Core Banking Modernization – Which Strategy is Right for You?

Core banking modernization can redefine how a financial institution operates, and the approach taken can have a big impact on its success. That decision depends on a range of factors, such as existing core banking maturity and long-term goals.

Whether the need is a small, targeted upgrade or system-level change, many players historically have assumed that a full core replacement is the only option. While this of course still has its place, progressive modernization through composable banking is gaining traction as a more flexible alternative.

Progressive modernization is a phased approach to updating banking software that allows you to innovate step by step (see blog for an overview). To understand why this approach is resonating, it’s helpful to first consider the inherent challenges of a traditional “big bang” core replacement:

• Operational impact: Prolonged changes can affect day-to-day operations across the entire system, even if just one area is being upgraded.

• Data migration: Moving large volumes of sensitive, real-time data requires precision to maintain consistency and security.

• Integration: Reconnecting systems and third-party services requires careful coordination to avoid potential downstream issues.

• Compliance: Timely updates to compliance-related functionality are essential for regulatory alignment.

• Resource planning: Large-scale projects typically require significant investment and time (sometimes years), so clear budgeting and timelines are vital.

Why progressive modernization is gaining momentum 

With these considerations in mind, many financial institutions are taking the more progressive route. Here are the main reasons why:

• Incremental approach: Individual capabilities, such as deposits, can be upgraded one at a time. This reduces modernization complexity and system-wide disruption compared to a full-scale replacement, lowers upfront costs, and accelerates time-to-market for new features and products.

• Reduced operational impact: Capabilities run independently and communicate via APIs and event-driven architecture, so any issues in one area do not affect the whole system.

• Coexistence and rollback: New capabilities can operate alongside legacy systems during a phased migration, enabling smooth cutovers and easier rollback, if needed. For example, a bank may integrate a third-party digital wallet capability via APIs without impacting its legacy payment systems.

• Balanced granularity: Grouping BIAN service domains within capabilities (e.g. deposits covering multiple account types) reduces integration complexity while maintaining flexibility.

• Strong integration: Support for multiple communication protocols and asynchronous messaging ensures reliable coordination across capabilities and legacy components.

• Dedicated UX layers: Tailored interfaces and customized product management tools reduce user disruption and simplify ongoing operations.

Choosing the right modernization path  

Core banking modernization is not one-size-fits-all; the right strategy depends on a multitude of factors including your existing technology landscape, organizational maturity, and business ambitions.

Large institutions with complex, distributed ecosystems tend to benefit most from composability’s granular approach. This is primarily because it addresses the considerations of a traditional core banking replacement while delivering maximum flexibility and scalability, as well as offering fine-grained control over deployment and upgrades.

Where appropriate, medium-sized institutions can also leverage composability to gain domain-specific agility while also managing integration complexity – essentially creating a “bank in a box” for each vertical.

Smaller institutions with simpler technology environments may, however, find a traditional core replacement or SaaS adoption to be more practical. Composable banking can still work in these cases, but it should be noted that robust integration capabilities, a solid core foundation for areas such as customer data, reporting, and compliance, and a cloud-native or equally scalable platform are among the foundational elements needed to support independent composable deployments.

Regardless of your organization’s size or structure, core banking modernization is rarely without challenges. However, understanding the opportunities and considerations of the available approaches in the context of your business is essential to ensure the most efficient process and maximize return on investment.