The widespread acceptance of the cloud as a practical deployment option presents new opportunities for financial services institutions, especially for community banks. Ten years ago, the cloud was reserved for high-end applications such as CRM and HR, but today deposit and lending solutions can be delivered effectively, efficiently and securely in the cloud.

The state of the basic transformation

To understand why the cloud is becoming a viable option for core transformation, we need to understand the history of recent core replacements. These fall into two categories: small bank and big bank. Core replacements in smaller banks are generally more successful than in larger ISFs. Obtaining more favorable contract terms and/or dissatisfaction with incumbent suppliers is the reason for many of these “bank in a box” replacements. Around 200 major platform conversions take place each year across the more than 4,500 community banks. For the top 100 banks, it’s a different story with only a handful of core corporate deposit systems replaced in the past two decades.

Not surprisingly, core transformation has lagged at the big banks. At large banks, enterprise core replacements typically cost hundreds of millions of dollars and take years, with many projects failing or being abandoned along the way. There is no doubt that some banking CIOs are concerned that the CIO may represent The career is over. For CIOs at large banks, replacing the core deposit platform is often too risky to consider or best left to the next CIO. The common analogy made for core replacement is “heart transplant surgery”. There are few, if any, successful core replacement stories on time and under budget that CIOs can emulate at the top 100 banks.

Obstacles to core replacement

Most big banks still rely on a slew of overly complex and outdated applications written in outdated programming languages ​​to run their businesses. As you might expect, these systems also have very high total costs of ownership. When many of these basic legacy platforms were first offered, they were designed for one channel, the branch, and one dominant payment mechanism, the check. There were no ATMs, interstate banking laws, call centers, online banking apps, mobile banking, etc. This software essentially provided (a) a system for recording customer balances and transactions and (b) display logic in the general ledger. Over the past 40+ years, these batch processing systems have been hastily modernized to keep up with changing regulations, new business models, changing market practices, more transactions without recourse, emerging channels, etc. For the big banks, this has proven extremely difficult. , expensive and time-consuming to replicate five decades of systems evolution in a next-generation platform.

Small banks don’t have it easy either; they also face a dilemma to swap out the core. Community banks have traditionally had many viable options for their core banking platforms. The major Big 4 vendors each offer multiple bank-in-a-box platforms mostly acquired through their M&A activity. As such, these platforms each compete internally for scarce R&D investments. For a new customer, there is a considerable risk of not selecting the “surviving” platform for fear that your bank will be forced to convert to another sooner than expected. Most bank-in-a-box platforms have become so obsolete and commoditized that it’s essentially a “Ford vs. Chevy” debate as to which is best suited. Additionally, platform limitations are making it increasingly difficult for community banks to technologically compete with cross-city rivals and large banks. A few years ago, a Wall Street Journal article spoke about community banks’ frustrations in offering Zelle® due to the lack of integration from major vendors. Around the same time, the American Bankers Association released its “Principles for Strong Bank-Major Supplier Relationships” and set up a grassroots platform committee to understand alternatives to the Big 4, so that members of their community banks can have better choices.

Core in the Cloud

With the cloud, things are changing for all banks. By definition, the cloud is elastic and can be deployed across the bank, for vertical E2E lines of business, or for horizontal enterprise services. Banks can mitigate core replacement risk by taking an end-to-end approach of migrating certain functionality to the core.

Three areas banks need to consider to embark on a journey of fundamental transformation:

  1. Launch of new business models: A good starting point is to use the cloud to launch new business models not supported by the legacy platform or by prioritizing the migration of products that are not optimal on the existing core to the cloud. Do it right, then move on to the next domain for migration. This phased approach to core transformation will help mitigate the potential risks of “big bang” conversions while accelerating the speed of value creation. Granted, this approach may be more time-consuming and involve running systems in parallel, but the long-term gains and reduced risk are worth it. Loans are a great place to start, as you can still integrate new loans into the cloud while aging the existing book.
  2. Standard adjustment: The broader implication of this shift in cloud technology acceptance is that banks need to start thinking more “standards-fit” than bespoke. In the 1970s, the establishment of a new central banking system was seen as a competitive differentiator, as most banks still relied on physical records, customer passbooks, and many manual accounting processes. Today, bank processing is fully automated, so differentiation occurs through other aspects such as customer experience, pricing, convenience, channel technologies, and more. can be done optimally in the cloud.
  3. Become an early adopter: Early adoption of a cloud-based core banking platform has its benefits. With the “standard-fit” nature of cloud solutions, the ability to shape and prioritize the “standard” is of tremendous value, as later adopters will have to wait, adhere to the standard, make their own configurations, or face challenges. expensive customizations. By co-innovating with a cloud provider, banks can get the best of both worlds: a solution tailored to meet their immediate and future needs tightly coupled with the agility, elasticity and cost-effectiveness of the cloud.

In conclusion

For small banks, the cloud represents a unique opportunity to adopt the robust solutions designed for the biggest of the big, but at an affordable subscription price. The widespread use of configurable parameters, conditions and user-defined fields makes modern cloud solutions very agile. These cloud solutions are also easier to integrate because a huge amount of data and services are exposed through published APIs. As the public cloud matures and banks become more open to using a “standards-compliant” approach, core banking implementations and total costs of ownership are expected to drop.