As financial institutions across the Asia Pacific region strive to remain competitive and up to date with modern technology, core banking systems are becoming increasingly important. Core banking systems represent a significant financial investment for banks, but the benefits of modern core platforms are well worth it. According to KPMG, core banking system upgrades in the Asia Pacific region tend to cost anywhere from US$50 million to a whopping US$200 million– depending on how complex a project may be.

Modern core platform technology offers financial institutions improved efficiency and cost savings, as well as new opportunities to develop innovative products and services that can help them stay competitive. Additionally, core banking systems enable financial institutions to benefit from all-in-one solutions, which can reduce costs in the long term.  

However, many financial institutions struggle to keep core banking systems up-to-date due to the complexity of core banking system updates and the cost associated with making substantial changes all at once. Mckinsey recently reported that only 30% of core banking system transformations succeeded in completing the full transition to a new platform, including data migration and product integration. As a result, many banks are turning to progressive modernization as an effective approach to updating their core banking systems.  

The Three Approaches of Core Banking System Modernization  

The core banking system modernization can be approached in three distinct ways:  

• Fully replacing existing systems, 
• Gradual modernization, and  
• Progressive modernization.  

Fully replacing existing core banking systems is the costliest approach and involves completely replacing the core banking system with a new one. This drastic solution usually requires extended downtimes and extensive data migration, making it a less desirable option.  

Gradual core banking system modernization involves updating core components over time, usually one or two at a time. This approach is typically viewed as middle-ground as it can offer financial institutions greater control over the core banking modernization process while still reducing costs associated with core banking overhauls.  

Progressive modernization, on the other hand, is a cost-effective approach to CBS updates and has become increasingly popular among financial institutions. It allows banks to quickly adopt modern technologies while also minimizing the financial burden associated with large core banking overhauls. With progressive modernization, banks can benefit from cost savings, innovation, and improved technology without having to completely replace their core systems in one go.

Benefits of Progressive Modernization

With progressive modernization, banks can update core components over time while still preserving the stability of their existing systems, iterating, and growing with their customers and business operations. This approach offers several advantages, such as cost savings, innovation, improved customer experience, more efficient processes, better scalability, enhanced security measures, and more. By embracing progressive modernization, financial institutions can draw on the same agile methodologies and processes that are used in software development to their own businesses. By doing this, FIs (Financial Institutions) can rapidly react to market shifts, competition, customer requirements, and other macroeconomic factors that necessitate rapid yet budget-friendly adaptations.

Key Challenges to Core Banking System Upgrades

Legacy Systems 

Core banking systems throughout Asia Pacific are incredibly intricate and differ from country to country. For example, in China, most core banking systems rely on Oracle’s iBanking platform for their technology stack. This set-up offers essential core banking features such as corporate and retail banking services that have been integrated into it by over 80% of Chinese banks. Innovating and integrating newer services with FinTechs and third parties can be daunting when you have legacy systems in play. Moreover, the scope of core banking overhaul becomes limited unless there is a technology partner who can collaborate with your existing systems seamlessly. 

Deployment Model 

Moreover, the core banking systems in Asia Pacific are created and managed internally by financial institutions. This makes it even more difficult to modernize their core banking system as they must properly maintain existing components and processes while upholding accurate data integrity, and protecting important security protocols, all the while delivering exceptional customer satisfaction. Banks may be tempted to pursue the cost-effectiveness, maintenance, and efficiency provided by a SaaS (Software as a Service) or cloud model for their core banking system. And although cloud-based core banking systems have extensive benefits, such an upgrade could easily become stifled due to regulatory and data concerns that arise from stakeholders in this process. Additionally, resources and effort need to be put in to educate stakeholders on the benefits of such a transition.

Cost and Time of Modernization 

As previously noted, core banking system upgrades are not cheap undertakings. Full-scale replacements cost millions of dollars and take months to complete; furthermore, teams must be retrained, and staff members readjusted for the transition from one system to another to go smoothly. Additionally, should something go wrong once the project has been initiated, it can be incredibly difficult – if at all possible – to revert. 

Stakeholder Buy-in 

One of the core challenges of core banking system upgrades is convincing stakeholders to invest in the modernization process. Stakeholders, such as board members, shareholders, and regulators, need to be persuaded that the core banking system upgrade benefits their financial institution. This requires a clear communication plan and strategy to ensure that all stakeholders understand why the core banking system upgrade is necessary and how it will benefit the financial institution in question. 

The Future of Core Banking System 

Core banking system upgrades are becoming increasingly crucial in the Asia Pacific region as financial institutions strive to remain competitive and offer their customers access to modern services. By embracing progressive modernization, APAC FIs can benefit from cost savings, improved customer experience, better scalability, enhanced security measures, and reduced complexity of their core banking upgrades.  

Furthermore, core banking solutions are rapidly evolving and changing with trends like cloud computing and artificial intelligence (AI). Thus, core banking systems are no longer focused solely on core functions such as account management or transfers. Rather, they include a wide range of innovative services that aim to improve customer experience, reduce operational costs, increase efficiency, and provide greater insights. Today’s banks must keep pace with the shift and capitalize on the opportunities that modern core banking systems provide to ensure they are not left behind.