Upgrading Core Banking: Its Drawbacks and Advantages

In many U.S. banks, retail core processing systems are becoming more and more difficult to manage, and financial institutions are under tremendous pressure to upgrade their old systems. This is especially common in older banks, where the systems are less flexible and thus limit the banks' operations and growth.

Core banking functions include deposit accounts, loans, mortgages, and payments. These services are available through bank branches, ATMs, and websites.

The use of real-time transaction processing has increased due to electronic clearing and transfer of payments. Old core applications designed for batch processing are not equipped to handle real-time transactions.



The retail core system is the center of all banking operations. Not only have real-time transactions placed pressure on banks, but also old systems may be more complex and inflexible and thus more difficult to manage. This hinders the growth of banks, especially older banks. Therefore, upgrading core banking systems is an urgent need.

Foreign banks, small and mid-sized banks, and credit unions find it easier to bring about changes to their retail core deposit systems. Smaller banks with new systems and greater flexibility have become tough competition for large banks.

Larger banks tend to resist implementing changes and upgrading existing systems for a variety of reasons. They may fear anticipated problems resulting from transitions from old to new systems. The risks associated with transitions can create inconvenience for existing customers, which may affect institutions’ reputations. Also, the costs of upgrading core processing systems are considerable for large banks. Some banks feel they cannot justify the large expenditures to their shareholders despite the fact that a number of banks currently spend nearly 50% of the cost of upgrading their core systems every year to maintain old systems.

It is widely accepted that under older systems, bank workers spend considerable amounts of time attending to customer-related back-office activities and less time on face-to-face customer interactions. Bank workers are also aware that core banking systems need improvement to increase efficiency and cut operating costs.

Upgrading retail core processing systems is beneficial, as it integrates all of the functions of the bank. Some of its advantages include:

• Substantial reduction of operation costs
• Easier introduction of new products
• Faster customer service
• Integration of all products and services, leading to improved risk management
• Real-time transaction processing
• Scaling up of operations
• Availability of e-trade options to bank customers
• Efficient and easy transactions which can be conducted 24/7

A number of established vendors supply core banking solutions. They help banks upgrade to new core processing systems. These vendors are continuously developing and improving products to meet the demands of the market.