Industry
Banking
Banking Services Transformation: Unlocking Exponential Value
Capital Markets
Unlocking Exponential Future Growth in Capital Market Firms
Insurance
Reinventing the Insurance Industry with a Digital-first Strategy
Solution
Consulting
TCS Consulting Services to Achieve Success in the Digital Era
Highlights
- Complex, monolithic core systems hinder BFSI firms’ ability to innovate, embrace digital technologies, and quickly respond to market changes.
- Banks and insurers must leverage industry cloud platforms to modernize their core and drive business innovation in order to mitigate the risk of new entrants eating into their market share.
- Banks and insurers can choose from various core-to-cloud transformation approaches to become agile and stay competitive and explore moving select capabilities or workloads from core systems to the cloud.
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Core systems occupy a central role
Core systems play a central role in the daily operations of banking, financial services, and insurance (BFSI) organizations.
Hosted on legacy mainframe technologies, bespoke core systems built using innumerable lines of code in various programming languages cost billions of dollars for maintenance and operations. The growing complexity of monolithic core systems, dwindling skill sets, and lack of subject matter expertise have adverse effects on organizations’ ability to innovate and quickly respond to business changes.
Given ever-shrinking IT budgets, banks and insurers must address these challenges leveraging industry cloud platforms, artificial intelligence, and open-source technologies to increase business agility, reduce costs, and mitigate operational risks. Over the years, major cloud service providers have matured to handle select but large workloads such as payments, underwriting, and brokerage, thus facilitating business model innovation. We highlight the various core-to-cloud transformation approaches that the BFSI industry can consider to become agile and stay competitive. The core-to-cloud modernization journey is inevitable for BFSI firms wanting to embrace new technologies and remain competitive. If BFSI firms do not transform legacy infrastructure, they may be exposed to the risk of new entrants—who don’t carry the burden of legacy systems—eating into their business resulting in the loss of market share.
Core-to-cloud models
Banks and insurers worldwide continue to rely on core systems built on legacy mainframe technologies in the 1970s and 1980s.
Additional functions and features were added over time to these systems. Consequently, most of these systems bear little or no resemblance to their original functionality or size and run on technologies with fast diminishing skill sets. To enhance business agility, reduce complexity and costs, drive innovation, and address skill set issues, BFSI firms must explore moving select capabilities or workloads such as clearing and settlement and trade analytics from core systems to the cloud.
The main objectives of core-to-cloud transformations in BFSI firms are cost optimization and business agility (see Figure 1) as well as accelerated growth through business model innovation. Firms must adopt a multi-pronged strategy using proven core modernization techniques like offloading, re-engineering, rehosting, technology standardization, cloud exploration for fit-for-purpose workloads, and greenfield development. The pattern selection depends on the underlying business or technical capability that must be optimized (IT for IT) or transformed (IT for business) as part of the organization's long-term vision and technology strategy. Most financial services organizations are in the initial discovery or pilot phase of their core-to-cloud transformation journey. We are yet to see enterprise-scale adoption or deployment because the risks associated with the transformation currently outweigh the potential benefits. However, a clear pattern is emerging—while small and medium banks and insurers are adopting more cost-savings-focused solutions, large enterprises embrace both cost optimization and business agility-focused solutions.
Figure 1: Core-to-cloud adoption drives cost savings and infuses agility into business
Cost optimization-focused solutions
For cost optimization, BFSI firms should consider mainframe as a service (MFaaS) and re-platforming as part of their overall strategy.
A strong core-to-cloud strategy for cost optimization should include:
Inquiry (data) offloading: Customers today check account balance or portfolio positions multiple times a day through mobile apps or text messages. Such always-on consumer behavior results in high business application run costs. In our experience, inquiry traffic accounts for over 70%-80% of real-time workloads in legacy core systems. BFSI firms must, therefore, offload inquiries to provide replicas of transactional and operational data in the cloud closer to the consuming applications. This provides customers seamless access to real-time data while reducing operational costs for firms. We worked with a mid-sized US bank specializing in personal and small business banking to enable this for high-throughput online transactions and reduce annual operational costs by over 70%.
Batch and output offloading: BFSI firms coexist and co-innovate with fintech and insurtech players, and the ecosystem thrives due to information-sharing among them. The type of information shared ranges from trade execution data and transaction data to insurance claims and more. Firms use batch processing for such information sharing, resulting in higher costs due to the need to process heavier workloads in a short span of time. Heavy batch workloads involving partner data exchange, file extracts, and reports must be migrated to the cloud to utilize serverless computing. This enables greater collaboration with ecosystem partners, reduces costs, enhances data exchange, and improves the ability to work with varied file formats. For a systemically important US financial institution, we helped offload batch and output management workloads in trade reporting to the public cloud, delivering over 50% cost savings and enabling the flexibility to collaborate with partners as well as the latest data exchange formats.
Re-platforming: Banks and insurers can port applications from expensive mainframe platforms as-is to distributed platforms on the cloud. This approach can be adopted for applications such as reporting, customer communication, and trade settlement with a footprint of less than 5,000 million instructions per second (MIPS) or as an interim alternative to a long-term mainframe modernization road map. High-cost applications that are moderately integrated with other mainframe applications, performing limited change-the-bank (CTB) activities and not part of any long-term plan to modernize, are ideally suited for this pattern. A large US bank re-platformed a portion of its brokerage function as part of a multi-pronged modernization program, achieving over 60% cost savings.
