Futureproof Core: the future is simpler

The issues

Currently, banks face three key issues, which add complexity, increase costs and limit their responsiveness to changing circumstances and customer demands. Products – particularly customised ones – have been added over decades, leading to complex portfolios that are costly to maintain and hard to digitalise. Meanwhile, systems have often built up around 1970s technology, with successive in-house customisations to support a growing product range: the result is a complex architecture that can’t easily adapt to the latest technology enhancements. Finally, there are still many opportunities to optimise, automate and digitalise processes, but banks have focused mainly on the front-end customer experience, without touching the mid- and back-office processes.

Complexity, then, is the thread that runs through these issues, but they’re also connected: systems and processes support – and reflect – a bank’s product offerings, so their complexity, challenges and potential for change are also closely linked. Looking to the future therefore needs a holistic approach, rather than treating this solely as, say, a technology issue.

Transformation options

Though technology isn’t the sole issue, or solution, it does provide a clear point of focus, for defining a strategic direction and getting the journey started. Our outlook considers three broad models, with increasing commitment and benefits: develop enhanced systems in-house; re-platform to standalone digital system; or adopt a totally new, cloud-based banking solution. Although we believe banks should aspire to the last of these, transformation is not easy, and these options allow banks to tailor the journey to suit their capabilities, with different ways to reduce complexity.

Augment legacy systems

In-house development might seem like business as usual, but it’s important to keep strategic focus on building a new core. In particular, the approach should integrate existing platforms with new, external data sources, focus on using digital services to engage across all customer interactions, and underpin end-to-end automation – particularly in mid- and back-office processes. Although this approach doesn’t directly remove the complexity of a legacy core, it recognises that many factors – such as maintaining the existing portfolio and regulatory compliance – might need a slower and more cautious approach, which offers an incremental simplification of products and processes.

Re-platform

Building a new, standalone system avoids the complexity burden of a legacy core. Rather than providing a basis for future rationalisation, though, streamlining products and processes is a prerequisite, to ensure that new systems don’t inherit the complexity of their predecessors, so the whole process can take several years. Throughout, the focus should be on incorporating the features and flexibility that make the new system adaptable to future demands.

Adopt an integrated, cloud-based solution

The most radical proposition is to start again from scratch, by adopting a new, cloud-based banking solution, as part of a holistic platform. This gives banks the freedom to exploit current technologies, benefit from the same ‘fresh start’ advantages as new market disruptors, and quickly gain agility. However, established banks carry heavier product portfolios than newer competitors, so, although preliminary deployment could take a little as a few months, the initial platform is unlikely to support all current products. Established banks will therefore need a strategy for adopting a cloud platform, which balances the advantages of starting afresh with the demands of its existing products: this could, for instance, involve a decision to see out such products through continuing legacy systems.

Considerations

Even though augmenting existing in-house systems offers a more measured approach, it will continue to carry the high costs of supporting outdated technologies (e.g., Cobol). Only the shift to a standalone solution or new cloud platform will offer banks the opportunity to realise the cost benefits of leaner portfolios and newer services.

Whichever route is chosen, if should reflect a strategy of reducing complexity and stripping out products that inhibit the development of streamlined processes and systems. The main choice is how radically and rapidly that will happen, which will typically reflect internal capabilities and capacity for change.

From our work with Dutch banks, it’s clear that portfolio rationalisation must do more than just eliminate outdated or high-maintenance products: it should serve the strategic aim of creating a simpler core. Although rationalisation can be started early, it’s most beneficial if the target ‘end state’ is known. Once the intended systems and processes are defined, products can then be assessed based on their ability to harness – not hamper – the target capabilities, and simplify migration.

To action

Although portfolio complexity is the main obstacle to progress, that knowledge offers the possibility of immediate action. Even as the transformation of systems and processes is being considered, some legacy products can be pruned to simplify the problem. That improves the bank’s readiness for effective transformation, but the work involved shouldn’t be underestimated. You should allow ample time to analyse your portfolio in depth, and to deal with whatever issues the analysis uncovers; it will be counterproductive if they’re simply ignored and passed forward into a new, clean core.

Such issues are most effectively identified holistically, through an integral analysis that includes data quality, compliance, governance and stakeholders across the value chain, as well as product characteristics. A fact-based approach, supported by data, can identify the best solutions, by examining the issues through several lenses, such customer impact, regulations, cost and – as discussed above – ease of migration.

If this seems like a daunting prospect, that’s a reasonable response. The lack of radical change at the core of banking over the decades means that few managers will have witnessed – much less overseen – this level of rationalisation and migration. However, Deloitte can help develop a strategy and identify the step-by-step actions that can make a huge leap forward possible and profitable.