Many industry observers recognise that banking is at an inflection point. The confluence of modern technologies is accelerating innovation in the financial services industry (FSI) and driving healthy competition with emergent, disruptive financial technology (fintech) players. Industry experts agree that financial services providers powered by modern core technology will be driving the future of banking.

With the age of core banking technology in Asia at 20 or more years, the demand for a modern solution is huge. Just last year, US retail bank JPMorgan Chase announced its intention to replace its legacy technology platform with a cloud-native core banking system, one of the first major FSI players to do so.

Many legacy core systems remain in place, and these systems are still the foundation of banks’ deposit, loan and credit processing transactions and data after many years. Most incumbents recognize the need to innovate, or risk falling behind.

Financial institutions such as Chase, HSBC and Standard Chartered are using cloud infrastructure from major cloud infrastructure providers such as Amazon Web Services (AWS), Google Cloud Platform (GCP), and Microsoft Azure – among others.  By moving away from costly, custom architecture and on-premise hardware, banks are benefiting from the relative ease of deploying products in the cloud and unlocking opportunities to innovate at scale.

Existing core systems have been shown to be inadequate to deliver the experiences that today’s customers are demanding. Additionally, layers of regulations increase operational costs as existing systems cannot be efficiently re-engineered to comply.

Legacy on premise IT systems can be extremely costly to maintain and are rarely pliable enough to support emerging digital offerings. Cloud computing provides the sort of flexible environment where new products can be built and run – no doubt why 94% of banking executives believe that at least half of their organisation’s business will be in the cloud in the next two years, according to Accenture Technology Vision, 2021.

Traditional core banking systems were built with reliability in mind, but these frameworks are increasingly outmoded, with fewer specialists available for repair and maintenance operations. They can be unreliable, slow, and costly to upgrade or extend. But change is inevitable as financial products grow in intricacy and capabilities.

Some banks have attempted to bridge this innovation gap with short-term upgrades designed to stopgap a growing technological headache. By moving functionality away from the original core system and patching in new functionality, banks have extended their core lifespans. However, these ‘hollow cores’ only provide a temporary solution – they lack the flexibility and capabilities to give banks the capability to compete in an evolving environment.

Much more efficient and cost-effective are cloud-native core banking solutions, which empower legacy banks to easily connect to the broader fintech ecosystem by leveraging industry-standard APIs. APIs in modern core systems dramatically reduce the cost and complexity of building a complete modern bank.

As with other enterprise industries, cloud-based services have the flexibility to integrate ‘out of the box’. With this level of agility, banks can move away from resilient yet closed on-premise systems, and towards cross-connected ecosystems in distributed environments.

Most customers today expect high quality personalised services. Fintech, e-commerce, and entertainment are raising the level of quality delivered to consumers globally making the quality gap more noticeable in traditional financial services. Updating core banking systems to the latest and greatest technology is an essential prerequisite before banks can deliver those market-leading features and experiences.

Moving core banking systems to the cloud will not only generate significant cost savings, but will enable and deliver better customer experiences. With cloud migration in the financial sector gaining momentum (arguably because of competitors’ moves), a new generation of cloud-native core banking providers is emerging.

Vendors are seeing the opportunity to provide legacy-ridden institutions the type of agility and lower operational costs that previously had only been possible after an extensive and expensive in-house re-engineering of systems written in a different era. Now banks can migrate much more quickly and easily, with proven cloud-native technologies already in place, and already data compliant.

Get up to speed on transforming the core of banking with Thought Machine’s whitepaper on comprehending the scale of the migration conundrum.