Replacing legacy systems with more modern and flexible platforms can pose a huge challenge for the banking industry. While banks understand the benefits of using more modern systems, they often shy away from the transition because of its complex process. Transforming core banking systems often involves a multi-year, multi-phase makeover that can be costly and time intensive. Additionally, where banks are expected to provide their services 24/7, replacing these core systems can significantly impact their ability to service their customers. Also, in recent years, financial institutions have experienced a significant increase in regulatory requirements, making it more cumbersome than ever to properly integrate these new systems onto their platforms.
However, banks do not have the option to put off this core system transformation for much longer. The economics of the industry are no longer allowing these financial institutions to continue to delay this inevitable renovation, as the benefits far outweigh the negatives. Modern banking systems allow banks to be more flexible and enable them to act more efficiently in response to the changing market opportunities. For example, on a newer, more modern system, banks have the capabilities to launch products more quickly by reusing already existing components rather than having to replace individual parts on legacy systems.
Unlike legacy systems, modern systems also allow banks to have a single and complete view of the customer in real- time. Finally, research has shown that banks that stay on these legacy systems ultimately spend more money trying to upgrade their systems piece by piece than they would if embraced a newer, more modern platform.
[The challenges of core systems modernization projects: Pride and Prejudice and Core Systems]
Not surprisingly, banking institutions worldwide are investing in technologies that help them modernize their existing systems. For example, Indian banks went through this complicated process between 2004 and 2008. Now, five years later, all of these banks are on real-time views, are heavily involved in e-banking, have reduced process turnaround and are better at understanding customer insight. Banks in China, Eastern Europe and the EU market also are undergoing this major transformation, which shows that this is truly a global transformation for the banking industry.
Recent research also has indicated that the global banking industry could regain a significant proportion of the profitability lost during the financial crisis by adopting these new modern-day systems. According to new research by Temenos and Deloitte, the implementation of modern banking platforms could close the gap by as much as 60%, or US $180 billion. Over the past three years alone, banks that have adopted these new modern platforms have experienced on average 25% higher return on assets and a 37% higher return on capital compared to banks that are still running on their legacy applications.
Once financial institutions realize that this change needs to occur, they can begin the replacement process. This typically begins with building a business case. A bank must identify the specific problems that need to be solved to ensure it is receiving a valuable return on investment. For example, banks should ensure that they replace their existing systems with a centralized platform that can deliver speed to market and is more flexible and accountable.
It is no secret that replacing your bank's core legacy system is a major endeavor for any bank to undertake. However, it does not have to be as challenging and costly as many assume. By investing the right resources into modernizing these systems, banking institutions can not only save money but also advance their customer offerings.
Dinesh Venugopal is Executive Vice President, Interim Head Banking and Capital Markets, MphasiS.