Technical Guide: Modernizing Core Banking Without Disrupting Operations

WAU Marketing

Feb 188 min read

Did you know legacy banking systems led to losses exceeding $36 billion in 2022? Core banking modernization has become critical for financial institutions to stay competitive. According to McKinsey, banks that continue relying on outdated systems may face up to ten times higher operational costs than those adopting next-generation technology.

Core banking has advanced dramatically since its introduction in the 1980s. However, 60% of banking leaders now see digital fintech as a growing threat, mainly due to its limitations in scalability and the high maintenance costs of traditional systems.

This technical article explores modernizing core banking systems without disrupting daily operations. It examines success stories like Valley Bank, which completed its transformation in just 16 months. We also discuss the most effective strategies we’ve used at WAU, considering that by 2026, 40% of global banks will adopt a parallel core model.

An Evaluation of the Current Core Banking System

A comprehensive evaluation of the core banking system requires an in-depth analysis of its architecture, limitations, and performance. Traditional core banking systems, primarily developed in mainframe technologies, present significant challenges for modern financial institutions [1].

Architecture and Dependency Analysis

Most core banking platforms in Latin America were implemented in the 2000s or earlier [2]. Whether proprietary or customized, these platforms have generated high maintenance complexity. Consequently, the current architecture shows significant limitations in terms of scalability and flexibility.

A traditional core banking system consists of several fundamental components: a database, an application server, a web server, and a firewall for protection against external attacks [3]. However, this monolithic architecture makes integrating new services and technologies difficult.

Identification of Critical Points

The most relevant critical points in current core systems include:

Limited processing capacity: Modern systems need to handle between 500 and 1,000 transactions per second (TPS), while legacy systems often fall short of these levels [4]
Complex integration: The closed architecture makes it difficult to connect with external services and APIs [1]
High operational costs: Maintaining customized systems requires increasingly scarce specialized resources [2]

Baseline Performance Measurement

The performance of the current system must be evaluated considering multiple dimensions. Key indicators include real-time processing capacity, transaction management efficiency, and system stability [4]. Moreover, 54% of financial institutions consider microservices and API connectivity essential for a next-generation core banking system [5].

The evaluation should also consider the system’s ability to handle variable loads and demand spikes. Furthermore, analyzing the system’s resilience to failures and recovery capacity is crucial, especially considering continuous service availability is critical for banking operations [3].

Design of the New Technological Architecture

The modern technological architecture for core banking, as we’ve implemented in projects managed by WAU, requires a comprehensive approach combining microservices, APIs, and containers. Consequently, 49% of senior executives prioritize implementing a next-generation central platform to make real-time data accessible and actionable [6].

Selection of Critical Microservices

First, microservices must be constructed entirely through APIs, allowing business users to create new resources by composing services in a virtuous chain [7]. 54% of financial institutions identify microservices as the most crucial attribute in a next-generation core banking system [7].

Critical components for the new architecture include:

Authentication and authorization services
Real-time transaction processing
Customer data management
Notification system
Reporting and analysis services

API and Endpoint Planning

The API strategy constitutes the core of the new architecture. Furthermore, 88% of decision-makers consider having a fully integrated end-to-end platform critical [6]. APIs allow controlled exposure of banking functionalities, facilitate integration with external services, and create new financial products [8].

Implementation must consider API management to establish Quality of Service (QoS) models and control authentication through custom logic [9]. However, a comprehensive security approach must be maintained, avoiding relegating security initiatives to mere compliance activities [2].

Container and Orchestration Strategy

Container orchestration automates and simplifies containerized applications' provisioning, deployment, and management [10]. Moreover, from our experience in modernization projects, these orchestration solutions are fully managed in the cloud. This is supported by developer surveys, where

70% report the same management system for these orchestrations [10].

The container strategy should include configuring a parallel environment for continuous validation and progressive migration. The Kubernetes platform has become the preferred choice for orchestration, offering significant benefits in terms of agility and reliability [11]. This technology ensures high availability of applications, automatically rescheduling workloads in case of failures [11].

