Core Banking in cloud - A new growth opportunity! 🚀

One of the most salient characteristics of financial institutions today is their aversion to risk. Instead of safeguarding financial institutions, this anxiety might be creating additional obstacles. Despite significant technological advances, banks continue to use the same information systems they have been using for decades. However, these systems were not developed with a focus on accommodating the continually changing needs of customers. 

According to an Accenture survey on banking operations, 80% of top bank executives fear that if they do not upgrade their technology to be more flexible and capable of supporting rapid innovation, the very existence of their organization might be at risk. Financial institutions must contend with the existence of new and innovative products that are simpler and faster than what they are currently able to provide. They must also deal with customers’ expectations for improvements and upgrades. 

Neobanks and fintech companies are definitely gaining ground by focusing, one at a time, on market segments that are underserved by traditional banks. While banks are aware of the potential threat, unfortunately, they are limited by complex, kludgy, and slow IT systems. These financial players must continue their digital transformation in order to be competitive. Still, they must also be open to pursuing new markets and services, such as BNPL, while aligning their technological strategies with the most promising markets. Banks must accelerate their growth by enhancing existing systems to meet this need. Then traditional players will be able to increase their return on investment (ROI) and avoid losing market share to competitors who have implemented new systems in order to focus on designing new products tailored to specific consumer needs. 

The end of "One-Size-Fits-All" ❌

The technological growth currently prevailing in the financial sector has shaken the market. According to BCG, banks will be putting 15% to 25% of their revenues at risk if they fail to incorporate new features, improve the customer experience, make better use of data, and charge prices that reflect the value they add. 

Today’s world is changing rapidly, and banks can no longer afford to follow their current growth strategies. The constant technological disruptions call into question even the most current plans to modernize systems. Technology and regulatory directives, such as Open Banking, Open APIsation, and PSD2, have given customers access to providers with customized services that meet their exact needs.

As customers tend to increasingly disregard generic banking products, personalization is fast becoming an indicator of banking agility. Traditional players must adopt advanced personalization strategies, such as using rules engines to leverage real-time data. Customer centricity becomes the cornerstone for all key decisions, from development to marketing to resource allocation. However, banking players are often behind in this area due to information systems incompatible with personalization. 

Aware of this fact, fintech companies have adopted the personalization approach to meet new and recurring customer demands. This focus on the customer and the customer experience is bearing fruit. Customer experience leaders outperform their rivals in revenue growth by 4% to 8% (Bain Company - Are you experienced). Because they are cloud-native, fintech companies have shown that they can develop and update consumer products faster than traditional banks, largely by adopting technology. BNPL (“Buy Now Pay Later”), payment processors, or neobanks would never have seen the light of day had it not been for the cloud. By 2025, digital-only banks in the U.S. are expected to serve nearly 20% of the population, reaching over 53 million account holders, up from 29 million in 2021 (Insider Intelligence). In particular, during the early months of COVID, cloud technology-enabled traditional banks to launch new products and processes in weeks rather than months or years. There is no doubt that fintech companies and other technology companies are putting a lot of pressure on banks as they lure customers with new products that are often just old banking services repackaged with sleek interfaces. 

Focus on the customer experience 🎯

Banks are beginning to understand that the customer-centric approach must be prioritized. What exactly prevents bank customers from enjoying an excellent customer experience? According to the Accenture report “Banking Cloud Altimeter,” 82% of banks want to migrate corporate banking operations to the cloud, such as accounting and finance software. While this step is often considered risky for the banking industry, which was once wary of the cloud, adopting the cloud doesn’t stop there. 

Banks are increasingly discovering that their main problem is their current Core Banking System. Nowadays, their IT systems prevent them from providing customers with a personalized experience, primarily because Core Banking Systems have become restrictive, complicated, and sub-optimal. New regulatory requirements have only increased this complexity. Designed for reliability, legacy Core Banking Systems are now hamstrung by an outdated mainframe architecture and rely heavily on an aging talent pool. This outdated architecture results in technology stacks that have become slow and expensive to modify. Pushed to the extreme by changing consumer demands, legacy Core Banking Systems cannot meet new expectations for real-time transaction notifications, understanding spending patterns, or rapid development and integration of new products and services. So customers are right to wonder why traditional banks cannot provide the same level of service as neobanks.

Banks have been reluctant to adapt because they have been comfortable with their current systems. Comfort—to which they have become accustomed—has made banks resistant to change. Unfortunately for the banks, comfort with their functional systems doesn’t mean they are immune to today’s wave of migration to core banking in the cloud.

It’s time for banks to adopt cloud-native, continually upgradable Core Banking Systems. Market leaders are now building their new banking capabilities in the cloud using a Software-as-a-Service (SaaS) model.

