Forget core-banking replacements – It is all about scale, digital and blockchain



I can remember sitting in conferences back in Australia during the “naughties” (2000 to 2010) and the talk was around which of the four major local was going to be the last to complete their replacement programs. It is the middle of the next decade and I think the count is two completed, one still in progress and one not started.

Having experienced the bruised ribs and black eyes from more than a few core banking system implementations, I can say with some authority that it is one of the hardest things to do in a bank. Apart from the spaghetti that a core system replacement has to deal with, it is also a major transformation program, because it invariably ushers in numerous analogous process re-engineering and automation programs.

So if you are a bank and thinking about embarking on a core banking system replacement, you have to ask yourself whether this is the best focus of the majority of your investment capital and energy over the next three to five years or more.

I would argue that it is not, because of the race for scale, the imperative to digitalizeand the potential of .

Scale is King

Back in the 1880s in the US, the Oklahoma Land Runs ( ) saw settlers dashing out on horses, in wagon trains, or any transport they could find to put stakes in the ground and lay claim to newly opened territory. Within 24 hours of each run, thousands of settlers had laid claim to packets of land, but the slow and the indecisive missed out.

The modern-day equivalent of the land run is happening today, but the real-estate of the age is customers. Alibaba is leading the “customer land run” across Asia. They have rapidly accumulated hundreds of millions of customers across China, and are already pushing out for new claims across Southeast Asia.

Alibaba’s investments in Paytm and Lazarda are prime examples of its drive for scale. Both take-over targets had been running loss-making business models focused on customer acquisition. In 2015 Lazarda for example had over a billion dollars in sales, yet by the time Alibaba bought them out they were close to burning through their entire 2014 $250m cash injection.

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Alibaba paid $500m to buy out most of the existing Lazarda investors and tipped in another $500m to turn that stake into a majority controlling interest. They weren’t buying a great technology platform (Alibaba already has that) and certainly not a profitable business model. They were buying customers.

But why pay such a premium? Surely Alibaba could have competed head to head with the likes of Lazarda and won over customers?

The answer is that this is a land run. Alibaba want scale and they want to lay claim to it before their competitors do.

If you look at Ant Financial’s own publications and beyond, ( ) the competitive advantage that scale gives them in terms of customer analytics and marketing is clear. If you read between the lines you will also see that there is an even bigger prize to be had with scale.

Alibaba’s customer numbers and payment transaction volumes are rivaling those of Mastercard and Visa. This is significant because the major credit card schemas used to rely on a combination of pipes (the need for physical cards, POS terminals at merchants and secure connections via banks) and volume as barriers to entry to protect their businesses. Smartphones and apps have removed the need for bespoke pipes, so the only barrier to entry now is volume, and Alibaba is breathing down the schemas’ necks.

It is not only the credit card businesses whose revenue is under threat; it is also the banks. Combating the threats of the customer land run is probably a more pressing problem to tackle right now than any core system replacement.

Customers want digitalization

As I noted in a recent article, there are multiple imperatives for banks to undertake digital transformations, but the most pressing of them is customer expectations. While there is no doubt that end-to-end digital solutions are required to take full advantage of the efficiencies and scalability that digitalization implies, for banks sitting on legacy core banking systems I think there is a strong argument now to “fake it until you make it” in terms of digitalization. A lot of customer-facing digital transformation can be undertaken while sitting on legacy platforms, and you are more likely to lose customers because of a lack of digital engagement than you are because of poor-performing back-end systems.

Blockchain is real

I have to admit that I have been a blockchain skeptic for some time, but I am changing my tune. The real prize of blockchain in my opinion is not so much the crypto-currency facilitation. For me it is the distributed ledger capabilities.

Wells Fargo and CBA just recently announced their joint experiment to use the blockchain’s distributed ledger to facilitate a trade finance deal. ( )

The blockchain is the perfect adjunct to trade finance transactions, and once trade finance gets settled there, other ledger-based financial transactions will soon follow. So if you are a bank thinking about buying the latest core banking suite from one of the leading vendors, now would be a good time to hold off and hopefully leapfrog to a blockchain-based solution in three to five years (my guess on the gestation period for the new breed of blockchain-based core systems).

 [linkedinbadge URL=”″ connections=”off” mode=”icon” liname=”Gregory Morwood (莫恪瑞)”] is Head of Strategy and Planning, Digital Bank