The banking industry is undergoing a seismic shift. As fintech disruptors and neo-banks redefine customer expectations, Tier 1 banks face mounting pressure to modernize their core legacy systems. Core modernization for Tier 1 banks is not a mere technical upgrade; it’s a strategic imperative. However, the journey is fraught with complexity, regulatory scrutiny, and operational challenges.
Through this article, let’s explore the unique challenges of core modernization for Tier 1 banks, outline the key strategies to overcome them, and provide actionable insights for CTOs and CIOs leading these transformative initiatives.
The complexity of modernization in Tier 1 banks
Tier 1 banks operate at an unprecedented scale, managing trillions in assets and serving millions of customers worldwide. Unlike fintech institutions and neo-banks, their IT landscapes are a dense patchwork of legacy systems, deeply embedded processes, and overlapping platforms. While these systems are resilient, they hinder agility, innovation, and cost efficiency.
Therefore, core modernization for Tier 1 banks is a structural transformation that demands strategic planning and execution. The scale and complexity of these banks introduce unique hurdles that go beyond technology upgrades. Some of the critical challenges include:
- Legacy systems and incomplete documentation: Legacy systems are considered stable and cost-effective, but they are among the biggest modernization barriers for Tier 1 banks. Over decades, they have accumulated inefficiencies, added complexities, and disrupted innovation. Incomplete or outdated documentation further complicates updates, making distinguishing between active and obsolete functionalities difficult. As a result, even a single business release can take weeks.
- Mergers and acquisitions: Many Tier 1 banks have grown through multiple mergers and acquisitions, resulting in fragmented IT estates with disparate systems that were never fully integrated. This managed coexistence creates layers of complexity that slow down modernization efforts.
- Dependencies and organizational complexity: Core banking systems are deeply intertwined with other platforms and functional areas. For example, we worked with a large UK bank where over half of the 30+ platforms we worked on had dependencies on the core banking replacement project. This interconnectedness makes managing scope, sharing knowledge, and maintaining a coherent understanding of the current and future states challenging. Additionally, large teams and deeply ingrained processes create barriers to adopting new ways of working, slowing down transformation efforts.
Beyond these critical foundational challenges, Tier 1 banks must also navigate modernization hurdles that add further complexity. These challenges stem from technology and the operational realities of running large-scale financial institutions. The operational/execution challenges include:
Scale and duration
Core modernization projects in Tier 1 banks are massive in scale and often span multiple years, resulting in a higher risk of failure due to changing circumstances.
Coexistence and migration
Unlike smaller banks, Tier 1 banks must manage coexistence between legacy and modernized systems, which can last years. This requires careful planning, multiple transitional states, robust abstraction layers, and seamless integration.
Regulatory scrutiny
Regulators are deeply invested in ensuring that banks maintain their ability to service customers during and after modernization with a focus on safe delivery, customer migration, and compliance with regulations like GDPR.
Competitive pressures and customer expectations
Competition from neo-banks and fintech is forcing Tier 1 banks to innovate rapidly. Customers now expect 24/7 availability, real-time transactions, and seamless digital experiences.
Strategies for navigating core modernization program
Successfully modernizing the core of a Tier 1 bank requires a balance of vision, pragmatism, and execution discipline. The challenge isn’t just technological; it’s about managing risk, aligning stakeholders, and delivering tangible business value at every stage. Let’s explore some key strategies to help banks navigate common pitfalls and accelerate modernization efforts.
The scale of core modernization can be overwhelming, but breaking the project into smaller, manageable phases is critical. The banks can begin with a minimum viable product (MVP) or a small proof point that delivers tangible business value. For example, these institutions can focus on a specific product line (saving products or loans) or customer segment to demonstrate the program’s potential. This approach helps build momentum, secures stakeholder buy-in, and avoids the perception of the project as a money pit. They must deliver incremental business benefits to maintain relevance and stakeholder support. This ensures the program remains aligned with evolving business priorities.
While building foundational capabilities for future needs is essential, delivering value quickly is equally critical. A balanced approach ensures both short-term wins and long-term scalability. Tactical components address immediate business needs with quick wins, such as improving customer-facing functionalities or reducing operational inefficiencies.
Strategic building blocks invest in generic capabilities that meet future strategic needs, such as a headless core, real-time processing, and messaging, a system of engagements and insights, or dynamic pricing models. However, banks must avoid waiting too long to deliver value, as strategic building blocks take time to develop and require extensive analysis.
Regulatory compliance is non-negotiable. The banks must engage regulators from the strategy stage and maintain open communication throughout the program. A dedicated function that interfaces with regulators can help navigate complex compliance requirements.
The Tier 1 banks must minimize disruptions that could cause customers to re-evaluate their relationship with the bank or minimize points of inflection. They should avoid unnecessary changes, such as issuing new account numbers or sort codes, which can be highly disruptive. Focusing on seamless transitions, such as updating customer IDs or security credentials, which are less intrusive, is essential.
