Spotlight

Beyond the Core: The Bank Modernisation Series

Part One - Empowering banks to modernise effectively

By Jody Bhagat and Krishna Aswani

Modernisation in banking is no longer a choice - it's a matter of survival, particularly in the competitive US landscape. Caught between using older, outdated technology and adapting to a digital-first world, financial institutions are at a critical point. 

The pressure to change is real and it’s here. National banks and neo-banks are winning the battle for new customers, while mid-tier banks are struggling to compete. Large national players, such as JPMorgan Chase, are leveraging their immense size and deep pockets to differentiate in both their digital prowess and acquisition capabilities.

Agile fintech disruptors are reshaping the landscape - and capturing market share. New players are setting market-leading standards for customer experience, unburdened by legacy tech stacks and tech implementation debt. How is that debt built up? According to Gitnux research, banks spend an average of 78% of their IT budget to simply maintain their legacy core tech platform, siphoning operating budgets that could otherwise go towards customer innovations.

Mid-tier banks - traditionally ones with a strong regional footprint - in particular are facing multiple pressures. Customers, inspired by the latest tech at their fingertips, demand 24/7, real-time, personalised digital experiences. Regulators, meanwhile, are pushing for granular and timely reporting on topics such as security, risk and operational resilience. 

Mid-tier banks are also facing a squeeze on their net interest margins, through rising costs for attracting and retaining retail deposit funding. Updates to legacy core technology - software infrastructure that runs the fundamental, back-end operations - improves the ability to perform dynamic pricing or product innovation to better compete against larger institutions.   

A sustained wave of M&A activity presents an existential threat to lower performing US banks - particularly ones with thin margins and little to differentiate them from the next bank down the road. 

The heart of the matter

The coming surge in M&A deals, where the potential for acquisition by institutions that have invested in modernisation and operating efficiency is only increasing, has created an inflection point. For those that invest wisely, there is an opportunity to create a more solid platform on which to expand.

Not surprisingly, core transformation - the process of replacing old mainframe systems with modern, flexible platforms - ranks near the top of banks’ priorities. McKinsey research has suggested that around 70% of banks consider it a top priority. However, even the term “core transformation” can prompt a visceral reaction from some banking executives akin to whatever the corporate equivalent is of open heart surgery.

This core banking space has long been dominated by a small number of traditional providers in the US. Staggeringly, despite their well-documented limitations, these providers still control around 70% of the market.

While the latest offerings of these incumbent providers are more cloud-friendly, they lack the flexibility and openness of truly modern, cloud-native offerings. Some have been burned by implementing so-called “thin” modern cores that place an enormous burden on the part of the bank to compose a platform that has all the required operational capabilities. 

In order to gain sustainable advantage, banks must undergo a true bank modernisation program to drive business outcomes - facilitated through effective core transformation. Bank modernisation programs are management-team led rather than CIO led, and their objectives reflect a balanced scorecard of strategic outcomes, rather than tactical goals of reducing risk and maintenance costs. 

The data driver

So how does this relate to that key currency of our times - data? Well, it’s good news for the forward-looking banks. A fully integrated platform built on modern core tech can produce huge amounts of granular data previously locked away in outdated systems. A unified data model enables banks to deliver seamless, personalised services for customers. A solid data foundation also empowers a bank’s workforce to better serve customers, with the full breadth of information at their fingertips. 

Ultimately, bank modernisation, enabled by new, innovative core tech can completely transform a bank's foundational capabilities. It establishes a superior, automated controls environment, embedding security and compliance directly into the bank's operations, allowing it to adapt proactively to new regulatory demands. Employees can shift their emphasis from maintenance to value creation, rapidly developing and deploying tailored products to meet customer expectations and drive future growth.

While bank modernisation programs hold great promise when executed well, the stakes are raised for the entire management team. CEOs must decide if their bank is better served by a CIO-led core upgrade, designed primarily to reduce operational and technical risk, or a management-team driven bank modernisation program to lead the bank into the future. 

Tangerine, a leading Canadian digital bank and wholly owned subsidiary of Scotiabank (link to news coverage), is a prime example of a progressive digital bank adopting modern core software - or in more technical terms: an integrated, coherent platform with a cloud-native, API-first core. 

The bank is now aiming to "build the future of banking services for [its] clients – delivering a premier banking experience with intuitive, personalised features that evolve with client needs," as Terri-Lee Weeks, President and CEO of Tangerine said, during a public announcement to the industry focusing on the  choice to leverage Engine as a  core vendor. This solution "provides an end-to-end platform on which Tangerine can innovate quickly and continuously, reducing the time-to-market for new products and features, and delivering world-class experiences for [Tangerine’s] clients."

Whether by choice or necessity, core re-evaluation is underway for most North American banks. Trailblazing banks such as Tangerine are being bolder through modernisation, paving the foundation to build a durable operating model that can deliver a loyal and profitable customer franchise.  

Many leadership teams will take the perceived simpler option: mitigate immediate risk and introduce some technology flexibility through the incumbent provider. Progressive bank leadership teams, looking to differentiate themselves from institutions achieving mediocre results, will demand greater outcomes - and may prove to be among the industry leaders going forward.

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This is the first instalment in our Beyond the Core: The Bank Modernisation series, in our next pieces we’ll be deep-diving on the various aspects of the modernisation journey; from strategic direction, leadership and implementation approaches to how Engine can support transformative change. 

The series is designed to provide insights and inspiration to help you rethink how your institution can be built for the future.