Implementation of Progressive Migration

Implementing a new core banking system requires a progressive and meticulous approach, as evidenced by projects implemented by WAU using our methodology with the Strangler Fig pattern. According to industry research, over 50% of mid-market banks favor a gradual transformation to reduce their dependence on legacy systems [12].

Parallel Environment Configuration

Establishing a separate central banking system that coexists alongside the legacy core emerges as the most effective strategy. Consequently, 40% of global banks will adopt a complementary core banking modernization strategy by 2026 [12].

This approach allows:

Establishing a parallel system for specific services
Selectively migrating customers
Maintaining critical operations without interruptions
Validating the effectiveness of the new system

Parallel implementation significantly mitigates operational risks. Additionally, it allows for evaluating the impact and effectiveness of the new digital core before gradually migrating more customers and products [12].

Initial Data Migration

Initial migration represents a critical phase and one of the main risks to mitigate in this project, where data integrity is paramount. Moreover, installations can be performed online without system downtime, ensuring customer services and operations are unaffected [13].

A notable example is Santander, which successfully migrated 90% of its technological infrastructure to the cloud using its Gravity platform [14]. This innovative solution facilitates simultaneous data processing, allowing workloads to be executed efficiently on both the mainframe and the cloud.

Service-activated migration emerges as an effective method, using specific events such as:

Credit restructuring
Issuance of new cards
Interest rate modifications
Incorporation of new products

During this process, while these customer and product segments operate on the new core, most operations continue on the legacy central system [12]. However, monitoring both systems is essential to ensure data consistency and operational continuity.

Progressive implementation allows financial institutions to evaluate the ROI of the new digital core and obtain valuable operational insights before expanding the migration [12]. Consequently, this approach minimizes risks associated with technological transition while maintaining operational stability.

Automation and Quality Control

Automation and quality control represent fundamental pillars in core banking modernization. Implementing automated systems allows for a considerable reduction in operational costs, as we’ve observed in several projects implemented by WAU, ensuring less need for manual labor in execution [15].

CI/CD Pipeline

Continuous integration and continuous deployment (CI/CD) constitute essential practices to streamline the development and implementation of core banking updates. Consequently, this approach allows for early detection and resolution of problems in the development cycle [16]. Implementing a robust CI/CD pipeline facilitates:

Automatic integration of code changes
Continuous validation of updates
Controlled deployment of new functionalities
Automated regulatory compliance

Automated Testing

Automated testing is critical to ensuring system quality. Implementing more than 150 automated full-flow tests has allowed the detection of over 50 incidents in different execution cycles [17].

The testing strategy should incorporate validations at multiple levels. However, the “shift-left” approach is efficient, integrating software testing and quality controls in the earliest stages of the development process [16].

Automated regression tests significantly shorten validation times [1]. Moreover, test automation allows:

Reducing manual errors
Accelerating response times [5]
Identifying potentially risky patterns
Taking preventive measures agilely [4]

Real-Time Monitoring

Continuous monitoring represents a fundamental aspect of maintaining the operational stability of core banking. Implementing tools like COBIS Platform Monitor allows real-time monitoring of system components’ status, generating automatic alerts for behavioral changes [18].

Monitoring automation facilitates proactive identification of potential threats and improves decision-making [4]. Likewise, integrating AI-based technologies allows for increasing revenues through greater personalization of customers' portfolios [4].

Automated quality control also contributes to efficient risk management. Consequently, banks can use automation to supervise operational control, monitor it, and detect incidents [19]. This capability is especially valuable for maintaining system integrity during technological transition.

Management of Technological Transition

The technological transition of core banking represents a significant challenge that requires meticulous management of parallel systems and data validation. Banco Santander has demonstrated the success of this approach by executing its core banking in 11 countries, processing up to 500 transactions per second in both environments [20].