Modernizing systems to meet customer expectations includes 24/7 availability, real-time transactions, personal experiences, and user-friendly interfaces. These capabilities are now table stakes in the age of neo-banks and fintech. They must also enable self-migration strategies to help customers migrate gradually, such as by opening new accounts on the modernized system and allowing old accounts to phase out naturally.
Unlike smaller banks, Tier 1 banks cannot afford a big bang migration due to their scale. Instead, they must manage the coexistence between legacy and modernized systems, which can last years. This makes designing a robust coexistence strategy critical, ensuring seamless interactions across legacy applications, channels, payment systems, and finance platforms. Managing this complexity requires a phased approach with clearly defined transition states to maintain operational stability and minimize the potential risks.
The first step is modernizing connectivity, which includes upgrading the integration between channels and back-end systems using modern infrastructure, such as API-based solutions. Once this foundation is in place, routing and coexistence mechanisms must be implemented to efficiently manage interactions between old and new systems, ensuring seamless communication. Finally, data modernization plays a crucial role by adopting an intermediate target data model that maps legacy data structures. This enables banks to maintain continuity while enabling future flexibility. Each transition state must be rigorously validated to maintain service levels, ensure stability, and allow a seamless modernization journey.
Modern APIs, streaming-based architectures, and cloud-native platforms can facilitate seamless integration between legacy and modernized systems. AI can further enhance this process by analyzing existing designs and integrations, identifying inefficiencies, and optimizing migration. Additionally, advanced tools can help deliver personalized experiences, ensuring that modernization efforts align with evolving customer expectations.
Core modernization programs span multiple platforms and engage thousands of individuals, making efficiency and scalability essential. A structured, factory-style delivery model can streamline execution, ensure consistency, while preventing resource wastage. However, timing is critical as scaling too early can lead to inefficiencies and inflated costs. Instead, the focus should be on delivering initial value before expanding the team or scope. According to the mythical man-month concept, adding more people doesn’t always speed up delivery, but careful planning and phased execution drive real progress.
How can banks measure the success of modernization?
Now that we have covered core modernization challenges and strategies, the next critical question is: Are these efforts delivering real business value? Without clear benchmarks, modernization risks becoming an open-ended pursuit. The right metrics help banks track progress, validate decisions, and ensure investments drive cost efficiency, innovation, and agility. Let’s explore the key indicators.
- Operational cost savings: Modern core banking systems reduce operational costs by eliminating exceptions, increasing straight-through processing, and enabling more digital servicing and sales capabilities.
- IT development and change savings: Modern platforms are inherently more flexible and easier to support, reducing the need for large change teams.
- Value delivered: The ability to offer new propositions and capabilities, such as dynamic pricing models, can increase revenue. Speed to market is a key competitive advantage.
- Applications decommissioned: The number of legacy systems decommissioned is a critical metric for assessing the success of modernization efforts. Rationalization and simplification should be a top priority.
Modernization imperatives for CTOs and CIOs
For technology leaders, core modernization isn’t just about implementing new systems. It’s about driving business impact, ensuring seamless integration, and maintaining regulatory compliance. Here’s what CTOs and CIOs should prioritize:
- Embrace incremental delivery: Long-duration projects are prone to failure. It’s important to focus on delivering incremental business benefits to maintain relevance and stakeholder buy-in.
- Plan for coexistence: One of the most complex aspects of core modernization is managing the interaction between legacy and modernized systems. Technology leaders must invest in robust abstraction layers, transition layers, and coexistence strategies.
- Engage stakeholders early: Migration planning should start early and involve all relevant stakeholders.
- Balance innovation and compliance: While innovation is critical, it must be balanced with strict regulatory compliance. A dedicated regulatory function can help navigate this complex landscape.
Core modernization in Tier 1 banks is a monumental task, but it’s also an opportunity to transform the bank’s IT estate, enhance customer experience, and drive operational efficiency. By thinking big but starting small, engaging regulators early, and prioritizing customer satisfaction, CTOs and CIOs can navigate the complexities of core modernization and deliver lasting value. The journey may be long, but with the right strategies and a focus on incremental delivery, Tier 1 banks can emerge stronger, more agile, and better equipped to stay competitive in the digital age.
Mridul Singh
Associate Director, BFS Consulting
Mridul is a seasoned digital transformation executive and trusted advisor with over 24 years of experience leading complex business and technology transformations across open banking, core modernization, digital identity, and payments. As a core modernization architect, he specializes in guiding Tier-1 banks through the transition from monolithic systems to modern, agile architectures. A TOGAF-certified expert, Mridul is known for solving complex IT challenges, securing stakeholder alignment, and delivering impactful results in highly regulated environments.
Andrew Grigg
Vice President, BFS Consulting
Andrew is a seasoned IT leader with over 25 years of experience in technology leadership roles, including chief architect, CTO, and program manager. His expertise lies in driving transformational change through modern digital architectures and banking platforms, including core processing and payments, across banks and financial services firms.
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