The world is changing, moving towards digital technology in every area of life. From smart refrigerators that allow users to check the weather and the temperature of their food to mobile apps that control everything from bill paying to thermostat settings, going digital is the goal of companies in most industries.
Yet for community banks and financial institutions, the digital transformation comes with a specific challenge. That challenge is the nature of the current core systems available for the banking industry. Some of these core systems, better known as Legacy Systems, are at the center of internal processes, online banking, bill pay systems, mobile banking, and cash management systems. These systems and processes face a tremendous transformation in the coming years to put them in line with current technological architecture, modern digital language, and available digital tools. As the banking industry looks to the future, banks that are utilizing older systems need to take a closer look at how their current Legacy System is going to evolve to adapt to this modern digital environment.
Today’s Legacy Systems Include Older Technology
Looking at the leading core providers in the market today, each of them has a legacy core system as one of the leading applications they offer. FIS has Horizon, Fiserv has Premier, and Jack Henry has SilverLake. All three of these Legacy Systems were created decades ago. FIS Horizon is the newest, but even that was built in the early 1990s. Fiserv Premiere was initially written in the late 1970s, with several significant updates since that time. Jack Henry SilverLake came onto the scene in 1989.
Many community banking organizations continue to rely on these Legacy Systems, even though the technology they contain may not align with some modern tools. Bringing them into a more efficient digital environment is a change that must happen.
Over thirty years from 1990, three new systems have come to the market, with DNA Fiserv and Phoenix Finestra remaining viable options. Yet even with these, which are popular in the community banking market, improvement is possible.
To address this need, all three of the top core providers are currently working on migrating these applications to where they need to be today. With the addition of more modern languages, cloud deployment, and digital integration, these Legacy Systems should bring major improvements in the coming years.
Transformation is Happening
In 2018, EY performed a survey of the global banking industry. The study found that 85 percent of banks named implementing a digital transformation program as their top priority. This has not changed in the two years since the survey. Financial institutions want to transform their internal and customer-facing interfaces to use technology more efficiently.
Currently, all three leading vendors are adapting to bring their products in line with the current needs of their bank customers. The speed at which these changes will occur remains to be seen, but it must happen.
There are new entries into the Core System market today. While they do not have some of the challenges of the Legacy core systems, they do face a struggle to get integrated with the complex systems that banking demands today. Building market share is no easy task with the rate of change we are facing today. In the 1990s, when three new core systems emerged on the market, it took 30 years for them to make headway, and only two were successful. Today’s new core systems face a similar uphill battle.
This migration of Legacy Core systems into the digital age must address at least two specific improvements: real-time processing and an extensive collection of open APIs to integrate third-party applications that a community bank might choose. Real-Time payments, same-day Ach, and bank anywhere demands from customers are all moving the modified batch environment to a real-time processing necessity.
Demand for Open APIs
First, the current banking industry has created a strong desire for open APIs. Open APIs create application programming interfaces that third parties can access to develop their apps and services. This gives account holders more financial opportunities through greater financial transparency. Financial transparency allows third parties to create personal finance management applications that will improve the economic situation for banking customers.
Not only does an open API allow Legacy Systems to improve the services third parties offer to their customers, but it also helps meet the new open banking requirements. Open banking is already required in the UK and other parts of Europe, and it is becoming a growing trend in the United States. Open banking allows financial institutions to share data securely when approved by a customer, and it requires open APIs.
Demand for Real-Time Functionality
Real-time functionality helps both the customer and the banking institution. Customers need to be able to make real-time payments and access their financial information in real-time. Not only does the core system need real-time data, but the applications connected to it do as well. Offering real-time functionality needs to be part of the near term plan for Legacy Systems as they adapt to meet the demand of the modern community banking market and its customers.
What Does the Future Hold for Legacy Systems?
The future for the three Legacy Systems vendors focuses on how well they will tackle the multi-year digital transformation. While what happens in the future is still unknown, what is clear is that Legacy Systems must transform to meet the demands of a new, digital world.
What does this mean for the community bank? Community banks who wish to embrace digital technology will need to approach the decision in one of two ways. They may search for a new Core System that will bring them into a completely digital world with a unique customer experience, or they can watch the Legacy Systems go through the digital transformation and choose one that does so well. Either way, community banks who wish to remain competitive are going to need to embrace the digital transformation.
As your bank or credit union approaches this digital transformation, you are going to need confidence that the vendor you choose and the core application you embrace are the right ones to give your customers the proper digital experience. If we can help, reach out today at Michael@michaelwofford.com.