In today’s crowded and competitive banking landscape, banks are looking to upgrade their technology infrastructure to gain the upper hand. The banking sector’s focus has shifted from upgrading existing traditional, on-premise core systems to adopting new cloud-native platforms to better respond to customer needs.

However, transitioning away from traditional core systems is one of the riskiest challenges in banking.  Historically, the process required replicating all capabilities and customizations in the new system, followed by lengthy delays as every system communicating with the core is cut over and tested. In the event of an error or failure, the only option often was to roll back the changes and try again later.

Fortunately, advances in cloud technology have led to more effective strategies for migrating systems. Nowadays, banks can adopt a more beneficial stage-gated, co-existence approach, allowing new and legacy systems to operate simultaneously for a period. This method is proving to be safer, quicker, and more cost-effective. Banks with next-generation core system offer more flexible and differentiated products faster. They can also better respond to rapidly changing customer needs, and leverage fintechs and their proprietary data algorithms to improve end-to-end customer journeys and automate existing workflows.

Five key considerations for a bank’s migration strategy

Core migrations require precise business planning and a strong business case. Success hinges on financial analysis for a realistic, financially sound plan that gains stakeholder buy-in. Benchmarking against successful peers is also crucial during the planning and analysis phase. Banks that are planning their migration strategy to a modern core need to consider the following five areas.

Ensuring the right skills and talent for effective migration

Banks need to assess whether they have employees with the right skills and experience in sufficient numbers. If not, they must consider where to seek expert advice, retrain existing staff, or hire new talent with the necessary skills. For example, banks should ensure their development and operations (DevOps) team has the engineering expertise to update the core platform and build a talent pool of technical business analysts who can quickly translate banking requirements into technical specifications. This will involve planning how these changes will affect their operating model and team structures.

Navigating interdependencies and complexities of existing systems

It is essential to understand the complexities of the upstream and downstream systems and how they interact with one another. For payments, for example, banks need to understand how their payments infrastructure interacts with their existing core banking system. From there, they can determine what changes would be necessary for the payment infrastructure if they move to a cloud-native core banking solution.

Understanding the ripple effects of core migration

Changing the core banking system can affect all supporting infrastructure, security systems, operating models, policies, operations, processes, and regulatory and financial reporting. To fully benefit from a core system migration, a bank must consider all of these aspects during project scoping to accurately capture costs and benefits and avoid scope creep.

Ensuring data quality and integrity are maintained during migration

It is essential to consider what cleansing or restructuring work is required for the existing data before migration. Moreover, banks will need to consider what the long-term data strategy is and how the migration of the core banking system aligns with that strategy.

Building robust risk management strategies for regulatory compliance

Banks need to think about how they will engage with regulators, including the guidance and input they will request from them, as well as consider what a robust risk management framework should look like for a core system migration project.

Adopting a co-existence core migration strategy

Co-existence is now preferred due to numerous high-profile failures of the conventional “big bang” strategy. Advances in cloud and distributed computing have made it more stable and lower risk. Due to the monolithic nature of most traditional core systems, there are numerous dependencies among specific products and systems. Other systems, such as limit management and collections engines, are often directly integrated into legacy core banking systems, further complicating the migration challenge. This added complexity makes co-existence’s iterative, test-and-learn method the safest and most suitable for banking migrations. Once a bank enables co-existence and routing between the legacy and new core systems, it can migrate products and features over to the new core system, monitor behavior, and run tests, before cutting over and promoting the new core.

One common approach is an active/active configuration, which allows for true co-existence by receiving mirrored requests and calls. It provides greater flexibility and is ideally suited to a test-and-learn migration strategy. Value can also be realized rapidly, as true co-existence allows for bringing new products online on the new core right after being tested and validated.

An active/passive configuration, which synchronizes the new core to the legacy core, also affords high visibility and validation. It allows the bank to compare the outputs of the two cores, reducing the risk of regression issues as the migration progresses. Technical demands are also generally lower compared with the active/active configuration. 

Why banks delay larger scale migrations

One of the challenges of systems migration is the evolving skills and talent landscape. The expert pool in legacy technology is shrinking, and there is a growing demand for modern technology banking talent. Banks should retrain existing employees and attract the right new hires to efficiently scale their migration and wider enhancement efforts.

Another challenge lies in reporting, risk management, and regulatory engagement. Banks can enhance reporting requirements and increase regulatory interactions. Meanwhile, to overcome slowdowns due to task scale and inadequate risk management functions, clients can establish a proven Transformation Management Office team early.

To keep stakeholder buy-in high, there should be early and regular realization of benefits to prove the business case. Economies of scale will eventually occur, with migration routines and benefits speeding up. To decide what to migrate and when, we recommend having technology and business teams jointly create the migration plan. The optimal order should be feasible, easy to validate, and account for data and legacy dependencies, while also protecting the customer experience and aligning with the product development roadmap.

Finally, corporate banks should remember to also account for the cost of migrating their clients’ integrations into the bank that interact with their enterprise resource planning systems.

Why modern core migrations are increasingly appealing

The declining costs and timelines of core system componentization and lean deployment make core migrations more manageable and appealing. The business case is also becoming easier to make as business and technology models shift, driven by modern delivery methodologies, flexible software deliveries, and adaptable commercial models.

Migration risks are decreasing compared with maintaining legacy cores, as cloud-based solutions offer more flexibility and cost efficiency through gradual upgrades and usage-based pricing. As these factors come together for each institution, there is a significant opportunity to jumpstart the migration and transformation process.

Explore more details in the full report.