In today’s dynamic and technology-driven banking industry, African financial institutions are making a concerted effort to remain competitive and keep pace with modern technological advancements. Core banking system upgrades have become essential in this regard. These systems serve as the foundation of all banking services and utilities, including customer onboarding, internet and mobile banking, loan processing, ATM services, payments, regulatory reporting, and much more. Hence, they represent a significant financial investment for banks. 

However, most traditional financial institutions are hesitant to adopt modern offerings due to the excessive costs involved, technical support challenges, and the fear of potential loss of customer data in case of unsuccessful implementation. And this is precisely the tipping point where modern core banking platforms come into play.

Modern core banking platform technology offers financial institutions a range of benefits. These include improved efficiency, cost savings, and the ability to develop innovative products and services. This helps institutions stay competitive by increasing their agility.

Moreover, core banking systems provide all-in-one solutions that can lead to long-term cost savings. It’s not surprising that Africa’s CBS market is projected to exceed USD 4.5billion by 2031, with a remarkable CAGR of 11.1%. The growing adoption of modern core banking platforms demonstrates their significance and potential for the financial industry.

A 2022 report by McKinsey indicates that the success rate of completing full transitions to new core banking platforms, including data migration and product integration, is only 30%. This presents a challenge for many financial institutions looking to update their core banking systems. As a result, more banks are now turning to progressive modernization as a practical approach to overcome this challenge. 

How to Modernize Core Banking Systems 

The process of modernizing core banking systems can be tackled through three distinct approaches:  

• Fully replacing existing systems: It’s the costliest and most drastic solution. It involves completely replacing the core banking system with a new one, often resulting in extended downtime and extensive data migration, making it a less desirable option.
• Gradual core banking system modernization: Involves updating core components over time, typically one or two at a time. This approach is viewed as a middle ground between fully replacing existing systems and progressive modernization. It allows financial institutions to have greater control over the core banking modernization process while reducing costs associated with core banking overhauls. 
• Progressive modernization: This approach has become increasingly popular among financial institutions due to its cost-effectiveness. With this approach, banks can quickly adopt modern technologies while minimizing the financial burden of extensive core banking overhauls. Progressive modernization enables financial institutions to benefit from cost savings, innovation, and improved technology without completely replacing their core systems in one go. 

Why Progressive Modernization 

Progressive modernization allows banks to update core components gradually while maintaining stability. This approach offers several benefits such as cost savings, improved customer experience, and enhanced security measures. Financial institutions can leverage agile methodologies to respond swiftly to market changes and reduce downtime.

By adopting this approach, they can iterate and grow in line with their customers’ needs, streamline processes, and ensure greater scalability. This empowers them to adapt rapidly and cost-effectively to competition, customer requirements, and other macroeconomic factors. It also mitigates the risk of doing a full upgrade in one go, enabling them to achieve sustained growth in a dynamic environment.

Challenges in Upgrading Core Banking Systems 

Legacy Systems  

One of the key challenges in Africa’s core banking system upgrades is dealing with intricate and country-specific legacy systems. FIs in the region face the complexities of either upgrading these legacy systems or adopting modern core systems from scratch.

However, Oracle and IBM have emerged as notable players in the market, with legal presence in over 24 African countries including Kenya, South Africa, Nigeria, Egypt, Ghana, Morocco, Angola, Tunisia, Tanzania, Mauritius, and Mozambique. These countries represent the most emergent markets for digital banking in Africa. Fintechs are assisting traditional banks in the region to transition from legacy to more adaptable and modular core banking systems..

Deployment Model  

Upgrading core banking systems in Africa comes with unique challenges, one of which is the deployment model. Most financial institutions in the region develop and manage their core banking systems internally. This makes modernizing the core banking system even more challenging as they must maintain existing components and processes, ensure data integrity, uphold security protocols, and deliver exceptional customer satisfaction.  

One solution to these challenges is adopting a Software as a Service (SaaS) or cloud-based model for core banking systems. By leveraging cloud-based systems, banks can achieve cost-effectiveness, streamlined maintenance, and enhanced efficiency. However, the upgrade process may face obstacles due to stakeholder concerns related to regulations and data security. This is because many cloud-hosting providers lack in-country hosting services, which can be a barrier.

To overcome these challenges, Codebase Technologies has formed partnerships with African companies. Through this collaboration, they offer their Digibanc digital banking platform on a SaaS model, ensuring in-country hosting capabilities are provided. This innovative approach promotes accessibility, compliance, and efficient banking services within the African market.

Cost and Time of Modernization  

Core banking system upgrades present a major challenge for financial institutions due to their high costs and time-consuming nature. The outlay involved in a full-scale replacement can be considerable, requiring significant financial resources and months of planning and execution. Additionally, upgrading existing systems demands considerable retraining of teams and staff readjustments to ensure a smooth transition.  

Once an upgrade project has begun, reverting to the previous system can be extremely challenging, if not impossible. Therefore, FIs must be prepared to face these challenges if they hope to modernize their core banking systems and remain competitive.

Stakeholder Buy-in

This involves persuading board members, shareholders, and regulators that the modernization process will benefit their financial institution. To ensure stakeholder support, clear communication is critical. A comprehensive and unique strategy should clearly outline why the core banking system upgrade is necessary and how it will benefit the financial institution, conveying the message effectively to all stakeholders.  

The Future of Core Banking System in Africa 

Core banking system upgrades are becoming increasingly vital in Africa as financial institutions endeavor to remain competitive and present modern services to their customers. Embracing progressive modernization presents several advantages, including cost savings, improved customer experience, scalability, enhanced security measures, and reduced complexity of core banking upgrades. 

As core banking solutions evolve and trends like cloud computing and artificial intelligence (AI) emerge, modern core banking systems are broader. They integrate a wide range of innovative services that aim to improve customer experience, reduce costs, boost efficiency, and provide deep insights. Therefore, banks must not lag behind; they must stay current with the shift and capitalize on the opportunities provided by modern core banking systems to secure their success. 

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.