Why change your core?
In a recent episode of the Dave and Dharm DeMystify podcast, Dave Wallace and I interviewed Joseph Edwin from Bain & Company.
Previously, Joe had led core transformations at Commonwealth Bank of Australia and Nordea Bank and now advises other banks on how to successfully navigate complex transformation journeys. It was a great conversation, and having known him for a few years now, he clearly has deep expertise.
Joe is too humble to admit it, but in my view, there are few people in the world that can match his experience and knowledge. Even prior to the interview, we have spent much time discussing core transformation: what makes it work/fail, how to approach it, who to use.
However, for me, the most interesting aspect to discuss, and this is Joe’s starting point when consulting with banks, is WHY are you undertaking this transformation? This is a point he insists organisations must agree on before commencing a multi-year transformation journey. This aligns with the great Simon Sinek, who said: “Why is probably the most important message that an organisation or individual can communicate, as this is what inspires others to action.”
The most common ‘why’ talked about is, “Our systems are aging and inflexible to change and it is becoming increasingly difficult to find developers that want to support/maintain them.” There are actually two points to cover here: 1) legacy technology/skills, typically Cobol or assembly language code, and 2) lack of agility.
The skills issue can often be addressed by using a partner/outsourcing the work. By doing this, the bank doesn’t have the challenges of having to replace staff or manage “the bench” when workloads are lower. Most banks can change rates and charges fairly easily and can clone existing products to create new ones. However, creating the product is only a small part of the overall “product lifecycle”, which includes being able to provide simulations for selling a loan, onboarding customers, operating the product and eventually sunsetting (closing down) the product, for example. There are a lot more considerations and processes than simply creating the product in the core system, and this is why it often takes banks time to launch new products.
Even if a product could be launched faster, how much advantage would that give a bank? Especially if what is being launched is a reconfiguration of something that already exists. Launching a new type of product like the first offset mortgage, or in recent years buy now, pay later (BNPL) loans, can provide first mover advantage. However, there is time from when the innovative product is launched and when customer adoption scales for other banks to react.
Another common ‘why’ is the operational cost. It’s very true that a modern cloud-based core is going to save a bank money. However, the cost, time and risk of migrating to a new core needs to be considered, and projects often take years before the legacy core can be made redundant. During the migration period, banks have to shoulder the cost of both platforms. Recently, Leeds Building Society announced a budget of £30m to migrate its core for just under one million customers. That gives us an optimistic figure of around £30 per customer. In comparison, TSB’s recent migration, which didn’t go too smoothly, reputedly cost around £366m, including compensation and fines. This puts the cost at around £80 per customer. These levels of cost are not beyond banks of course, especially when you consider customer acquisition costs could range from £50 to over £150 per customer.
Even though incumbent banks have high cost to income ratios (generally over 70%, with Lloyds being one of the best at 56% according to 2021 figures from Statista.com), this is also the case for challengers like Starling (77%). However, this is because challengers are investing in scaling their customer base and expanding their propositions to compete more broadly with incumbents. As such, without the heavy cost of branches, challengers will find it easier to reduce their cost to income ratios over time than incumbents.
In the USA, core transformation projects aren’t as common as they have been elsewhere. There, much of the “innovation” is done outside of the core. However, I do believe it is only a matter of time before they find limitations in what the “wrappers” they’re creating around the core will allow them to do.
Any bank that has a vision to provide Banking-as-a-Service (BaaS) must also be based on a modern, fully cloud-native core. Without one, they will not only struggle to scale cost efficiently, but they will also not be able to provide the flexibility, agility and innovation their customers/tenants require.
There are many good reasons to change your core, and as always the appropriate numbers can easily be put together to justify the business case. A key point that Joe made during our conversation is that a core transformation often outlives the team that initiated it. I’ve seen one project where the CEO changed three times before the transformation was complete.
Therefore, the ‘why’ has to be so important to the bank that it is seen through to the end. The ‘why’ is the reason that the people involved in the project strive to make it a success. It should inspire them with the belief that they are delivering something that is meaningful and purposeful. Making savings or creating greater efficiency isn’t a ‘why’, but enabling financial inclusion, creating a sustainable bank or assisting customers to meet their financial goals are.
I’m just saying that if you treat core transformation like a standard large project, the chances of success are slim. Inevitably, politics and career paths will hamper successful implementation. A strong overarching purpose can not only transcend individual/personal goals, but provides something that unites disparate teams and departments. It should be something that doesn’t only appeal to investors or those with bonuses tied to the project. It should appeal to customers and others that would benefit from the bank achieving its purpose. Banks can of course have a purpose-driven vision without changing their core. But, if you’re about to embark on something as complex, large and risky as changing your core, then you really want everyone’s backing both inside and outside the bank.
About the author
Dharmesh Mistry has been in banking for more than 30 years and has been at the forefront of banking technology and innovation. From the very first internet and mobile banking apps to artificial intelligence (AI) and virtual reality (VR).
He has been on both sides of the fence and he’s not afraid to share his opinions.
He is CEO of AskHomey, which focuses on the experience for households, and an investor and mentor in proptech and fintech.
Follow Dharmesh on Twitter @dharmeshmistry and LinkedIn.
Read all his “I’m just saying” musings here.