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The absence of a modern core is preventing organisations from offering innovative propositions, achieving high operational efficiency and unlocking the full value of transformation. Given how quickly cloud is maturing, cloud-native core banking is an idea whose time has come, writes Infosys Finacle's Puneet Chhahira.


Puneet Chhahira, head of marketing and platform strategy, Infosys Finacle

While all banking enterprises may claim to be digitising, no two are equal. In fact, very few, just 14 percent, according to the latest EFMA Infosys Innovation in Retail Banking study, have managed to scale digital transformation and achieve the results they set out to. A big reason for this is that the transformation of enterprises has been highly uneven so far, with the majority of banks not modernising their core as a part of the exercise. The absence of a modern core is preventing organisations from offering innovative propositions (for example, smart deposits/ mortgages, BNPL); and achieving high operational efficiency (such as the 30-40 percent cost-to-income ratios common in digital/ digital-only banks). All of which is necessary for unlocking the full value of transformation.

It is not that banks are unaware of the importance of core modernisation. But they have been unable to get going because they either lack the expertise or the appetite for a project with a long gestation and payback. Consequently, many banks have ended up prioritising short-term projects, settling for quick returns instead of working for large and long-term value.

It will interest them to know that core modernisation has evolved rapidly in recent years, pushed forward by cloud. Today, modernising the banking core is faster and easier than ever before, because it can be done selectively, by component, and on cloud to boot.

Cloud-native core banking – twin win

Given how quickly cloud is maturing, cloud-native core banking is an idea whose time has come. In fact, the core should not only be modernised, it can even be composed and consumed on cloud. Banks got a taste of this with CRM and marketing automation; now, the progressive among them are gradually composing core banking capabilities on cloud, leveraging SaaS (software as a service). Credit must go to the cloud provider community, who have expanded their footprint to conform to data residency requirements (for instance, AWS is in more than 80 locations); launched banking-specific clouds fulfilling compliance and security expectations; and even located “outposts” within clients’ physical premises.

Within the cloud option itself, there are several choices: banks can stay on a private cloud, migrate to a public one, or simply consume services from vendors as a SaaS offering. The best option for each bank depends on its particular context; that being said, the future of almost every bank lies in hybrid cloud. Hence banks should work on creating a suitable mix of applications distributed between public cloud, private cloud, and SaaS (which is how they can unlock maximum value). Also, it is very important to go the distance – our recent research shows that banks need to migrate a critical mass of 60 percent of their workloads on cloud to derive value from it.

The good news is that core banking and cloud vendors are also exerting themselves to make core banking on cloud a compelling proposition. Today they offer several options, of which the following three are the most popular:

Focused replacement: Favoured by large banks with complex operations, this approach recommends replacing select core banking components around a single line of business, geography, or product, before moving on to the next one. This allows the bank to quickly take the product or service in question to market very quickly, and also delivers both short-term and long-term returns, the first from the transformed product or business, and the second from the progress made towards the bank’s target model or architecture.  The challenge, however, is that the bank has to manage both legacy and (new) core components through the transition period.

Parallel core: Suitable for banks that are reluctant to change their legacy systems even gradually, a parallel core enables digital-only propositions, or innovations like BaaS, which need a powerful modern core, to be launched.  Over time, the bank may migrate even old products to the new core platform. While this approach speeds up time to market for new offerings – a parallel core can be set up quickly – it comes at a high TCO in the short-term when both full stack legacy, and full stack new core, components need to be maintained.

Full replacement: The preferred choice of smaller institutions or international subsidiaries with relatively low operational complexity, full replacement brings a simplified, unified architecture in place of legacy. This approach allows the bank to run the existing product portfolio, in addition to new offerings, on the new core and thereby generate broad-based value. The obvious challenge is that there is a higher risk of budget, time and effort overrun; however, there is also a significant upside because the bank can unlock the true value of comprehensive digitisation with this approach.

To conclude

Finally, core transformation may have become easier, but it is never easy. Banks can mitigate the risks and improve outcomes by choosing proven cloud-native solutions and experienced partners. Here, the verdict of independent analysts – for example, Gartner, which classifies vendors in its Magic Quadrant every year – can be a valuable input in the decision-making process. 

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