Conversion experiences

Some bankers would rather get a root canal than do a core conversion. Here’s why others are finding the conversion option attractive.

By Julie Knudson

Sometimes the prospect of converting the core slinks in from the side, quietly entering the conversation as the team looks at what competitors are doing to capture customers and control costs. Frustration builds when a core provider fails to support a bank’s evolving strategic needs. In other cases, a core conversion slams into the bank in the form of an end-of-life notification, providing little advance warning of the need to pursue a change.

For many banks, a core conversion is a huge undertaking and one they may be hesitant to launch. There’s a risk of upheavals within normal operations. The customer experience during a cutover might be poor. Employees likely need to be retrained and existing workflows will need a refresh. Given the wide perception of possible downsides, it’s little surprise that institutions don’t engage in core conversion conversations lightly.

TOOLKIT—Access resources on conversions and other core provider topics from ABA’s Core Platforms Committee at
Results from the 2022 ABA Core Platforms Survey bear out the reluctance institutions display when it comes to converting core systems. In the most recent edition, 42 percent of banks report being “dissatisfied” with their core processor. But despite their complaints about their current systems, only 21 percent of banks say their next renewal is likely to see them switching to a new solution.

Cores are typically in place for a long time. Years-long contracts, combined with the potential for significant disruptions to operations and customer-facing services if the core is disturbed, mean that banks don’t think about replacing their cores on a day-to-day basis. So what prompts an institution to consider the possibility of swapping out their core for a new system?

Banks on the tipping point: When a core conversion comes into view

Some banks embrace a core conversion as part of their strategy to simplify and streamline products and operations. Many want to take advantage of technology innovations that aren’t available from older cores. According to a survey by Gartner, 47 percent of banks reported their top reason for pursuing modernization was to support digital transformation. Increasing operational efficiency was second at 45 percent.

Other banks have little choice. Aging cores can present numerous challenges, including ongoing stability issues and sagging support as the number of customers falls over time and vendors turn their efforts to newer offerings. Lake Central Bank’s most recent conversion was almost a decade ago, but many of the reasons the team began assessing the need are similar to those impacting banks today. High on the list of considerations was that, as an in-house core processor, staff took tapes provided by the vendor and updated the core manually. “It got harder and harder as more technology and more updates came out,” says Bryan Bruns, the Annandale, Minnesota, bank’s president and CEO, and a member of the ABA Core Platforms Committee. The need to have employees on hand to carry out the updates, plus their lack of availability to take care of other tasks while this was occurring, consumed valuable resources. A desire to automate more processes and free up staff was one reason the bank began exploring a core conversion.

For Zions Bancorporation in Salt Lake City, the core conversion journey started over 10 years ago and the organization expects to complete it this year. Several factors played into the decision to pursue a new core, including an acknowledgement that the existing core had fallen into legacy territory.

“The original impetus was sort of an end-of-life type situation,” says Kristiane Koontz, EVP, director of banking transformation, and vice chair of ABA’s Core Platforms Committee. At the time, perhaps only about a dozen banks remained on the then-current system and the team knew it needed to seek alternatives. But rather than simply evaluate its options as a one-to-one swap, the institution also saw an opportunity to consolidate multiple cores into a single system and seek other operational efficiencies. The core conversion, though triggered by the sunsetting of the existing platform, would enable the organization to move forward on a larger digital transformation plan.

Early conversations set the stage for core conversion success

When asked about their modernization challenges, banks in the Gartner survey said that securing commitment and support internally tied for first place with budget concerns—both at 43 percent. For Zions Bancorporation, the idea of converting the core began with the chief technology officer and was quickly championed by the CEO. Early in the decision-making process, the bank saw the value of understanding the marketplace and making an informed decision about their next system. “We looked at what the alternatives were in the market at the time, and there was really nothing in the U.S. market that was an established core provider that was forward looking in terms of where we saw the technology going,” Koontz says. By blending the institution’s longer-term modernization strategy and the leadership team’s perspectives around how best to run banks in the future, Zions was able to begin the core conversion journey with its broader goals solidly in the fore.

When the prospect of converting the core arose, Lake Central Bank was smaller, with a workforce of about 35 employees and assets around $125 million. The executive team was deeply involved in the process. “We were fortunate enough that we could have everybody in a room,” Bruns recalls. “We only had six people we could sit down and talk with.” Cost was central to the conversation, as was the likelihood that the entire employee base would require retraining. “More importantly, it was about how this was going to affect our customers and was it the right time.” By leveraging a holistic approach with participation from the entire senior management team, Lake Central Bank’s early core conversion strategy was shaped to support both operational and strategic needs.

What can a core conversion help achieve?

Gaining benefits from technological and data advancements is also an important element that can push a bank to take the core conversion plunge. As banks continue to move their modernization strategies forward, the ambitions for a core conversion can stretch from gaining operational efficiencies to delivering new capabilities.

Koontz says the group at Zions was keen to implement real-time processing. “A big limitation we saw that went into the decision was that so many of these systems are batch-based.” A transition away from overnight processing can also enable the bank to eliminate numerous manual steps, reducing staff time that can then be put toward higher-value activities.

The ability to select best-of-breed products was something the Lake Central Bank team wanted to gain as part of their core conversion. During their discussions nine years ago, the solutions marketplace wasn’t as vast as it is today. With so many integrations available, a core that offers the ability to build something akin to a composable environment has been a notable benefit. “Now with all the tech that shows up, we can start to pick and choose who we want for other vendors, whether that’s teller software, working with car dealerships, or it’s some of those other products. That has really helped us,” Bruns says. Whether a bank hopes to tap into multiple providers to deliver targeted services or it wants to consolidate vendors for ease of management, a strategically driven core conversion can help lay the groundwork for the next stage of transformation.

Why a core conversion might be the right choice

For institutions toying with the idea of a core conversion, it’s important to have good visibility into the current state of operations before deciding whether a new core would deliver value. “Sometimes you become desensitized to just how challenging your current systems are,” Koontz says. Employees might have developed ways to work around gaps or poorly implemented features in the current core. Oftentimes, the leadership team doesn’t even realize the convoluted hoops workers need to jump through to accomplish a task. And the potential for errors and lost time in these scenarios is significant.

“There’s a risk reduction and a simplification there that’s very meaningful,” Koontz says.

“With everything changing so fast, if your core provider isn’t keeping up with your bank’s strategic initiatives or what your roadmap is, I think you have no choice but to look seriously at doing a conversion,” Bruns says. He encourages banks to start with their strategic plan first. “Is what you’re trying to do for your customers the same thing your core provider’s trying to do?” In today’s competitive environment, if you and your current vendor aren’t aligned, then a conversion might be the right choice to ensure you can execute on that strategic plan and protect your market position.

Julie Knudson is a frequent contributor to the ABA Banking Journal.