Banks and credit unions are taking a new look at the role their core systems play in delivering products and services to customers.
In addition to altering consumers' banking habits, the pandemic forced FIs to rethink how they transform their systems and layer new digital capabilities onto their existing technology stack.
Swapping out core banking platforms can be a time-consuming process – and expensive if you intend to do so before your contract ends – so many banks and credit unions are getting creative and turning to fintech to hasten innovation.
Let's look at how quickly things have changed in the past three years and what FIs are considering when it comes to updating platforms, adding functionality, and removing friction for consumers.
Setting the Stage
Switching your core platform has historically involved getting better terms or pricing. It rarely added significant expansion of services or product capabilities.
While serving as "the brain" of daily operations for financial institutions, the features have been similar – and for years, banks and credit unions were content with that system. Meanwhile, the primary core platform providers have been more focused on areas such as compliance.
We assert that the system of engagement is now more important than the system of record. While providers have settled into offering a commoditized black box, banks and credit unions no longer rely on their cores for delivering innovation.
The pandemic greatly accelerated the timelines for digital enhancement at most FIs, and we've seen significant investment in fintech to add product features.
The Sidecar Core Strategy
The funny thing is that most FIs are reluctant to swap out their cores. A recent survey conducted by the American Bankers Association found that three-quarters of CEOs aren't planning a change despite the need to pursue digital transformation.
Enter the sidecar core strategy, where banks and credit unions turn to middleware firms to add niche products while leaving the underlying core platform in place – often by taking advantage of cloud-based offerings. You essentially position a core-like solution next to the legacy core.
The strategy can help FIs quickly adapt to market conditions and changes in consumer attitudes. Rather than waiting an extended period to turn to an alternative core with better APIs, the FI can gradually migrate data over time. What once took years could occur in as little as one weekend.
A sidecar core approach could apply to several areas, including real-time card issuance products or Buy Now, Pay Later (BNPL) platforms. The possibilities for this are endless.
Going Core Agnostic
Legacy providers also present challenges in terms of support and service. Let's say you want to do a conversion. How do you achieve this without disruption for your customers or members?
Traditional core providers use point-to-point integrations, which are not always efficient and can have a spiderweb of connections for something as simple as opening an account.
It pays to be core agnostic by turning to alternative third parties to bolt onto the core or run parallel systems. There are many options to consider – it comes down to developing a sound strategy with the right partner to recognize value in months rather than years.
Middleware firms can have reusable APIs for a solution that is easier to manage. They can help the FI understand that a digital strategy doesn't have to involve a core conversion. Still, you must hold your cores accountable for access to data.
The Bottom Line
Banks and credit unions can move nimbly and capture value faster by pursuing a strategy that identifies sidecar solutions that work with the core or operate in the cloud.
This strategy can be a difference maker when it comes to improving customer satisfaction, accelerating loan closing times, or adding new products and services. It can be achieved in a fraction of the time it would take to consider and convert to a new core.
SRM is committed to tracking current and emerging trends in this space, and we are ready to discuss ways you can tap into a growing market for third-party innovation.