How Banking Technologists and Growth Leaders Can Align on Core Modernization

Did you know that the top 20 fintech companies now serve 3.8 billion customers globally, surpassing the 2.7 billion customers served by the top 20 banks? 

As fintechs continue to drive customer acquisition through digital-first models, traditional banks that fail to modernize risk falling behind. While many financial institutions have invested in modernizing their front-end digital interfaces and some of their payment capabilities, the true competitive advantage lies in modernizing the back-end systems that power growth, efficiency and customer-centric experiences at every touchpoint in the digital banking journey.

Making core modernization a tech and a business priority

Today’s customers demand seamless digital experiences, and banks that cannot meet these expectations risk losing market share. A recent consumer study by PwC found that it is more important to have a personalized experience in banking than any other industry. 

Digital-first banks have reached new levels of personalized offerings, make products easier to get for customers who are already in their ecosystem and guide customers smoother through the customer lifecycle from acquisition to activation and retention. Traditional banks can’t capitalize on those same opportunities without the technological capabilities to support these offerings that create new revenue opportunities.

Modern core banking systems are the key to delivering personalized services that drive customer loyalty and retention​. Core modernization is about more than technology, it’s about how that technology can transform a bank’s business model to be more customer focused, agile and iterative. 

The core banking systems of many traditional banks have become outdated and costly to maintain. According to a 2023 report by IDC, outdated technology is projected to cost banks a staggering $57.1 billion globally by 2028. 

Despite this burden, many banks lack organizational alignment and inertia to act, mainly due to concerns over cost, risk and disruption that large-scale modernization efforts might entail. 

3 Ways Banks Can Overcome the Tech Modernization Hurdle

But there’s an achievable solution to this challenge. Rather than swapping out an entire legacy core for a modern one in a “rip and replace” method, banks can adopt manageable modernization strategies through iterative, progressive and gradual greenfield approaches.

Most banks do iterative and progressive migrations that involve moving gradually from an old system — often by geography and customer segment or by business or product line.

Often referred to as the “sidecar” approach, this model entails a new core banking system being built alongside the legacy core. This allows the new system to handle a specific subset of services while the primary operations continue on the legacy core. Over time, more services and products can be shifted to the new system, minimizing disruption and risk.

Standing up a side core alongside legacy tech also helps banks identify what can be modernized independently, prioritize investments and integrate modules slowly and strategically to build out new products and innovate without disruption. 

Adapt or Become Irrelevant: Incremental Core Modernization vs Full Transformation

By layering modernization efforts incrementally, banks can manage costs, reduce operational risk, and create a more flexible, scalable system to support sustainable future growth​.

How to secure stakeholder buy-in and ensure strategic alignment 

One key challenge in modernizing core banking systems is overcoming the divide between technical teams focused on mitigating risk and managing costs and business teams that prioritize growth and opportunity. To bridge this gap, banks must align their key performance indicators (KPIs) across both groups, understanding that they have different challenges, but the same root cause.

When establishing KPIs, stakeholders must look beyond short-term financial ROI and take into account the full transformative value of modernization, which includes cost savings, as well as faster product launches, enhanced customer experiences and new revenue streams. Banks that embrace modernization can transform long-standing manual compliance processes with automated controls, while quickly introducing new high-value services such as real-time payments and buy now, pay later (BNPL) offerings.

Core banking modernization is not merely a technical upgrade—it’s a critical business strategy that allows banks to stay competitive in a rapidly changing market. By embracing an incremental approach and aligning the priorities of technical and business teams, banks can reduce risks and costs, and unlock significant growth opportunities.

For more strategies on this critical priority, download our new ebook, Making the Core Banking Modernization Business Case: Balancing Cost and Risk with Growth and Revenue. Or, watch the webinar with leaders from Galileo, SoFi and PwC.