Digital Banking, Core Renewal And Thinking From The Inside Out

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More than a couple of really smart folks in the industry have suggested that for financial institutions to be able to respond to the digital revolution raging around them, they first must address the deficiencies in their core banking systems. 

This proposition, in my opinion, is wrongheaded.  It is not that core-processing systems aren’t in need of renewal.  They are.  Many contain programming languages that only a minority of the population on the planet can spell.  They are monolithic, account driven beasts that restrict the view of the customer’s overall relationship with the institution.  Address them and you will be able to decrease complexity and cost – if you survive the project. 

However, renewing the core is not the answer to addressing the digital revolution.  The digital landscape is too fluid and fast moving to make this option viable even if someone were lucky enough to guess what the core would need to accommodate over the long haul in a   world breeding the Internet of Things.

Another really smart guy, David Gibbard, wrote about the fallacious belief that a core renewal could save a financial institution struggling to find its bearings in the digital age.  This quote from David’s blog is a long one but worth the read:

“Core banking systems, also known as core data processing systems, were architected and built 30 to 40 years ago. They were designed more than 20 years before anyone heard of the Internet and their basic architecture has not changed since then. They were built to handle internally-generated transactions from tellers, loan officers, CSRs and back-office support staff.

They most definitely were not designed and still are not designed to meet the needs of external users such as customers and members. As a former executive of a core banking system company, I have seen the inside of the belly of the beast and it is not pretty….If you saw how core banking systems are architected, enhanced and maintained, the spaghetti code cobbled together, and the lack of documentation, you would not want to rely on it to run your bank or credit union…

Converting from one core data processing system to another core data processing system is like adding Internet radio to your 300,000 mile, 15 year old car. It may provide you with a feature you are missing, but what happens when the engine blows up?” 

My Honda Element is only 12 years old with only 150,000 miles on it.  Being a Honda from another age, it might live to be twice this old and double up on the miles before the engine goes.  However, if I wanted an Internet-connected car, no one would think it sane for me to retrofit the Element with that capability. 

The “fix the core to win the digital battle logic” is an example of a point of view from a different era when financial institutions defined how and when they would deliver the services they provided.  Unfortunately, this perspective is still entrenched in the minds of too many.  They think the public will wait while their organization sorts through its best option, in other words the lowest risk to value ratio they can find. 

The reality is financial institutions lost control of the catbird’s seat in the decision making process related to digital channels sometime shortly after the introduction of the iPhone, and since then consumers have been voting with their feet in search of perspectives that consider first what is best for the consumer rather than what is optimal for the bank or credit union. So important to the consumer is the digital experience that they will even sign up as customers of the “Too Big To Fail” set that so many swore off of after they nearly burned down the barn a few years back.

Not all bankers are stuck in the past, though.  Some are working hard to find a way to meet the digital needs of consumers even if the option involves some risk.  Take for example Jay Sidhu, the former long-time boss of Sovereign Bancorp who is now at Santander.  Jay was recently featured in the WSJ’s blog, Moneybeat.  Jay, with his daughter Luvleen Sidhu, has launched BankMobile, a branchless bank whose app you can pick up as of this week in the Google and Apple app stores.  

Sure, you can argue that others have tried the Internet-only, branchless thing.  Jim Marous (uber smart guy) noted in the WSJ blog, “The challenge with every internet-only bank in the past and today is the ability to provide enough value in exchange for ‘giving up’ branches and local access.”  I would never argue with Jim (or I would at least be very selective about when I do).  His point is valid.  However, what I like about the Sidhu approach is that their thinking is oriented toward the future, not the past.

Jay and Luvleen, along with others with similar business plans, are not thinking about 40 year old systems.  They are thinking about how to use new technology to address the issues of connectivity, convenience and control consumers want any time, any where, from whatever device they are holding for whatever purpose they deem important at the time.  My bet is that some version of this strategy will carry the day and that by the time most pursuing the core renewal logic finish up, the game will be over.