Synchronization of Parallel Systems

The simultaneous operation of parallel systems is an effective strategy to minimize risks. Consequently, during the initial phase, the new and legacy systems operate jointly, processing more than 35,000 batch jobs daily [20]. This coexistence allows:

Continuous performance validation
Bidirectional data synchronization
Real-time monitoring of over 300 events
Agile and contrasted decision-making

However, the complexity of this parallel operation requires careful management. Additionally, Santander’s experience demonstrates that the new system can become a priority after nine months of parallel operation, maintaining the traditional one as a synchronized backup [20].

Data Integrity Validation

Data integrity constitutes a fundamental pillar during the transition. Consequently, migration errors are minimized through a rigorous validation process in the source and destination environments [21]. The implementation of specialized tools like Integrity Checker allows:

Analyzing the database structure
Verifying data dictionary coherence
Examining and correcting discrepancies
Ensuring the unique migration of each element

Core banking modernization provides a framework for banks to operate more efficiently [3]. Moreover, new systems incorporate elevated levels of cybersecurity, including advanced encryption modules to mitigate fraud and credit risk [3].

Experience shows that gradual change is more effective. For example, after six months of successful coexistence, Banco Santander completely disconnected its mainframe [20]. This approach allows financial institutions to access their data directly and securely, facilitating the progressive withdrawal of redundant traditional technologies.

Effective management of technological transition also involves implementing robust authentication measures, such as biometric verification and two-factor authentication [3]. Additionally, the single-entity model of modern platforms increases operational efficiency by quickly connecting with multiple branches, significantly reducing transaction processing times [3].

Conclusion

Core banking modernization represents a fundamental transformation for today’s financial institutions. Our results and experiences within WAU demonstrate that an integrated strategy combining modernization and refactoring can overcome traditional scalability and security limitations while significantly reducing maintenance costs.

Implementing a microservices-based architecture and progressive migration using the strangler pattern minimizes operational risks. This approach facilitates the management of inherited technical debt and ensures service continuity during the transition.

The main challenges include resistance to organizational change and the need for specialized talent to execute migration toward emerging technologies. However, test automation and the implementation of CI/CD pipelines ensure system quality in each iteration.

The new technological architecture, based on containers and orchestration through Kubernetes, allows for greater agility in regulatory compliance. Additionally, efficient deployment capability facilitates rapid adaptation to new regulations in the financial sector.

Want to implement technological solutions that transform your core banking? Contact us to start your modernization process.

Experience shows that financial institutions adopting this comprehensive approach achieve significant competitive advantages, improving their capacity for innovation and response to current market demands. Core banking transformation, strategically executed, establishes solid foundations for sustainable growth in the digital era.

FAQs

Q1. What is core banking modernization, and why is it important?

Core banking modernization is the digital transformation of a bank’s central systems to integrate emerging technologies, improve products and services, and facilitate collaboration in the banking ecosystem. It’s crucial for increasing competitiveness, meeting regulations, and reducing operational costs in the current financial environment.

Q2. What are the main challenges in core banking modernization?

The main challenges include organizational resistance to change, the need for specialized talent in new technologies, managing inherited technical debt, and ensuring service continuity during the transition. Maintaining data integrity and complying with regulations throughout the process is also fundamental.

Q3. How is progressive migration implemented in core banking modernization?

Progressive migration is implemented by configuring a parallel environment where the new system coexists with the legacy one. Customers and services are selectively migrated, continuously validating the new system's effectiveness. This approach allows for maintaining critical operations without interruptions and evaluating the impact before a complete migration.

Q4. What role does automation play in core banking modernization?

Automation is fundamental in core banking modernization. CI/CD pipelines are implemented to streamline the development and deployment of updates, automated tests to ensure system quality, and real-time monitoring to maintain operational stability. This reduces errors, accelerates response times, and improves proactive problem detection.

Q5. What are the benefits of adopting a microservices-based architecture for core banking?

A microservices-based architecture offers greater flexibility, scalability, and innovation capacity. It allows developing and updating components independently, facilitates integration with external services, improves system resilience, and enables a faster response to market demands and regulatory changes.