There are many core systems central to running a bank, but none more critical than core deposits systems. In a recent conversation, KPMG banking leaders in digital strategy discuss how customers view deposits as a fundamental service.
Key takeaways include:
- The role of technology and enterprise architecture when modernizing core platforms
- Investment options for sequencing and staging core deposits transformation
- How to balance new platform selections with legacy systems.
A bank’s critical systems need to align with heightened consumer expectations, integration requirements, and ever-evolving regulatory demands. The modernization of core deposits is a good place to begin that alignment.
You're listening to Core Modernization with KPMG, a banking podcast series dedicated to helping banks become future-ready with digital transformation strategies that work and executions that deliver.
For hundreds of years, customers have gone to the bank. Perhaps in a new world it's time for the bank to go to the customer. We're now living in a world where Space X has figured out how to send people to the moon, yet banks are still operating old and archaic technology to serve their customers. With the growing need of customers to securely transact from anywhere, with an optimal experience, banks will be forced to modernize their core banking platforms, or simply put, risk gradually losing market share from their competition.
My name is Anand Shah, and I'm a KPMG partner responsible for driving our deposits, payments, and lending modernization focus in context of digital transformation. In the podcast today, I'll be joined by two of my fellow partners, Celeste Diana and Mark Shank, whom I've worked closely with across a variety of U.S. banking clients, implementing end-to-end core banking, deposits modernization transformation efforts, tying in digital front-end capabilities.
Today, we'll focus on retail and core deposits modernization, as it is analogous in complexity to performing a heart transplant. During the course of the dialogue today, we'll be talking through a variety of topics centered around shedding more light on key considerations for achieving successful results for this imperative. More specifically, at the end of the podcast we will seek to address the following types of questions that are typically on our clients’ minds. Questions like, “Why should I modernize my core now, and what is driving the need?” “Do I really have to do it?” Or others like, “What approaches are our clients taking?” And, “What options exist to sequence the transformation?” “Where does deposits typically fall in that priority?” Others like, criticality of technology, enterprise architecture, integration, cyber, and cloud as being paramount considerations for a successful transformation. And finally, “How can I increase my chances for success?”—because failure is just not an option.
So with that, Celeste, we've seen a world in which banks have not touched their core bank platforms or deposits platforms for years outside of routine maintenance and required enhancements. What's driving the need to modernize the core now?
That's a great question Anand, and I think it goes back to, it's called “core” for a reason, right? These are really their systems that are central and most critical to the running of the bank. And banks have many, many different core systems. Deposits core is generally the biggest kid on the block. It houses the majority of clients. It doesn't care whether it's a consumer or if it's a commercial customer. And ultimately, it's what every customer views as fundamental to banks opening their doors every day. They need to make deposits. They need to transact. It is what they expect of their bank every single day. If a bank can't get their deposits right, it's unlikely they'll ever have primacy of wallet with their customers, let alone have their trust to do things like take in their mortgages or acquire their credit card business.
So why do they need to modernize? Well, the world has dramatically changed since most core deposits were implemented 30 years ago. These systems were really run off of paper processes. Check 21 and digitization wasn't even a thing. There are still rules in many of the core deposits systems. They're running off of the concept of local clearing houses and geographies. So checks literally had to get on a truck and move from geography to geography in order to get processed. That went away years ago. These were also times when iPhones didn't even exist. Digital capabilities today are really table stakes, and your most critical systems need to be compatible with today's consumer expectations. Putting a SIM card in a rotary phone does not make an iPhone.
The need today, as you asked me, is really being driven off, in my mind, of three things. The first thing is, digital is now and will continue to be the future. Consumer experiences anywhere are expectations everywhere. The stage is much bigger. Competition is coming from anyone that has great concepts and some seed money. And finally, 30 year old systems cannot support the pace of innovation needed to compete in today and tomorrow's world, and nationalization is consumer requirement, not an ambition.
That's great perspective Celeste, and I couldn’t agree with you more. One additional thing I would add, that I am seeing from a variety of my clients, is the need to solve for obsolescence given the lack of investment and the growing need to build an engine, to not only drive more agile product innovation, but also, to implement solutions to stay current with the ever-changing regulatory data capture and reporting needs.