New Core Banking Systems, New Opportunities, New Growth 🚀

According to The Digital Banking Report, banks now realize the importance of the customer experience. It is one of the top three priorities for 86% to 96% of banks. Banks will be better equipped to adapt to the ever-changing marketplace by migrating mainframe functions to the cloud and connecting applications from different vendors to provide a better customer experience. In addition, the cloud will allow financial institutions to achieve their goals faster and with less risk. According to a study by Accenture, 73% of bank executives expect a rate of return ranging from 15% to 76% in less than 18 months. Therefore, the cloud offers a faster time to market, which logically allows financial institutions to achieve profitability, economies of scale, and return on investment more quickly due to a flexible and adaptable technical environment.

Experts insist that financial institutions migrate to the cloud because the cloud offers many advantages over traditional Core Banking. Cloud banking has become a secure alternative because financial institutions can use cloud-based technologies to detect anomalies to better manage identity fraud and money laundering. In addition, the cloud infrastructure runs on all platforms because it is platform agnostic. It also enables the delivery of financial services with integrated data management systems, allowing banks to benefit from automated reporting and analysis. Finally, the cloud is affordable because you only have one subscription and don’t pay server fees.

Core Banking players (such as Skaleet) and cloud providers are working together to make Core Banking in the cloud an attractive option for financial institutions that want to undergo such a transformation. We have various choices: a targeted replacement, the creation of a parallel Core Banking System, or a complete replacement. 

• The first choice is mainly used by large banks with sensitive and complex operations, as it allows them to launch products at a faster pace.
• The second choice is appropriate for financial institutions skeptical about upgrading their legacy systems. This makes it possible to launch an exclusively digital product or service, such as Banking-as-a-Service (BaaS).
• Smaller financial institutions with relatively less operational complexity tend to prefer complete replacement. This option allows them to manage their existing product line with new offerings while generating value across a broad base. 

Innovation leaders can deliver tangible results faster by capitalizing on the agility and speed offered by a shared legacy infrastructure, i.e., cloud-native digital Core Banking. Using this process, they can codify lessons learned from customers, develop a repeatable model, and launch capabilities that can be leveraged in other parts of the business. 

The right approach to modernizing your architecture 💡

The rush to be the first to market with new customer experiences applies across all segments. However, traditional banks are hampered by a number of IT challenges, including complex IT, technology debt, budget constraints, culture, and resistance to change. Because of the processes and systems that have been developed over many years, the reluctance to transform and replace old IT is understandable.

There are currently four principal methods for modernizing banking infrastructure. The most important driver of change for the bank—whether it be sustainable costs, operational and regulatory risk, or the desire to innovate—will determine the best strategy: 

• Customer Engagement and Service: modernizing the customer experience is paramount, including customer interaction and customer service.
• Customer experience and product improvement: this focuses on improving the customer experience while offering product upgrades.
• Core-centric transformation: the initial focus should be on the core, facilitating an eventual extension to the customer experience layer.
• A front-to-back transformation: is a realization of a front-to-back technology with a transformation in data management.

Some banks have chosen to free themselves from cumbersome legacy software and launch separate digital banks with a front-to-back transformation. However, building an independent subsidiary with a brand new technology stack is not always the best or fastest option, especially for banks with established customer relationships. Instead, a shared legacy approach combining a cloud-native Core Banking infrastructure with a bank’s existing digital capabilities can deliver a unified customer experience across diverse products and offerings more quickly and cost-effectively. 

The Banking-as-a-Service model is one that conventional banks can emulate. By implementing the BaaS transformation model and leveraging open cloud-native Core Banking, APIs, and an orchestration layer, you can maximize your investment and develop a customized solution architecture for a dedicated audience, product, or region. By leaving the legacy infrastructure as the registration system and then applying a Next-Generation Core Banking Platform (SaaS) on top, banks can launch new products quickly and stay in the game.

Constantly evolve - a strategic orientation to win in the long term ⏱

Leaders in banking innovation recognize that change cannot occur without a deep understanding of the market segments that will generate the highest returns. The right strategy and a Next Generation Core Banking solution should be chosen based on customer-centricity. By proceeding to the next steps and working with a Core Banking Platform provider, banks will be able to ignite the expected spark while augmenting their new digital capability of developing new functionality that will reach their target markets. 

Regardless of the size and scope of their transformation, banks need to design with customers in mind and not for themselves. This will allow them to identify the best opportunities for growth, plan for realistic results with a viable business model, build tomorrow’s products via a “test & learn” approach, and use scalability as a competitive advantage to deliver value to customers and to target markets. 

For banks with the greatest appetite for growth, the fastest path may be one that starts with smaller steps. By using Core Banking Platforms in the cloud and a shared legacy approach, they can optimize their architecture to help them scale and serve one segment at a time. By doing so, they will be able to develop and introduce products and services that are new, more diverse, and always customer-centric while creating a more responsive delivery model that will allow for rapid adaptation and thereby generate sustainable growth over the long term. 

Moving to the cloud is a wise move for banks! Skaleet and its Core Banking Platform are committed to helping financial institutions digitally transform their information systems by providing a scalable and modular SaaS platform to facilitate new product development and support growth in new key markets. If you would like to learn more, do not hesitate to get in touch with us below.