Navigating the Core Banking Transformation: Five Best Practices for Retail Banks

Core banking transformation refers to the processes by which retail banks modernize and upgrade their core systems and practices to better serve their customers and stay competitive in the marketplace. Updating critical infrastructure and systems enables banks to improve their agility in the fast-paced and ever-changing fintech landscape, enhance the customer experience through real-time data processing and insights, reduce costs, improve efficiency and increase security. 

In order to achieve a successful transformation and modernization, it is imperative that banks follow certain best practices:

1. Develop a clear strategy and goals
2. Evaluate and streamline processes for a digital-first approach
3. Define a domain-driven composable architecture 
4. Develop a comprehensive migration plan
5. Embrace new technology

Develop a Clear Strategy & Goals

Before embarking on a core banking transformation, it's important for organizations to have a clear understanding of what they want to achieve and how they plan to get there. This should include a detailed analysis of current systems and processes, as well as a clear set of goals and objectives for the transformation. A few examples of goals that a bank may have for a core banking transformation include:

• Improving the customer experience by reducing wait times for service, providing more self-service options or increasing instant response with real-time processing.
• Reducing labor and licensing costs associated with the maintenance of legacy systems.
• Increasing revenue by expanding products and services and scaling to new regions. 
• Improving data analytics capabilities for better marketing efforts.
• Improving security and compliance with regulations such as GDPR, AML and DORA, to protect against digital threats.
• Leveraging new technology, such as artificial intelligence, blockchain and cloud computing. 

By having a clear set of goals and objectives, a bank can ensure that its core transformation is focused and aligned with its overall strategy and track and measure progress.

Evaluate & Streamline Processes for a Digital-First Approach

During a transformation, it’s easy to fall into the trap of copying existing processes 1:1 to new architecture, but this can lead to excessive customizations and ultimately hinder the transformation.

When migrating to new architecture, it is important to take a step back and evaluate existing processes to determine which are truly essential and which can be simplified or eliminated altogether. This will help to ensure that the new architecture is aligned with strategic goals and that the migration process is as streamlined as possible.

Additionally, by not copying existing processes, banks can take advantage of new technologies and methodologies that may not have been possible with legacy systems. This approach also allows banks to rethink processes and services to devise more cost-effective, customer-centric solutions.

Define a Domain-Driven Composable Architecture 

A core banking transformation is a great opportunity to re-architect a bank’s systems and processes to enable innovation and flexibility. One way to achieve this is by implementing a domain-driven architecture (DDA), which is a design approach that focuses on the business domain and the relationships between the different parts of the system. Benefits of applying a domain driven composable architecture include:

• Reduced lock-in: By breaking down monolithic systems into smaller, more manageable components, a DDA allows banks to reduce dependence on a single vendor or technology. This also makes it easier to switch to new technology without having to replace the entire system.
• Opportunity to leverage fintech innovation: Composable architecture allows banks to integrate best-of-breed solutions and implement new and innovative technologies to stay competitive in a fast-paced FinTech landscape.
• Increased agility: Individual components can be changed independently without negatively affecting the entire system, making it easier to implement or develop new features and services and facilitate quicker responses to changes in the market.
• Improved scalability: A DDA allows a bank to scale components independently to handle large volumes of transactions and data.
• Better maintainability: A DDA can make it easier for the development team to understand and maintain the system. This can reduce the time and cost required for maintenance and decrease the risk of errors.

Develop a Comprehensive Migration Plan 

There are several migration strategies that banks can choose when undergoing a core banking transformation:

• Gradual migrations involve breaking legacy architecture into separate domains with new interfaces, and then replacing domain by domain with a new solution. This allows a phased rollout of the new system, with minimal disruption to customers. It also allows for testing and fine-tuning before implementation.
• The big bang approach involves “building” a new bank and switching over when all customers are migrated. This approach is typically faster, but there are more risks involved and can be more disruptive to customers, as the entire process must be completed before the new system is fully implemented.
• Parallel builds involve creating new bank architecture alongside the existing one, with events being processed by both old and new systems. This approach allows for a phased migration of customers and also enables the bank to acquire a modernized architecture without requiring all functionalities be available immediately. This allows for testing and fine-tuning of the new system before it is fully implemented, providing a more efficient and seamless transition for both the bank and its customers.

Each approach has its own advantages and disadvantages. The choice of migration strategy should be based on the bank's specific needs, resources and goals and it’s important to carefully evaluate options and select the strategy with the best fit.

Embrace New Technology

When leveraging new technologies to improve data analytics capabilities, enhance customer experiences and stay competitive in the marketplace, banks would be wise to consider cloud native solutions. Cloud native solutions can help reduce the bank's dependence on physical infrastructure, scale as needed, lower costs and improve operational resilience. Additionally, many cloud providers offer built-in security and compliance features, which can help banks meet regulatory requirements.

Another important technology is real-time data analytics, which allows banks to make data-driven decisions in real-time rather than relying on batch processes. This can help improve the quality of services and products and enable quick responses to changes in the market. Real-time data analytics combined with AI-modeling can also help improve decision-making, targeted marketing efforts and customer service, or even detect fraud.

The Bottom Line on Banking Transformation

A core banking transformation is a vital process for retail banks. By developing a comprehensive migration strategy, focusing on streamlining around a digital-first mindset, defining a domain-driven composable architecture and embracing new technology, banks can successfully modernize and upgrade their systems and processes to better serve their customers and stay competitive in the marketplace.