Modernize core banking to differentiate and future-proof beyond cost-cutting or UI polish

The COVID-19 pandemic and the rise of generative AI (GenAI) have underscored the urgent need for banks to modernize their technology infrastructure. As customer expectations evolve and the fintech competition intensifies, banks fail to modernize risk obsolescence. To stay ahead of the curve and be responsive, they must upgrade their creaky old legacy systems—with options ranging from using APIs to creating entirely new tech stacks. At the same time, modernization must go beyond short-term cost-cutting or user interface (UI) enhancements, and the focus should be on building long-term resilience, agility, and more importantly, adaptability.

In the 2024 HFS Horizons study on core banking modernization, interviews with 28 bankers highlighted the top drivers for undertaking this challenging and costly process:

Future readiness—the imperative for long-term survival (53%⁽¹⁾): The primary motivation for modernization is preparing for the future by reducing maintenance costs and simplifying system modifications. The growing expense of maintaining legacy systems, coupled with a talent shortage, makes it increasingly difficult for banks to innovate and launch new products/services with their outdated technology.

Digital competitive differentiation—building unique value beyond the cloud (32%⁽¹⁾): Achieving a competitive edge through custom digital features is the second-most cited reason for modernization. Over 20%⁽²⁾ of respondents ranked this as their top priority. While cost reduction or updating the rigid technology plumbing is essential, banks must align their business strategies with their transformation roadmaps to fully realize the benefits of modernization. They should also have robust strategies in place for integration and data management.

Mainframe migration—accelerate agility and speed to market (29%⁽¹⁾): Migrating to the cloud to enhance agility and scalability is another key driver, enabling faster product launches and improved efficiency. In an environment of rapidly changing customer demands and the growing fintech competition, banks need flexible infrastructure to stay ahead.

Other reasons for modernization include leveraging AI/ML, analytics, and automation, improving customer experience through hyper-personalization, managing large transaction volumes more efficiently, consolidating systems post mergers and acquisitions, and complying with regulatory pressures.

The Bottom Line: Core modernization is imperative but expensive. Banks must choose their technology and approach carefully to ensure future-ready and continuously evolving systems.

Enterprise leaders should prioritize investments in scalable, adaptable infrastructure—while building a culture of innovation that aligns with long-term business goals and regulatory requirements. Those that can effectively manage the balance between innovation, compliance, and customer needs will be best positioned to lead the industry into the future.

(1) Sum of the top three ranks in the exhibit
(2) Percentage of Rank 1 in the exhibit