Is your core a cost center or a catalyst for growth?

In their efforts to win and maintain market share, many community bankers have recognized the need to invest in innovation. The problem is innovation efforts are often focused on front-end technologies, such as websites or mobile apps. Meanwhile, the back-end technologies, including legacy core banking systems, are left in place.

Murthy Veeraghanta

Bankers know that migrating to a new core system is a big investment, in both time and upfront costs. However, bankers should also consider the cost of staying on a legacy core, which includes the cost of maintaining an outdated IT system and the cost of missed growth opportunities.

Legacy core banking platforms are expensive to maintain, and these costs will only grow over time. According to the Financial Times, banks often dedicate up to 75 percent of their IT budgets to the maintenance and upkeep of legacy systems. Data also shows that legacy systems can cost an organization up to a 15 percent budget increase annually for maintenance.

One reason for this is legacy core systems put a considerable strain on bank employees, especially those working in IT. These systems require constant attention and resources to avoid major failures that would disrupt operations or customers’ abilities to access their money. Between resolving technical bugs, security upgrades, managing siloed databases and other maintenance activities, these outdated systems not only impair productivity, they also drain resources away from more impactful initiatives that would generate revenue for the bank. 

At the same time, maintaining and troubleshooting a legacy system requires a high level of expertise. A significant number of banks still use COBOL, a programming language that dates back to 1959. This could make it harder for banks to find knowledgeable IT professionals who can run these systems effectively, especially in smaller markets. 

The dated programming language being used in legacy core systems, combined with the tendency for many banks to support newer applications and functionalities by layering them on top of their existing core, ups the risk of an outage that could disrupt core banking services. The cost of unplanned downtime is expensive. Technology and research consultancy firm Gartner estimates that, on average, downtime can cost an excess of $9,000 per minute of outage. 

Bankers should also consider the cost of missed revenue opportunities. Being able to launch new products quickly is a competitive differentiator in the current market. However, faster product delivery is difficult to achieve when restrained by legacy cores, which often rely on slow software delivery processes that involve manual testing and deployment. As a result, launching and then scaling a new product or service can be more time- and resource-intensive on a legacy core. 

Additionally, third-party providers are becoming increasingly crucial for banks to offer the financial tools and products today’s customers want. However, outdated and inflexible architectures lack the connectivity needed for banks to effectively collaborate with other parties to deliver truly innovative products and services for their customers. 

For example, with real-time payments, banks will need to establish connections with the appropriate payment rails, such as the FedNow Service, set to launch this year. Many are choosing to partner with third-party payment platforms to support a variety of faster payments options; having modern core banking technology will make this process much easier. According to a survey by the Federal Reserve, 70 percent of consumers say it is important that their bank provides faster payments capabilities. Some are even willing to pay to ensure quick access to funds. The banks that are not burdened by a legacy core will be able to roll out new offerings that today’s consumers want and are willing to pay for. 

Legacy cores also make it difficult for banks to deliver personalized experiences for customers because data is typically stored in multiple product-aligned core systems. This prevents a comprehensive view of customer data that supports more intelligent, tailored services and product offers. 

Both retail and corporate banking customers want a personalized experience. Community bankers should consider whether their core gives them access to the data needed to identify these opportunities to deepen customer relationships. Beyond that, banks should also evaluate whether their core supports the customization needed to act on those opportunities quickly. 

Oftentimes, sticking with an outdated but familiar legacy core system exceeds the cost of investing in a more modern core banking platform. As fintechs, banking and payments evolve, bankers must consider whether their core systems pose a threat to their long-term growth.

Murthy Veeraghanta is chair and CEO of VSoft, a global provider of digital banking and payment solutions to financial institutions of all sizes.