- Core banking modernization is a strategic imperative that builds the competitiveness of banking
- 70% of banks globally are investing in the modernization of their core banking systems.
The financial sector is at a crossroads. The convergence of traditional banking and fintech accelerates the need to modernize core banking systems, a trend that has become a strategic imperative to maintain competitiveness and meet customer demands in the digital age.
According to a joint report by consulting firms EY and HFS Research, titled “Horizons: Core Banking Modernization,” the modernization of these platforms is no longer an option but an urgent necessity for financial institutions seeking to survive and thrive in an increasingly complex and dynamic environment.
Context of pressures and opportunities
The report highlights that financial institutions are facing unprecedented pressures. On one hand, customers demand seamless, personalized digital experiences available in real-time. On the other hand, competition from fintechs and neobanks, which operate with agile models and are free from technological debt, forces traditional banks to rethink their technology investment strategies.
Moreover, financial regulation continues to evolve, with a growing focus on transparency, security, and financial inclusion. These factors, combined with the need to reduce operational costs and improve efficiency, are driving banks to modernize their core banking systems, many of which are based on outdated infrastructures dating back decades.
The report estimates that 70% of banks globally are investing in core banking system modernization. It notes that 45% of banks have already started migrating their core banking systems to cloud-native platforms. Additionally, this percentage is expected to rise to over 60% by 2026, driven by the need for scalability and flexibility.
Core banking modernization can generate significant savings. The report states that banks that have completed the migration to modern platforms have managed to reduce operational costs by 20-30% due to increased efficiency and process automation.
Core banking modernization projects typically take between 18 and 36 months to complete, depending on the complexity of the existing infrastructure and the approach adopted (incremental vs. total transformation).
Despite the benefits, the report identifies that 55% of banks face significant barriers to modernizing their systems, including technical complexity, high initial costs, and internal resistance to change.
Banks that have modernized their core banking systems have reported a 25-35% improvement in customer satisfaction, thanks to the ability to offer faster, more personalized services available in real-time.
Three horizons in core banking modernization
The EY and HFS Research report proposes a three-horizon framework to guide core banking modernization:
- Optimization of existing systems
In this phase, banks focus on improving their current systems through patches, updates, and incremental improvements. While this approach can offer short-term benefits, the report warns that it is insufficient to address long-term challenges. Many institutions are stuck in what is described as a “paralysis state,” where the lack of a clear vision and fear of disruption prevent them from moving toward more transformative solutions. - Adoption of modular platforms
The second horizon involves adopting modular solutions that allow banks to update specific components of their infrastructure without replacing the entire system. This approach offers a balance between agility and cost control, enabling institutions to implement new functionalities, such as open APIs, which facilitate integration with fintech ecosystems and third parties. - Full transformation to Cloud-Native platforms
The final horizon represents a complete transformation to cloud-native core banking systems. These platforms offer scalability, flexibility, and resilience, enabling banks to respond quickly to changing market demands. Additionally, the cloud facilitates the adoption of emerging technologies, such as artificial intelligence and real-time data analytics, which are key to providing personalized and predictive experiences for customers.
Modernization underway
Unlike traditional banks, many fintechs have been operating with modern core banking systems since their inception, allowing them to innovate quickly and offer more agile, customer-centric services. This has created a dynamic of collaboration and competition, where fintechs act as both technology partners and market disruptors.
For example, many fintechs are offering BaaS (banking as a service) solutions that allow traditional banks to expand their product offerings without having to develop new internal capabilities. This collaboration is driving the adoption of more open and collaborative business models, where banks and fintechs work together to create value for customers.
Despite the clear benefits, core banking modernization is not without its challenges. The report identifies several obstacles that institutions must overcome, including technical complexity, high implementation costs, and resistance to change within organizations. Additionally, migration to modern systems requires careful management of operational and compliance risks, particularly in an increasingly demanding regulatory environment.
To address these challenges, the report recommends a strategic approach that combines a clear vision, solid governance, and continuous investment in talent and technology. It also emphasizes the importance of adopting an agile, customer-centric mindset, where innovation and experimentation are integral parts of the organizational culture.
A collaborative future
Core banking modernization is not just a technological issue; it is a strategic imperative that is reshaping the future of banking and fintech. Institutions that successfully navigate this process will be better positioned to compete in an increasingly digital and collaborative market. As the EY and HFS Research report states, the path is complex, but it is also full of opportunities for those willing to innovate and transform.
In a world where technology and customer expectations are evolving at a rapid pace, this investment is key to ensuring relevance and growth in the coming decade.