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Don’t Fear Modernizing Your Core: Banking Innovation in the Digital Age


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Today, 80 percent of U.S. bankers would like to modernize their core deposit systems and they see a wide range of benefits in innovation, functionality and the overall financial return. Conversely, only 15 percent of bankers believe a new core deposit system will be installed in the next three years. This exclusive research from NTT DATA Consulting, unveils what factors are supporting and hindering core deposit system replacement today. For more information or to receive the white paper visit:

Published in: Economy & Finance
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Don’t Fear Modernizing Your Core: Banking Innovation in the Digital Age

  1. 1. © 2016 NTT DATA, Inc. Innovation in the Digital Age April 19, 2016 Don’t Fear Modernizing Your Core
  2. 2. © 2016 NTT DATA, Inc. 2 What are the factors supporting and hindering core deposit system replacement? 2 Can banks’ existing core deposit systems enable the innovation required to compete in an increasing digital financial marketplace? 1 Do banks believe they need to modernize their core deposit systems, and if so, are they planning to? 3 Is there a rising threat as consumers look for banking alternatives? 4 What is the path for success to modernize their core deposit systems? 5 Key Questions: Investigating Core Deposit System Modernization
  3. 3. © 2016 NTT DATA, Inc. 3 Survey Snapshots Banker: • 114 banker surveys conducted with core deposit executives • Director level bankers and above • Distributed between small, regional, and national banks Consumer: • 1,010 consumer survey responses • Online survey • U.S. based • Reflect higher income • Required to be 18+ Household Income 19% 21% 55% 5% Less than $49,999 $50,000 to $99,999 $100,000 to $249,999 $250,000 or more Age Distribution Overall mix of respondents reflects a higher income base Even distribution of respondents across age segments 31% 50% 19% 18-34 35-54 Over 55 Bank Interview Summary 114 surveys were conducted to understand core deposit system status, roadmap and performance 40% 24% 36% Top 5 Nationwide Banks (U.S. Bank, Wells Fargo, Citigroup, Bank of America, JPMorgan Chase & Co. Large Regional Banks (PNC, Citizens Bank, SunTrust, Capital One, BB&T, etc.) Other Banks (Community, Brokerage, Insurance, etc.)
  4. 4. © 2016 NTT DATA, Inc. 4 Rise of Expectations: • Consumers want and expect real-time and intuitive financial transactions • Millennials are raising the expectations in consumers who have significant assets Market Factors Make the Need to Modernize Banks’ Cores More Urgent Consistent Experience Across Channels: • Mobile has already surpassed online for some banks • Consumers still want branches Banks’ Best Customers are at Risk: • 60% of banking profits are at risk from FinTech1 • 40% of revenue could disappear by 20251 Inefficient Legacy Applications: • 78% of IT budget is spent on maintaining legacy systems • 70% of bankers do not feel their processes can quickly adapt to change 1. McKinsey & Company, "The Fight for the Customer: McKinsey Global Banking Annual Review 2015"
  5. 5. © 2016 NTT DATA, Inc. 5 Major Challenges with Current Core Deposit Systems: 37% Major Challenge % Responded 8-10 The cost of maintaining legacy systems Complexity of integrating with other systems Cost of product development Scalability of the systems to support growth Improving the customer experience Cost of responding to regulatory 35% 29% 29% 28% 26% 26% Q16 On a scale of 1 to 10, please rate the degree to which each of the following is a challenge or limitation with your organization's current core deposit system strategy. Bankers Identified at Least One Major Challenge with Their Existing Deposit Systems 2 3
  6. 6. © 2016 NTT DATA, Inc. 6 More than 50% of bankers expect that a new core will enable faster response to customer expectations New products/innovation ………………………………………………….. 53% Improvements in processes within the business ……………………... 49% Increase the customer experience ………………………....................... 48% Improved agility to respond to business needs …………………........ 48% Ongoing cost and maintenance ………………………………………….. 46% Overall financial return on investment ………………………………….. 46% Improved functionality …………………………………………………….. 45% Major Business Benefits of a Modern Core Deposit System: Q24. On a scale of 1 to 10, please weigh each of the following business benefits that would result from investing in a modern core deposit system Bankers Expect a Wide Range of Services3 4
