Hello, I'm Laurel Ruma with MIT Technology Review. Welcome to Accelerating Innovation in Global Finance. This discussion is presented by MIT Technology Review in association with Publicis Sapient. I'd like to welcome Dave Murphy, head of financial services for EMEA and APAC at Publicis Sapient. Also joining us today is Sovan Chapathi, the senior vice president and chief technology officer of the Navy Federal Credit Union. And Clive Cornitzer, who is the group chief operating officer at OSB Group. Welcome.
Hi, Laurel. It's a pleasure to be here.
Glad to be here.
Delighted to be invited. Many thanks for the privilege.
So let's begin by providing some context about our topic today, which is core modernization. Efforts to modernize the global banking system have been underway for many years. Dave, what is core modernization and why has modernization been so difficult?
So core modernization, at its most simplest terms, is about modernizing or improving the core banking system that runs many functions in a bank. The thing is, though, this can mean many different things to banks across the globe. And at its most basic essence, though, when you think about what a core banking system is, it's there to basically manage the debits and credits against the banking products that a bank offers. And those products could be checking accounts, loans, savings accounts, you name it. However, when core banking systems were first created about 30 to 50 years ago, they had a very different meaning back then. And they actually were the entire bank. And so back then, when core banking systems were created, they would do everything from onboarding customers to detecting fraud to running payments to managing the debits and credits for your products, et cetera. And so when we have a conversation about modernizing a core or doing a core modernization, in many cases, we're talking about moving from what was a very legacy monolithic world 30 to 50 years ago to a new modern banking architecture. Now, the question is, why is that difficult? Well, if you just sit there and you imagine the complexity of what you're trying to do, where you are basically trying to modernize and grapple with 30 to 50 years of changes, enhancements, integrations with other systems, and probably most importantly, knowledge that in all likelihood has left your bank, these types of programs become exceptionally difficult. However, they are very, very strategic and very important for banks to ensure they're ready to handle the next sort of challenges in front of them.
So then ultimately, Dave, we're not talking about replacing one monolithic system with another. What is that desired outcome?
So if you think about what really powers banks today, and frankly, powers any industry, it's data. And so a lot of what you're doing and the processes associated with that data. And so a lot of what you're doing when you're thinking about modernization, you're thinking about moving away from this monolithic core and monolithic system. It's very much ensuring step one, that you have ownership of your data as a bank, and then you are able to compose services to your customers. And those composing of those services will rely on a number of different functions and capabilities, some of which sit inside your bank, some of which may sit outside of your bank. And our belief is this is what provides the maximum flexibility and enables banks to take advantage of all the innovation that has happened in their entire value chain. You just look at any area in a bank's value chain, from identification to payments to how you actually create banking products. There's an enormous amount of innovation. So if you as a bank are owning that data, but then leveraging vendors for their specific solutions and their value chain, that can set you up to really harness the types of innovations you want to stay competitive in this world. And we know how important that is to stay competitive as well as innovate. So thank you, Dave.
So, Sivan, beyond the competitive pressure to keep up with innovation, how do regulatory requirements also motivate modernization considerations?
So if you think about banking as a sector, I think it's primarily a trust-based business, right? It's all about trust. It's all about service. Sure, powered by technology and data, right? I mean, if you were to ask me, those are the four things I think of. Trust, service, powered by tech and data. So in that world, it's no secret that we manage people's financial well-being, right? In the Navy Federal's case, we have close to 14 million unique customers and growing at almost 1.2, 1.3 million a year. So you lose the trust you lost everything, and we're in a highly regulated environment. What's happening is the regulations keep coming at us from all angles, right? Now, it's almost a catch-22. You have systems which are 40-year-old, 50-year-old, and then to meet up or keep up with the latest regulation in our case, let's say from CFPB or NCUA or whoever, as you see, you name it, we keep adding Band-Aid on top of Band-Aid on top of Band-Aid, and then it becomes unsustainable, right? I mean, the systems are so customized that the original product vendors who actually created the code, they don't even recognize it, right? I mean, this is kind of true for bulk-ups across the world. So it almost becomes imperative that if you want to do things clean and you want to maintain that one single biggest thing which really matters for a financial institution, trust and your brand equity which comes with it, you must modernize the code and all the spaghetti web of systems Clive talked about because otherwise there will come a time when we just topple over and then there is no looking back, and none of us want to be there.
That certainly makes sense, Sivan, and the different requirements across global markets also adds to that kind of complexity. So Clive, let's dive into that talent part of the question. How are you working to build the team you need to achieve the vision you've shared for OSB Bank? You've mentioned that there is almost a two-team strategy here.
