Many banks today face mounting pressure to modernize their technological infrastructure, and some are approaching the end-of-life of their legacy core banking systems. The legacy monolithic core, once the backbone of financial services, is increasingly being viewed as bottlenecks. The demand for scalable, flexible, and cloud-native solutions has shifted the industry's attention towards next-generation core platforms.

Next-generation cores have differing approaches to their solutions — some focus on the customizability of the product, while others focus on ready-made building blocks that prioritize speed-to-market. All of them enable banks to embrace cloud-native architectures, prioritize progressive system modernization, and deploy innovative products at scale. Addressing complex requirements such as product innovation, regulatory compliance, cost reduction, and operational efficiency in banks necessitates a thoughtful and future-proof approach to core system transformation.

10 key considerations for banks to achieve core modernization success

Whether the goal is to adopt a modular composable core, balance regulatory burdens, or enhance digital customer centricity, these practical considerations will ensure a smooth and impactful transformation.

1. Program set up, governance, and risk management

Core modernization is complex and introduces risks, necessitating a robust governance framework. That starts with having a strong cross-functional team. Setting up a Core Modernization Control Tower to drive alignment across business, operations, and technology stakeholders on key topics such as hollowing out and migration sequencing is key to building trust, providing transparency around the scope of the core modernization program, and timely execution. That group should also be responsible for assessing risk, both operational and regulatory. 

2. Business case and cost strategy for growth

A core modernization program can be capital-intensive but also unlock value in the long-term through system rationalization and operational efficiencies. Building a compelling business case and managing the value narrative that aligns stakeholders is key to securing funding for the program. 

3. Customer experience and transparent communication

Reaching parity or zero impact on the existing customer experience is often a pre-requisite for stakeholder buy-in. Ensuring a seamless transition for clients and having transparent communications are crucial, including providing real-time updates and establishing a customer feedback loop.

Once parity is achieved, new models of digital engagement can be made possible with the new tech stack. For example, banks leveraging smart notification systems coupled with low-latency customer service resources (chatbots or proactive email campaigns) have seen higher platform adoption rates post-migration.

4. Vendor selection and contracting

Choosing the right next-generation core platform is a cornerstone of successful transformation. For example, some products can be customized, but doing so requires knowledge of the platform and your product to maximize the value of the new platform. Things to consider when evaluating a vendor include performance, scalability, customization, and reliability across geographies. 

5. Technology transformation and system abstraction

Banks should use this time to re-architect their technology stack and move towards a modern, composable, and service-based architecture. Banks should create a detailed map of existing capabilities to avoid functional gaps post-core migration. They should also weigh the pros and cons of building their own system versus buying one.

Layering software — abstraction layer utilization — is important, too. Doing so enables banks to bridge technical gaps identified when migrating to a new core, such as differences in integration patterns and data transformation. The abstraction layer is also useful for bridging technical differences in legacy and new core and serves as the ‘translator’ to minimize impact on operations during the transition period. 

6. Migration strategy and execution excellence

The method of cutting over to the new core systems drives the success of transition efforts. Two options include progressive modernization with co-existence (“dual core”) strategies and “big bang” cutovers. In co-existence, we see most banks opting for progressive replacements to accelerate roll-out on a new platform through a phased approach. Some have also found success leveraging small-scale launches like challenger brands or digital banking arms to test new systems before scaling them to full operations. Big bang replacements are higher risk and have encountered regulatory pushbacks due to their inherent unpredictability. This could be suitable only if the bank has a less complex or digital-enabled portfolio, has most core capabilities already hollowed out, and is under strict deadlines to sunset legacy core.

7. Operating model refresh and workflow optimization

Core modernization is not just technological. Operational processes must also adapt to the changing tech stack. Aligning with business priorities is an essential starting point. Assessing opportunities to streamline business workflows is also an important step, as is establishing new linkages and ways of collaborating between business units. 

8. People and talent development

To sustain the technological leap, banks require robust talent strategies. Program transformations often fail due to gaps in required skillsets and reliance on non-permanent staff. Banks should lean into upskilling existing staff to enable them to manage the new platform. Working alongside external partners can also facilitate knowledge transfer while balancing progress and time for skills ramp-up. 

9. Data management and security for data integrity

Modernizing core systems also includes a parallel overhaul of data management processes, which is an opportunity to clean up legacy data quality issues and sharpen data integrity on the new platform. A phased approach to data migration can minimize errors and includes data cleansing, data integrity verification, and pilot deployments ahead of bulk data migration or transfers. Secure data encryption should be used throughout migration for data in transit and at rest. Geographical mandates, particularly on data sovereignty, will guide where data can be stored or transferred across borders.

10. Observability and real-time monitoring for system stability

Modern platforms typically offer a higher degree of transparency into the system codebase and runtime execution, which can be leveraged to increase resiliency and stability of the systems, including building event streams and downstream data flow to observability dashboards tracking throughput, errors, and environmental statuses. Dashboards should be deployed to track the following key metrics — latency, utilization, errors, and idle capacity. This is used as a baseline to compare against the new platform performance to ensure that the new tech is stable and resilient before the active/active configuration is removed and the legacy core decommissioned.

Why core modernization is now a critical necessity for banks

Modernizing core banking systems is no longer a question of if for most banks — it is a critical necessity to meet the demands of a rapidly shifting financial ecosystem. Next-generation core platforms provide the functionality, scalability, and flexibility required for banks to innovate. However, this transformation is not solely a technological initiative but a systemic overhaul of operational models, risk frameworks, talent strategies, and product ecosystems.

Banks must carefully consider key elements such as migration approach, architecture design, and customer transition plans to deliver a successful program. A robust governance structure is required to streamline decision-making, ensure stakeholder collaboration, and mitigate risks.