Core banking migration during M&A: Seven keys to success

April 20, 2023This insight was written before current events in the global banking industry. It is not presented to be read as a direct response to the current state of the sector.

Banking leaders often see Mergers and Acquisitions as opportunities to transform core technologies and build digital capabilities to serve their customers better while enhancing their institution’s scalability and resilience. Indeed, these are pressing needs, but banking executives are also understandably hesitant. The core banking system —the heart and lungs of a bank’s technology architecture—carries a disproportionate share of M&A risk: traditional approaches to integration and modernization are prone to failures and susceptible to significant cost overruns. As a result, technology integrations routinely take significantly longer than expected to capture value and, in examples we have observed, can overrun initial cost estimates by 50 to 100 percent.

Despite these challenges, it is possible to complete a core conversion on time and under budget. Based on our work supporting institutions’ migration efforts, we have identified seven steps bank leaders can take to mitigate the risks and challenges and lead their institutions through a successful migration in an M&A. These lessons are also applicable to next-generation core banking migration efforts.

1. Make the migration a business-sponsored strategic priority, not an IT-led project. Too often, banks make the core conversion an IT-led effort. This frequently results in the business throwing the problem over the wall and hoping for the best. In contrast, a senior business leader took charge of a successful core migration we recently supported. This leader could speak the language of technology and work seamlessly with the technology organization, so both sides of the organization viewed him as credible. As a result, the core migration effort was completed on time and under budget – which is often not the case.
2. Plan the technology vision early on. Business and IT need to align on a North Star—a vision for the technology architecture that will guide the core migration and keep it on schedule. This requires that banks scale up enterprise architecture functions early on, so they can codify what is typically held as tribal knowledge deep in the organization.
3. Track development efforts on interoperability, functionality, risk management, and data. Successful core conversions pay special attention to development efforts aimed at four objectives. First is basic interoperability, such as reformatting account numbers to make them compatible with the new core system and integrating the core systems with third-party subledgers. Second, conversions address client functionality by preserving integration with the systems of major clients and optimizing high-frequency customer journeys. The third objective is managing risk—for example, bringing in active know-your-customer (KYC) data automatically and integrating off-stack, anti-money-laundering solutions. Finally, development addresses data consolidation, including migration to a single enterprise data warehouse and building “householding” information to enable customer analytics.
4. Adopt out-of-the-box capabilities and avoid customization. Teams implementing core conversions receive many requests from business, technology and operation stakeholders for complex and/or nice-to-have functionalities that contribute minimally to strategic differentiation but introduce significant implementation risks. To keep these programs on track, banks must rigorously scrutinize any requested deviations from the selected core, weighing whether the new functionality justifies more complexity and slower processes. Based on successful examples we have observed, banks should adopt at least 80 percent of the selected core’s functionality. This will ensure that the implementation risks are minimized.
5. Fully validate solutions. A core vendor’s ability to meet a bank’s requirements is often hard to validate definitively beforehand. To surface any technical issues early on, banks can bring in business, IT, and operations stakeholders to test-drive a vendor’s proposed solution using proofs of concept designed around specific domains, use cases, or products. Banks should also tightly control vendor deliverables across data mapping, solution design and delivery, user acceptance, performance testing, and mock testing. This can be done through the availability of weekly dashboards for vendor deliverables that highlight any “missing items”, with daily defect tracking calls with the vendor and bi weekly escalation calls with the senior leader in the vendor’s organization.In addition, banks need to ensure vendors position their top team to the program—for example, by having specific individuals named to the account and by periodically reviewing the performance of vendor team members.
6. Make the trade-off between a phased approach vs a single cutover. Typically, large technology programs take a phased approach to implementation. But during an M&A, this can add unexpected complexity; for example, maintaining two cores in parallel (as well as the associated operational processes) puts added strain on training, compliance, and operations. This can delay the integration and value capture. To determine the best path forward, leaders should assess whether the bank has the organizational capability to manage a phased implementation and whether a single cutover would be better.
7. Prioritize the core migration over all other platform conversions. Core conversions fail when the executive management team does not clearly prioritize them ahead of other initiatives. Prioritization helps ensure access to the scarce pool of subject matter experts who are critical to the program’s success. For example, one of our clients, after establishing the core conversion as a top priority, built a talent and competency database to determine exactly what talent existed in-house and what talent needed recruiting. The bank also dedicated more than 200 people in the core conversion program and backfilled as needed across all related workstreams.

For banks to meet the demands of today’s marketplace and get the most value out of their M&A transactions, they must migrate to core platforms that can deliver rapidly evolving digital functionality. It’s no easy lift, but the seven steps described here can help banks keep conversions on time and under budget.