The banking industry in MENA has experienced tremendous growth in recent years, driven by changing customer behavior and technological advancements. As financial institutions strive to remain competitive and up to date with modern technology, core banking system upgrades are becoming critical aspects of digital transformation journeys. 

Core banking systems are the foundation upon which banking services and utilities stand – from customer onboarding to mobile and internet banking, ATMs, loans, payments, and regulatory reporting. These systems represent a significant financial investment for banks, making it difficult for traditional financial institutions to adopt change due to excessive costs, technical support, and potential data loss.

This is where modern core banking platforms come into play. They offer financial institutions improved efficiency, cost savings, and innovative opportunities to develop new products and services that can help them stay competitive in a rapidly changing market. Core banking systems also enable financial institutions to benefit from all-in-one solutions, which can reduce costs in the long term. 

With the CBS industry in the region expected to cross USD 4.5 billion by 2031, rising at a CAGR of 11.1%, financial institutions cannot afford to fall behind in the race to modernize their core banking systems. However, what hinders most banks is the complexity of core banking system updates and the cost associated with making substantial changes all at once. 

McKinsey reports that only 30% of banks have succeeded in completing the full transition to a new platform, including data migration and product integration. To overcome these challenges, many banks are turning to progressive modernization as an effective approach to updating their core banking systems. By implementing incremental changes over time, rather than attempting a massive overhaul all at once, financial institutions can mitigate risks and achieve successful outcomes. 

Approaches of Core Banking System Modernization in MENA   

The process of modernizing core banking systems in the MENA region can be approached in various ways:  

• full replacement, 
• gradual modernization, 
• Or progressive modernization.

The first approach, full replacement, involves entirely replacing the existing core banking system with a new one. This approach involves completely replacing the current core banking system with a new one, which can lead to prolonged downtime and extensive data migration. As a result, this approach is usually considered less desirable. 

Gradual modernization is another approach to modernizing core banking systems. This approach involves updating core components of the system gradually over time, typically one or two at a time. While this approach can offer financial institutions greater control over the full replacement method, it may not always result in significant cost savings. 

Progressive modernization, the third approach, has gained popularity among financial institutions in the MENA region. It offers a cost-effective solution for updating core banking systems. By adopting modern technologies in a quick and efficient manner, banks can minimize the financial burden of extensive core banking overhauls.

With this approach, financial institutions can enjoy cost savings, embrace innovation, and leverage improved technology without the need to replace their entire core systems simultaneously. This progressive approach allows for a smoother transition and ensures a coordinated flow of updates. 

Advantages of Embracing Progressive Modernization 

Progressive modernization is quickly becoming the favored approach for updating core banking systems among financial institutions in MENA. This method allows banks to upgrade their core systems cost-effectively without the need for a complete overhaul. By adopting progressive modernization, banks can update core components over time while preserving the stability of their existing systems, making it a seamless and iterative process. 

The advantages of progressive modernization are numerous. Cost savings are significant since the approach requires minimal capital investment, making it an ideal solution for institutions with limited budgets. In addition, progressive modernization promotes innovation, which is critical in today’s highly competitive financial industry. 

Another advantage of progressive modernization is the potential for improving customer experience, making it more efficient, scalable, and secure. By adopting agile methodologies and processes used in software development, FIs can rapidly adapt to market shifts, competition, and changing customer requirements. This approach also allows financial institutions to quickly implement new regulatory requirements and improve compliance while reducing risk. 

Overcoming Challenges to Core Banking System Upgrades 

Obstacles with Legacy Systems 

These systems are often complex, and upgrading to modern core banking systems can be a complicated and daunting process. Financial institutions must be careful not to lose valuable data or disrupt operations when upgrading. To overcome these challenges, many financial institutions in the region are turning to progressive digitization of their core banking systems using banking platforms that allow for a more gradual and efficient transition. 

Deployment Challenges  

In the MENA region, financial institutions face unique challenges in upgrading their core banking systems. Unlike other regions, they develop and manage their systems internally, which complicates the upgrade process. That’s because they have to maintain existing components, ensure data integrity, protect security protocols, and satisfy customers.

Although a cloud-based deployment models offer cost-effectiveness and efficiency benefits, there are regulatory and data concerns that stakeholders raise during the upgrade. Financial institutions must also dedicate resources to educate stakeholders about the benefits of transitioning to this model. 

Cost and Time Implications 

Modernizing core banking systems is a major investment that involves significant costs and time. Full-scale replacements can amount to millions of dollars and take several months to complete. Throughout this process, retraining staff members and managing operational disruptions can pose challenges. Furthermore, in the event of any issues, reverting to the previous system may prove to be difficult.

However, despite these hurdles, upgrading banking systems is essential in order to remain competitive and meet the evolving needs of customers. It enables improved efficiency, enhanced security, and the ability to offer innovative services. Therefore, although careful planning and seamless execution are necessary, the long-term benefits far outweigh the initial difficulties.

Gaining Stakeholder Buy-In 

Convincing stakeholders to invest in upgrading core banking systems can be a challenge. Board members, shareholders, and regulators need to understand why the upgrade is necessary and how it benefits the financial institution. Effective communication and a clear strategy are crucial to gaining buy-in from all stakeholders. This can involve demonstrating the potential cost savings, increased efficiency, and innovation that a modernized core banking system can bring.  

Final Thoughts on Progressive Core Banking Modernization in MENA 

Progressive CBS modernization in MENA is gaining momentum as financial institutions strive to enhance competition and offer customers excellent services. Embracing modernization offers various benefits, including cost savings, improved CX, scalability, enhanced security, and less complex, agile systems.

Furthermore, the advent of technological trends like cloud computing and artificial intelligence (AI) has transformed core banking solutions. These solutions now go beyond basic functions such as transfers and account management. They incorporate innovative services that aim to enhance customer experience, streamline operations, boost efficiency, and provide valuable data insights.  

Therefore, Banks must keep pace with these shifts else they will be outshined by their competitors, neobanks and challenger banks.

If your financial institutions, fintech, or start-up are looking for an agile and flexible core banking system, speak to us about our Digibanc SaaS platform with in-country hosting.