of 5G, does that mean firms will go around tearing down 3G? Of course not.”
While banks are told by some vendors to replace and switch out their core infrastructure, many have taken the strategy of augmenting their existing platform, says Kumar. “Once that augmentation is done you can begin to hollow out some of those core functions.” That hollowing out is not in the sense of completely replacing the software, he adds, but rather moving some functionality over to systems operating outside of the traditional layer of the core.
“The battle is completely in the middle layer, not in the core. Even if you deploy a better ledger management system for tomorrow, what does that mean? It is not going to offer any fundamental functional capability for a bank. But what about a better credit rating mechanism, which can help a bank have a better understanding of the customer, or help them buy a home? That is where the phenomenal value lies.
“Even if you replace your entire core system, your new system cannot have the level of functionality which can be achieved in the middle layer,” adds Kumar. If you try to implant new logic systems and services into something built for transactions, he adds, it will end up becoming a bizarre platform.
Kumar says that SunTec has been in conversation with a lot of major banks in Europe and the UK since the introduction of both the second payments services directive (PSD2) and Open Banking. Initially those conversations didn’t go very far because most banks were focused on complying with the regulation.
“Now I can see a lot of people starting to talk about the possibilities and a new reality of needs-based banking. Look at what fintechs are doing in spaces like trade finance, where they understand the customer’s business in much more detail and place them within an ecosystem of services. Then the supplier, customer, and both parties’ transaction history sit within your own environments, it’s a pool of your own making.”
For Kumar, no matter the size of the institution, digital transformation is a phenomenon that must be faced up to. “If they don’t they will perish. I don’t think that is a debateable point, but your journey must be a stable one. Flexibility in digital transformation can be represented by your arm. Your fingers at the end of the arm are flexible and able to manipulate and move, but the forearm and biceps are rigid and strong. The middle layer, your new services and technological experiments with things like AI and machine learning, they will sit in that flexible hand, backed up by a strong and rigid core.”
Kumar believes that many large banks shouldn’t aim to build things from the ground up when good infrastructure is already in place. “The City of London is hundreds of years old. There are buildings in the City which were built long ago but when you go inside they are modern and have all the amenities you need. They have adapted to the modern needs and lifestyles of people. You don’t have to rip down the entire building and replace it with a shining glass house. In the future if a few walls or sections need to be removed you can remove them, but the building remains the same.
“When you try to change everything en masse you are putting not just the customer at risk but your own existence as a bank. Dealing with change in an evolutionary manner will allow banks to provide the level of intelligence, customer centricity, and experience management that is needed without ripping up the heart of your infrastructure.”