So with that, Mark, to turn to you for a second. The concepts around technology, enterprise architecture, cloud, and infrastructure tend to be coming up in every conversation for any of our clients considering replacement of their deposits or core or lending platforms. Can you please comment about what you are seeing and key considerations to take into account to optimize for customer experience while building a solid foundation for agility to be competitive in the market?
Sure. I think there are a lot of different things that banks want to consider around when they're going to replace their core. I think the number one is thinking about what's really driving this from a business comparative perspective. It's not so much that in a mature future state, you want all the things. Of course, you do. It's more of like, what are you trying to go for first? Because this modernization effort is multiple years long. There's a point in time you're going to be kind of living with multiple legacy and new systems. And so, where are you kind of putting that investment first? So depending on what that is, is it your partnering strategy, in which case you're looking more at the kind of modularity and flexibility of your API and integration layer? Is it more of a time to market, in which case I'm actually looking at your full end-to-end automation tool chain, your ability to do policy as code, get these kinds of controls and things codified into tests so that you can really have real automation end-to-end. There's a number of different kind of balancing acts in where you even land with your core selection. Some of these core platforms, the more modern ones, are still being built a little bit. I mean, just call a spade a spade. You really have to be engaged thinking about what you want, where their features are, who you know has implemented them, and where they are in those implementations, or you're making a safer choice with a more legacy core, but then that comes with some of the architectural baggage around it.
Thanks for that perspective, Mark. As many of our clients are evaluating options for core for replacements while effectively tying in their channels and originations capabilities, they are certainly, to your point, not finding a silver bullet that solves for all their needs. So they are having to think carefully about where to leverage platforms, and natively built capabilities aligned to their strategic imperatives, with technology selection, security patterns and infrastructure playing a paramount role in their decision criteria.
Segueing into another but related topic, that many of our clients are grappling when considering core replacement is with how do you think about sequencing your transformation, and where is the role of deposits in that implementation lifecycle? So Celeste, I know you and I have had many conversations with clients about this topic. “Do I start with building foundational technology and channels capabilities?” “Do I look at originations, or do I start with deposits core?” And of course everything in between, like doing things in parallel. Can you share some perspectives on what you are seeing and how clients are thinking about it?
So, first of all, Anand, I think you said it really well. There is no silver bullet. There's no one-size-fits-all type of approach that's out there. There is one fundamental requirement though. You have to get the foundation right. If you don't, everything else you've built on it or around it will be forever at a disadvantage and not be there to support your future. Can't do it in a vacuum. Both the channel and the ecosystem and the core, they're all important, and they're all necessary. What you can do though, is run in parallel with your other monitorizations, but they have to be highly coordinated with a very, very prescriptive plan around sequencing and staging. Without this well-articulated vision and strategy and plan, you run the risk of never getting done and losing the race before you even begin.
If you want to build a great car, you don't want to do it at a high cost, and you want to make sure that you have a comparable engine. A great paint job is meaningless if the engine doesn't run well. And that's what we're seeing in the core space. Core is not a sprint. It's a marathon. It's going to take years to modernize, so if you haven't begun already, now is the time to get started. And there needs to be, when you do get started, this balance of speed to market spends and putting your talent where it matters.
In terms of which core to start with, there are many efforts well underway. Mortgage originations, for example, has been going on for years. Many have gotten new systems in and now are moving into what I call optimization. So tweaking and going back and fixing things that they missed when they initially did their roll-outs.
Deposits is where we're seeing today the highest priority. Again, if we go back to, this is why you open your doors every day. This is where the focus is. It's a top priority in every C-suite, and everybody recognized it's fundamental to their future. So in summary, starting modernization efforts is critical. Coordinating these efforts across the various areas, whether it is channels, ecosystem, or the core platform itself is critical. If you haven't started today, you're in danger of never catching up. It will take time, effort, and tremendous talent to be successful. And this is your investment in your future.
Thanks Celeste. And very well said. Modernizing your core and in particulate deposits indeed takes an army, but requires extreme coordination and planning given the integration to a variety of upstream and downstream applications. The cost of not doing this right can lead to a negative client impact , and even worse, a loss of market share due to customer attrition in a fierce and competitive market. Wherever you are on your journey, KPMG is certainly happy to bring our experiences to you in any way helpful given the complexity of the undertaking. Thank you for listening today and we look forward to connecting with you down the line.
Thanks for listening to today's episode of Core Modernization with KPMG. We look forward to hosting you again on future episodes where we'll dive deeper into key areas of the core infrastructure.