Five rules of core modernization success

Every successful tech-enabled transformation adopts guiding principles to serve as a compass to keep the program progressing in line with the initial vision and toward specific milestones. When clearly articulated and collectively agreed, such principles help prevent near-term pressures and shortsighted decisions from compromising long-term objectives. They also help ensure that “getting it done” doesn't supersede “getting it done right” and that growth targets are compatible with the organizational risk appetite. 

Every modernization effort will have its own principles, based on the organization’s unique strategies, customer base and operational footprint. But all should be designed to link specific platform functionality (e.g., support for integrated cross-channel experiences) with specific business goals (e.g., increased customer engagement). 

Business and technology principles can – and should ¬– be mutually reinforcing. For instance, the business will prioritize solutions that enable rapid, dynamic responses when market conditions change or competitive threats emerge. In technology terms, the requirements will emphasize modularity based on interchangeable assets and components that are extensible, reusable, maintainable and adaptable, all of which are inherent in the design of advanced technology platforms.

While there is no singular prescribed route to achieving successful modernization, there are several validated adoption models, each offering distinct advantages and drawbacks. Banks seeking to stimulate growth through new products or entirely new business models (e.g., stand-alone digital banks) may gravitate toward adoption models that establish an entirely new core system with minimal integration dependencies on current infrastructure. Conversely, banks aiming to reduce potential disruption to customers might favor an adoption model that involves two cores – one legacy and one new – working simultaneously in tandem to serve customers during the transition period.

Effective adoption models for core modernization in the banking sector include:

• Digital bank – rapid implementation, minimal integration: This model is often used by traditional banks launching direct-to-consumer brands via a complete, independent deployment of new technology that is not integrated with any existing systems or platforms. This approach can be particularly advantageous for digital-only initiatives and brand-new implementations.
• Sidecar (also known as side core) – rapid implementation, moderate integration: New core systems are connected solely to the bank’s channels and backend existing systems (e.g., general ledger, statements), enabling rapid deployment. New products become accessible through and new customers are onboarded onto the new core system. The two cores operate independently alongside each other, with accounts gradually shifting away from the legacy systems over a period of time.
• Targeted adoption – business value focus, moderate integration:  In this approach, sometimes called “strangler,” specific functional capabilities of the legacy core systems are externalized through new enterprise components (e.g., customer management, product catalog, relationship pricing). These components abstract and expand upon the existing core functionalities. This focused preparatory phase aims to deliver early incremental business and technical value, mitigating risks associated with transitioning from a monolithic architecture to a new core structure based on microservices and event-driven architecture. Subsequently, the new core platform is introduced, offering new products to both new and existing customers. The two cores coexist independently, with accounts gradually transitioning from the legacy systems to the new core over time.
• Phased full adoption – low-risk focus, comprehensive integration: In this strategy, the new core platform and enterprise components are implemented within existing application ecosystems. A complete range of existing and new products operates on the modernized core system. The two core systems operate independently alongside each other, with a gradual transition of accounts from legacy systems carried out systematically to shorten the coexistence period. While this approach may require increased resources, it can effectively reduce deployment risks by limiting user exposure and providing clear fallback options.

Tight budgets often limit investments in organizational change management. But research from EY and Oxford University shows that the so-called soft side of change often delivers the hard, bottom-line results business leaders are looking for. For instance, businesses are 2.6 times more likely to drive successful transformation by putting people at the heart of the change as a critical element of strategic leadership and planning. 

Human-centered design can lead to more satisfying customer experiences and help employees understand both why new tech is necessary and how they should use it. New platforms boost customer-centricity through more intuitive product interactions, personalized experiences, timely communications and notifications. Employees can – and should – help design new technologies to improve adoption and advocacy of new systems and tools. 

New platforms may also lead banks to seek new talent and access to scarce skills (e.g., data science). Alternative sourcing models can also enable a strategic shift within IT, as relatively low-value activities (e.g., maintenance, back-office processing) are handled by partners or specialty service providers. It’s worth remembering that better technology is key to attracting top talent.