The Road Toward Carving A New Banking Landscape
With deeper regulation in the pipeline and an increasing need to protect customer data, banking institutions have been planning major upgrades to their core systems. Much, if not all, of core functionality is hidden from customers. Instead, it operates in the background to ensure the security of personal information while also helping banks manage risk and customer relationships. The problem is that credit markets remain tight and these projects can cost millions of dollars.
How are financial institutions dealing with this challenge? In this article, we’ll explain the problem as seen through the lens of a bank. We’ll also explore some of the factors involved with a major conversion.
The Challenge In A Sluggish Economy
Few people outside the banking industry know what a core system is or the role it plays. It contains customer deposit and loan data, and ensures a seamless transfer of that information to the various networks used by a financial institution. Those networks that depend upon the transfer of that data are routinely upgraded. The technology on which they’re built constantly becomes more advanced.
The core system functions as a bank’s heart. If it is not upgraded at the same pace of the networks that rely upon it, the technology that drives those networks may not be able to communicate effectively. That is why many banks are considering major upgrades. The alternative is to patch holes in the architecture as they occur, an endless pursuit that can quickly become a money pit.
The challenge for the banking industry is that the credit markets that would make a complete core conversion financially possible have tightened. As noted above, such conversion projects can be extremely costly. Without access to the credit markets, upgrades of this level are all but out of reach.
Meanwhile, existing systems have begun to buckle under the weight of growing technological gaps. What’s more, the industry itself will be on the receiving end of additional regulatory legislation over the next few years. There is a substantial need for an architecture that can provide more stringent risk management in a new regulatory environment.
To meet this significant challenge, many banks are considering a tapered approach. Rather than a system-wide core upgrade, they would instead focus upon components with the highest priority. For example, risk management remains a clear and ever-present priority for the banking industry. Also, many financial firms are considering an upgrade to systems that are more customer-centric.
As the recession threatens to deepen and the credit markets remain tight, banks must carefully manage their limited resources when making core system upgrades. The conversions are necessary; they support improved data integration between disparate architectures, offer better customer security, and provide better tools for risk management. The challenge for banks is making the needed improvements even as funding sources remain sparse.
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