Is your core a cost center or catalyst for growth?

Between neo-banks, fintechs, alternative financing options, the big tech companies and large financial institutions, there is no shortage of competition for today’s community banks. In their efforts to win and maintain market share, many community banks have recognized the need to invest in innovation. The problem is innovation efforts are often focused on front-end technologies, such as websites, mobile apps and other channel experiences. 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 However, bankers should also consider the cost of staying on a legacy core, which includes the cost of maintaining an outdated IT system and the cost of missed growth opportunities. 

The costs of legacy IT systems

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 maintaining 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 so that they do not cause major failures that would disrupt operations or customers’ abilities to access their money. Between resolving technical bugs, security upgrades, managing siloed databases and other ongoing maintenance activities, these outdated systems not only impair productivity, they also drain resources away from more impactful initiatives that would generate revenue. 

At the same time, maintaining and troubleshooting a legacy system requires a high level of expertise. According to a study by Reuters, more than 43 percent of U.S. banks still use COBOL, a programming language that dates back to 1959, in their legacy IT systems. Therefore, it will likely become more difficult for banks to find knowledgeable IT professionals who are willing and able to manage 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 operations. The cost of unplanned downtime is expensive. Technology and research consultancy firm Gartner estimates that, on average, downtime can cost in excess of $9,000 per minute of outage. 

The cost of lost revenue

Bankers should also consider the cost of missed revenue opportunities from legacy core systems. 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 core architectures, 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 is more time- and resource-intensive on a legacy core. 

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 However, outdated and inflexible architectures lack the connectivity needed to effectively collaborate with other parties to deliver truly innovative products and services for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

Accelerating time to market for new products, services and partnerships is crucial as the financial services industry continues to evolve and new developments, such as real-time payments, become more widespread. 

With the RTP example, banks will need to establish connections with the appropriate payment rails, such as the FedNow Service. Having modern core banking technology makes it much easier to partner with third-party payment platforms. According to a survey by the Federal Reserve, 70 percent of consumers say it is important to them that their bank provides faster payments capabilities. Some are even willing to pay an extra fee to ensure quick access to funds. The banks that are not burdened by the limitations of 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 to deliver personalized experiences for customers because data is typically stored in multiple product-aligned core systems. This prevents banks from gaining a comprehensive view of customer data that supports more intelligent, tailored services and product offers.

Until recently, consumers were relegated to choosing from a few basic retail and business products offered by their bank. Now, retail and corporate banking customers alike want their bank to personalize their experiences. For example, business franchisees may have specific needs for credit products or institutional customers may want customized reports or foreign-exchange capabilities. Therefore, community banks 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, without having to depend on costly, time-consuming programming. 

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

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