Core System Modernization in Financial Services: A Happy Medium?


Core System Modernization in Financial Services: A Happy Medium?On Tuesday, February 15, Aite-Novarica Group hosted the second quarterly meeting of our Financial Services CIO/CTO Advisory Research Council. Several financial services executives came together to discuss trends and challenges around core system modernization, return to office, and the war for talent. My colleagues CEO Kurt Reisenberg and Head of Banking and Payments Christine Barry also attended.

Core system modernization efforts dominated our discussion. One of the first steps to achieving a competitive state is outlining the organization’s overall approach: modular or end-to-end? This key decision will guide the organization’s modernization process for years to come.

As new technology brings with it novel risks, the stakes feel ever higher for institutions reliant on homegrown systems. Simultaneously, executives at financial institutions which have already moved to vended solutions are actively enmeshed in the process of risk management.

Modular Approaches Find Favor

A study conducted prior to the meeting showed that modular approaches are often favored over end-to-end solutions in core system replacement efforts. Modular approaches are generally perceived as lower risk since sequentially deploying modules and concurrently wrapping legacy system modules lessens the up-front financial burden and is easier to make a business case for.

A more gradual transition away from legacy platforms, often found on the mainframe, has the potential to be smoother and minimize disruption to various departments. It is also more adaptable during a time when flexibility is key for financial institutions who wish to remain competitive in a constantly developing marketplace.

Integration Challenges in Financial Services

That being said, the modular approach comes with its own set of challenges. One participant described embarking on an initial plan to select vended solutions for each individual core function only to find that “it’s like a never-ending story just trying to integrate two components together.” Rather than immediately giving up on the benefits of modular deployment, it can be prudent to search for a happy medium.

A number of financial services executives are either choosing solution sets that are neither fully end-to-end nor single purpose or implementing modules only after establishing a holistic, end-to-end plan commonly referred to as a roadmap. The roadmap allows the organization to move from its current state to a target blueprint.

Accept, Anticipate, and Address Transformation Risks

Effective management of transformation risk can pose additional challenges for financial services institutions. Individual modules will unavoidably vary in their age, their use of APIs, and whether they are vended or non-vended solutions. In addition, mainframe systems will continue to exist until they have been fully replaced.

When questioned about how to manage the risks these factors cause, participants concurred that accepting the reality of the situation was the first step to addressing it. End-to-end solutions might sound attractive at surface level, but they are not practical for many institutions, largely due to financial and resource constraints. As the war for talent rages on, it’s wise to consider attrition rates, what skills are available to hire for at present, and how this could constrain your modernization efforts. The rapidly changing pandemic landscape has had unprecedented effects on talent availability and retention; resource availability will likely continue to be an issue for some time to come.

Core system modernization is top of mind for financial services executives in 2022. Although there will doubtless be challenges, it doesn’t have to be an excruciating process. A major takeaway from our discussion was that core system modernization initiatives are most likely to succeed if organizations take a flexible approach and resist the impulse to view decisions as immutable.

Given the importance of core system modernization to financial institutions, especially banks, our future research will explore the topic further. If you’d like to learn more about Aite-Novarica’s Financial Services CIO/CTO Advisory practice or becoming a member of our Research Council, contact me at [email protected].