  7. 7. © 2016 NTT DATA, Inc. 7 0% 10% 20% 30% 40% 50% 1 in 10 banks are making fundamental changes But Struggle to See the Path to Modernization Current Architecture and Product Strategy: Adding new functionality through external and third party applications Significant changes to the core deposit system to support new functionality Little to no investment to add new functionality to the core deposit system Fundamental "re-architecture" of the core deposit system in process (or being considered) to support 21st century initiatives Complete change to a new core system in process (or being considered) Q18. What is the bank's current position on the architecture and product strategy for core deposit systems over the next 3 years? Top Modernization Fears 1. Information security risk 2. Catastrophic failure 3. Implementation and integration 4. Public image 5. Dependence on specialized vendor resources
  8. 8. © 2016 NTT DATA, Inc. 8 Banks Want to Change Their Core Deposit Systems of banks will assess their core deposit system within the next three years 80% Plans to Assess Core Deposit System: Q17. Have you conducted an assessment of the costs and steps necessary to replace your core deposit system 16% 21% 37% 6% 80% Have conducted an assessment within the past three years In the process of conducting an assessment Plan to conduct assessment in the next 12 months Plan to conduct assessment in the next 36 months Don't anticipate conducting an assessment 20%
  9. 9. © 2016 NTT DATA, Inc. 9 of banks expect to start a modernization effort 0% 10% 20% 30% 40% 50% 60% Increasing investments in the current system to ensure we are competitive moving forward Maintaining investments to the current system in order to support business needs Expecting to begin planning for a core system replacement or transformation within the next three years Replacing our core system over the next three years 15% of banks expect to actually replace their core over the next three years 4% More than recognize that they will need to increase investments in current environment to maintain parity 1/2 Current State of Investment in Core Banking Deposit Systems: Q15. Which of the following best describes the current state of investing in your core deposit systems?
  10. 10. © 2016 NTT DATA, Inc. 10 Bank Challenges vs. Customer Expectations Customers expect to bank when and how THEY choose Customers want innovation: 1 in 3 consumers would strongly consider switching primary banks for better online or mobile technology 1 in 4 consumers would strongly consider switching primary banks for one they consider more tech-savvy in general Customers want access: 63% of banks acknowledge being challenged by the complexities of integration Banks struggle to innovate: The vast majority of spending, 78%, within core deposit systems is on maintenance and regulatory compliance Majority of core deposit systems were architected 30+ years ago Banks are challenged by integration:
  11. 11. © 2016 NTT DATA, Inc. 11 of consumers would consider Target or Walmart as a banking alternative 47% Consumers are beginning to think of alternative providers as “this is how banking should be” of consumers indicate awareness of alternative providers like Google Wallet 53% 46% of consumers have an account with an alternative provider
  12. 12. © 2016 NTT DATA, Inc. 12 Bank Expectations Top 8 Things Consumers Want From Banks Banks Need to Modernize Antiquated Core Deposit Systems Access Innovation Incentives New products/innovation ModernizedCoreDepositSystems Improvements in processes within the business Increase the customer experience Improved agility to respond to business needs Ongoing cost and maintenance Overall financial return on investment Improved functionality • Ability to use my money immediately after making a deposit • Better customer service • Better benefits/cost of the relationship • Best tools for money management • Best online and mobile technology • Better/more convenient bill pay • More convenient locations • Personalization
  13. 13. © 2016 NTT DATA, Inc. 13 Banks Should Not Fear Upgrading Their Core Build Out the Business Case Find the Core That’s Right for You Determine the Right Model • Upgrade a U.S. platform • Partner with a non-U.S. vendor • Partner with a non-U.S. bank • Big Bang • M&A • Shadow Bank • Aggressively quantify tangible benefits • Get comfortable with intangible benefits • Identify risks 1 2 3
  14. 14. © 2016 NTT DATA, Inc. 14 Bank’s Struggle: • Market forces are now hastening the need to update aging core systems • Banks want to modernize their core, unfortunately this desire is tampered by the fear of failure and the view that customers will not flee • The response has been to “Band-Aid” solutions through third party and externalized apps Consumer Expectations: • While consumers are generally satisfied with their bank, they are open to switching banks for the right innovations/incentives • Consumers familiar with FinTechs describe them as “how banking should be” Customer Retention: • The best model to retain and grow customers is through: • Providing innovative solutions • Across all the customer channels • While providing superior customer service Path to Modernization: • The path to modernizing success involves a rigorous plan to mitigate implementation risk and leveraging the conversion model appropriate to the institution Conclusion
  15. 15. Contact Us NTT DATA Consulting, Inc. 704.936.1600 | @NTTDConsulting | LinkedIn: /NTTDATAConsulting 15 Peter Olynick │ Senior Practice Lead, Retail Banking