Mainframe-as-a-service: Firms can move to consumption or capacity-based licensing models for mainframe hosting. Mid-sized firms can move away from multi-year capex contracts, with no automatic hardware or operating system (OS) upgrades, to opex models being offered in select geographies. In our experience, banks and insurers with an installed capacity of less than 10,000 MIPS are best suited for this model. A Finland-based financial institution operating across the Nordic countries migrated from an on-premise mainframe infrastructure to our private cloud, providing mainframe services in a consumption-based model, enabling economies of scale. This move helped the bank reduce costs by 30% and eliminated periodic hardware refresh hassles.
Business agility-focused solutions
Microservices and APIs are critical to designing solutions for business agility while moving the core systems to cloud.
Robust business agility solutions can be achieved with:
Microservices and APIs: Instant, real-time, and embedded finance is reshaping business models. Reimagining such critical business capabilities into microservices and application programming interfaces (APIs) will require firms to leverage domain-driven design (DDD). For core and differentiated business capabilities, the shift from mainframe to cloud-native technologies such as microservices and containers helps banks and insurers innovate in the marketplace, adapt to ever-changing business requirements, and heighten participation in the API and cloud economy. Retail banks with legacy, monolithic core systems, or large integration layers orchestrating multiple services from core systems, can benefit by adopting this model. A large US-based financial services firm we work with, transformed its decades-old monolithic payment system through microservices and APIs to cater to the changing payments landscape and customer preferences. The firm transitioned to a hyper-scale environment and realized a whopping 200% improvement in release cycles.
Commercial software-as-a-service (SaaS): Banks and insurers spend significant amounts on commercial software packages and maintaining existing homegrown bespoke applications. Vendors are increasingly offering cost-effective, cloud-ready software packages as de-facto upgrade paths in place of their existing commercial packages or as replacements for homegrown bespoke applications. Prominent SaaS offerings exist in transaction banking, cards and payments, trade analytics, policy administration, insurance claims, and even bank-in-a-box for mid-tier firms. Here, out-of-the-box fitment, the extent of customization needed before go-to-market, and total cost of ownership (TCO) are key for successful adoption. Insurers globally are adopting commercial SaaS models for policy administration, claims, and billing to improve time-to-market for new products or new markets and increase operational efficiencies.
Re-engineering: Settlement functions in payments and capital markets are shifting from T+1 or similar timelines to instant or near real-time settlement. To improve flexibility and business agility, firms can explore re-engineering business-critical functions such as order management in investment banking, billing and pricing, and payments. This approach involves building independent and scalable components, each encompassing services, business objects, and related data. This two-phase process begins with reverse engineering to carve out existing systems’ functional specifications, followed by forward engineering to develop cloud-native applications that meet functional and non-functional requirements. Automation plays a crucial role in extracting insights and business rules from existing applications.
Greenfield: Reimagining critical business capabilities necessitates replacing core applications, either completely or in parts, with fresh builds on the cloud or by buying commercial software. In investment banking, there is tremendous potential for replacing decades-old order management and settlement functions with greenfield development to keep pace with fintech competition and comply with current regulations. Investment banks should adopt a gradual build approach for customer-facing applications that demand frequent changes, to improve customer experience.
Getting it right
Most core modernization programs fail to meet expectations due to a limited understanding of existing system complexities.
Target business and technical architecture must be well thought out. Clear insights from the existing landscape will enable design decisions such as defining target-state service fabric, information fabric, and integration fabric. Banks and insurers must identify the right combination of modernization solutions and tailor execution methodologies accordingly.
In addressing core modernization, a no-rocking-the-boat philosophy is advisable as opposed to a big bang rip-and-replace that aims at radically exiting legacy technologies. While planning core modernization, banks and insurers must consider the following:
Right capability: Select the right business capabilities for modernizing or transforming to the target state. Moving all business capabilities to the target state is not recommended. Segregate the existing business capabilities into golden core (foundational capabilities that rarely change, for example, transaction processing and reference data) and adaptive core (peripheral capabilities that often require change, for example, output processing, relationship pricing, and product management) to define the target state and implementation strategy.
Right returns: Prioritize business capabilities with the potential to deliver the most value for investments made, or those that alleviate key operational risks and can be executed incrementally. For example, migrating customer information systems running on mainframe technologies to the cloud helps banks gain a 360-degree view of customers and alleviates risks due to technology obsolescence.
Right strategy: Consider the extent of modernization envisioned, re-architected, or reimagined. Select the appropriate modernization and automation options, enabling zero disruption to business as usual. Initiatives focused on business agility help banks and insurers drive new growth, while cost-savings-focused initiatives bring in the required operational efficiencies and reduce the total cost of ownership.
The bottom line
Core-to-cloud transformation isn’t just another technology upgrade.
Banks and insurers must involve business stakeholders up front so that there is adequate emphasis on building capabilities needed to drive innovation and adopt new business models to adapt to changing market demands and unlock new business values. Contextual knowledge of the existing landscape is critical in such transformations and will help firms maximize business benefits and minimize the risks of transformation. Successful core-to-cloud transformation will require banks and insurers to collaborate with a partner with the requisite domain and technical expertise after a well-rounded market analysis.
