Over the coming decade we can expect the core systems that underpin banks’ day-to-day operations to become digitalized, automated and cloud-based. 

This transformation has already taken place in other industries – for example, in the telecommunications sector the use of APIs [application programming interfaces] and data management deliver the enhanced agility that ensures firms can respond quickly to market and regulatory changes and customer demands. 

Banks and other traditional financial services players still have some distance to travel to reach similar levels of responsiveness and efficiency. Many Italian banks have kickstarted their digital transformation journeys by launching digital offerings and personalizing products for their customers. However, most still rely on legacy systems and processes that are decades old. Banks will need to embrace change if they are to stay competitive.

Below we examine the trends that will drive the evolution of core banking systems and identify the key pillars of a successful transformation strategy.

Six trends shaping the future  

The transformation of core banking systems will be driven by three imperatives: customer-centricity, harnessing emerging technologies, and compliance with increasingly complex regulatory requirements. 

The following trends will be key to future success: 

1. Digitalization and Open Banking – With the increasing demand for digital banking services and the greater interoperability offered by open banking initiatives, core banking systems will need to be able to support seamless integration with different digital channels and enable secure data sharing with third-party providers. This will allow for greater customer convenience and foster further innovation in the financial sector. 
2. Cloud computing – Core banking systems are expected to leverage cloud computing for enhanced scalability, flexibility, and cost efficiency. Cloud-based solutions can enable banks to rapidly deploy and update their core banking infrastructure, improve system performance, and enable real-time data processing.
3. Data analytics and personalization – Modern data architectures can bring together customer and product data with external datasets to create higher quality data assets. Built on the cloud and API driven, these architectures support data analytics that offer much deeper insights into customer behaviors, preferences, and risk profiles – allowing for more personalized banking services and tailored product recommendations.
4. Artificial intelligence (AI) and automation – AI technologies, including machine learning and natural language processing, can enhance core banking systems by enhancing the automation of manual processes and improving fraud detection. This in turn will help drive better customer experiences and allow AI-powered chatbots and virtual assistants to handle customer inquiries and perform routine banking tasks.
5. Regulatory compliance – Core banking systems will continue to evolve to address shifting regulations in areas such as data privacy, anti-money laundering (AML), and Know Your Customer (KYC). Integration with regtech solutions will be crucial to ensure regulatory compliance and mitigate financial risks.
6. Blockchain and distributed ledger technology (DLT) – Banks continue to explore how they might leverage blockchain/DLT-derived innovations such as smart contracts and tokenization to enhance security, transparency, and efficiency in areas such as payments, identity verification and cross-border transactions.
   
   

Enabling a successful transformation 

Core systems transformations impacts the entire organization and requires substantial investment, both in terms of time and resources. By adhering to three key principles, banks can ensure these complex, multi-phase/multi-year programs stay on track. 

Be clear about your specific goals. The case for core transformation must be specific to each bank, be customer-centric, and be driven by a clear vision of future business objectives. This will ensure ongoing buy-in from senior leadership – and such C-suite support is critical to success – as well as other relevant stakeholders, and ensure a clear set of guiding principles for the transformation. 

Selecting the right strategy. For financial services firms, a number of transformation strategies are available – and they continue to evolve. These range from more abrupt 'done in one’ or ‘big bang’ transitions, to progressive modernization through ‘hollowing out’ of the core, to pivoting to cloud-native platforms. Again, each bank will have its own optimal strategy depending on their current technology estate and specific business change case, and this should be decided upon via a thorough understanding of the pros and cons of different strategies and available technologies.

Precision-planned execution. From talent and vendor selection to progress tracking and control, the successful execution of a core banking system transformation relies on a detailed roadmap. This roadmap will have clear milestones and sufficient flexibility to accommodate changes in evolving customer needs and technological advancements. It should be supported by a mobilization plan that defines the required resources as well as a governance framework to ensure that the transformation remains on track through to successful completion. 

In summary, ageing and inflexible legacy core systems restrict a bank’s ability to innovate and to offer the personalized, data-driven products customers expect. Through a clear understanding of their internal capabilities, risk appetite and their own specific future vision, banks can select the strategy and approaches that best suit them – ensuring a successful transformation while remaining relevant and profitable.