Editor's Note: Forrester analyst, Jost Hoppermann, recently published a report entitled "An Introduction to Digital Core Banking." In this blog, we break down the report and discuss what a digital banking core renewal means for financial institutions.
In a recent report published by Jost Hoppermann from Forrester entitled, "An Introduction to Digital Core Banking," two keys takeaways were highlighted:
Banking Platform Transformation Can be Slow and Is Risky: The majority of banks and their AD&D teams accept the transformation imperative. Nevertheless, many banks struggle with their transformation initiative. Various obstacles slow transformation projects down and increase their risk.
Digital Core Banking Focuses On Customer - Facing Banking Capabilities: The "new core" separates customer interactions and data. Combined with modern architectural approaches, this decoupling supports constant change and can also reduce risk.
To my knowledge, this position has not been advocated by many analysts or pundits to date. Most still see the issues around legacy core systems that create a fragmented view of the customers as separate from the needs of those same customers when it comes to digital banking. Hoppermann's conclusions in this report offer a way around this Prisoner's Dilemma that is so common in financial institutions here in North America and around the world.
In a prior 270° blog - Digital Banking, Core Renewal and Thinking from the Inside Out - published in January 2015, this quote from David Gibbard sums up why Hoppermann's position should be burned into the brain of any bank or credit union trying to figure out how to address the digital revolution outside their gates:
"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 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's not pretty....
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?
And yet, so many institutions seemed determined to think from the inside out rather than the outside in. Hoppermann posits that an end-to-end digital banking solution (i.e., a single platform that delivers a comprehensive set of services with a consistent UX across all devices, e.g., laptop, smartphone, tablet, wearable, etc.) should serve as the new core for financial institutions while the traditional core is utilized as a data repository serving the new core. This diagram from the report represents this approach:
The devil may be in the details here but at least it is the devil we know. For example, almost certainly this new core must contain a digital banking solution that features an API-driven architecture. In addition, it would be advantageous if the solution featured its own database where more current data is held (while also being shared in an updated form with other systems) so that data provided to an and about the customer is more easily actionable. Lastly, providing a solution that allows a bank or credit union to control the UI and data associated with all services - even those provided by third parties - simplifies things for the end user while giving the institution valuable options that can make a monetary difference to their bottom line (e.g., lease cost routing when doing any form of money movement).
By the way of full disclosure, I should share with you the main reason why Hoppermann's point-of-view resonates with us at D3 Banking. This is the diagram we most commonly use to represent a high-level view of what we provide to financial institutions.
As you can see, ours is a "new core" layer for banks and credit unions not unlike what Hoppermann describes. In a year's time, while conducting two of the largest replacement projects in recent history in the United States, more than 1.2 million end users were migrated to this view of how a digital banking solution should function. At least 1.3 million users will migrate onto our platform in the next 12 months.
So, it is easy to see why we are partial to Hoppermann's recommendations. Even so, our blatant self-promotion set aside, the view is a powerful one and provides a roadmap for financial institutions that may currently feel there is no other option than replacing their core banking system(s). It is a viewpoint we would urge all such banks and credit unions to consider the risky and expensive path of core replacement, regardless of the digital banking solution they choose. The fact is, there isn't time for the old school approach of updating the core. By the time that type of project is over, the opportunity to differentiate institutions competitively will have already passed.