Original text here from Patrice Bernard (LinkedIn)
The modernization of core banking systems is a contentious topic in the banking sector (as well as in insurance), with opinions divided between those who see it as unnecessary and others advocating for various methods, making it hard to identify an optimal approach. However, Santander's case, which appears to be on the path to success, offers some insights.
Launched in 2020, Santander's program is highly ambitious. Beyond just a technological component, it includes the establishment of a common operational model across all its global entities. This model relies on new IT foundations named Gravity, hosted on Google's cloud infrastructure, intended to replace the old systems that, like many other large corporations, run on IBM's mainframes.
To minimize the risks of a drastic migration – the kind that has caused numerous disasters among European institutions in the past – Santander developed a specific approach with Google. This has since been turned into a commercial offering named Dual Run. It allows for the parallel running of all processes on both old and new applications, providing a real-world testing capability to avoid unpleasant surprises.
Today, the bulk of the software conversion to the new infrastructure is complete. Initial deployments have also started: corporate clients in the UK, retail clients of the Chilean subsidiary, and more recently, the entire corporate and investment banking (CIB) activity, have all been switched over without any service interruption. The transition is currently underway in Brazil, with the goal to complete the project across all locations by the end of 2024.
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Although the most challenging part is still ahead (as accidents can easily happen), everything so far suggests that Santander might successfully achieve, in a relatively reasonable timeframe given its scale, a feat that most of its peers no longer dare to consider. However, several indicators – like the initial budget allocation of around 20 billion euros, albeit for a somewhat vague scope, and the recruitment of 4,500 digital professionals over the past year – hint that the very principle of the initiative might not be viable.
Even excluding the portion allocated for reorganization, the magnitude of the cost for renovating the core banking system, significantly higher than the 4 to 5 billion euro attempts of the previous decade, reflects both the increasing complexity of the task at hand, due to constant integrations adding to the overall muddle, and a major deterrent, as it almost renders justifying an acceptable return on investment impossible.
In summary, Santander might indeed prove that replacing a core banking system is feasible without major setbacks, but under such conditions that the leaders of the vast majority of institutions still relying on (pre)historic systems today will be unable to take it as a model for their own strategies. If they don't want to fall behind, up to the point of obsolescence, they will need to find another solution. Time is of the essence, but the path forward is unclear...