Yeah, I mean, to be frank, it's with some difficulty and some challenge, but if it wasn't, it would be very boring and very dull. But we're kind of doing three things. We are building our own internal capability, and I have the privilege of running and sponsoring the project. So I'm building out under a lead individual, a transformation director, a transformation team, and the bulk of that team has been recruited from outside the bank because we want a different mindset. We need a different pace and a different set of energies and knowledge and experience. But I'm really pleased to say that we've augmented that with some internal individuals who have shown the right, and it's the right mindset really to jump across because we're happy to train those people. So it's about, it's really about attitude as much as anything. So we're building internal capability at pace in a discrete team, and that is causing a little bit of conflict with those that are perhaps seeing themselves as being left behind. But the more we can create the opportunities and move people across from old bank to new bank, we're doing that. We are clearly aware that we need to go at pace and need some skills quickly. So we are using third party suppliers and other experts to augment our capability from day one. And then the plan will be to upskill people internally as the opportunity arises and wind our own skills up as we kind of say slightly goodbye to the externals that we've used to help us get there on the journey. So I kind of see it as a, if I kind of, it's like a cross really wind up, wind down kind of approach. And then over time, we hope to redeploy internal resource. Let's say we are not looking to really exit any people in this program because I guess ultimately people always are resistant to change because there's always that fear of what does it mean to them and are they going to be part of the future? So wherever possible, we are going to take people who again, I think touching on the same point, have the right attitude and we will retrain them into the new skills, be that on the sort of IT engineering side, be that product owners, be that with a new lens around regulation and so on and so forth. So, you know, we've called the program a program of modernization, but in fact we were, I'm very keen to move that to the words transformation because we are transforming the way our bank operates and fundamentally as well as the tech stack, we are end to end changing ways of working across the bank as a whole. So lots to do, hence it's a five year program, but exciting and actually from a personal perspective, it's really nice to see individuals developing their own journeys and their own careers as they take the opportunity so that as a senior, you know, executive at the bank is always nice to see.
I really like that optimistic viewpoint of ensuring everyone sort of has a place at the firm and also the idea of a transformation because that's what it is. So it ebbs and flows. Siobhan, what would you add to that? How do you see the challenges comparing on your larger scale?
Well, for a second I want to pivot towards the people aspect and one of the things we are very conscious of is a lot of the subject matter expertise who built up Navy Fed to be like world's largest credit union and all the functions and services, they may be wanting to move on in their lives and we have a window of opportunity where we kind of bring in people who kind of know where we are going and people who know where we come from and create like the perfect harmony to get things like not just core modernization, I call it like a bank in a box, end-to-end transformation done in next three to five years, right? So that's something all we are very, very conscious of. We are incentivizing people to look at the bigneeds to do this on a larger scale.
So Dave, what else would you advise executives to take into consideration as far as aligning the talent and the technology needed to advance these initiatives?
I think there needs to be a recognition that this type of change, which is when you talk about modernization, you're talking about effectively moving from something that is current or you want to call it old to something that is new. And in many ways, the migration between those two points are quite complex. But those two solutions are quite large as well. And many executives, when we talk to them, very much like that to be a, is there any way I can just do it as a one-time event? And our guidance as counsel is, well, first off, if you think about banks, you think exactly as Sivan said, they are in a trust-based business, heavily regulated. The risk of actually thinking of this as a one-time event is just too enormous. And there's been too many examples over the past 10 years of banking institutions attempting to do these modernizations and these cutovers into this new model as a one-time event. And so our belief is that as you approach this, you need exactly to have the three- or five-year time horizon. You have to be looking at the people and the capabilities that you need to build over time, but you need to be thinking about doing this incrementally. And you need to think about actually, I'm going to have a world for a period of time where my old and new are going to coexist. And during that time, there will be some greater complexity that you as a business will have to manage. But that additional complexity and the risks associated with that additional complexity are dwarfed by the risks of actually trying to make this as a one-time event cutover. And so our advice is recognize that this is not an easy decision to make, but it will have to be a journey, and it is going to have to move through a set of increments in a progressive manner over time.
Very great point there, Dave. It is a journey. So as we bring this excellent discussion to a close, what are some last pieces of advice about how organizations can avoid losing momentum on that path to modernization? Sivan, do you want to kick us off?
Yeah. I'll speak from my experience. I think if you think about the entire ecosystem of what runs a bank or a financial institution, there are three layers. There is the customer-facing layer, then there is what I call as the product layers. We talked about product pricing. We didn't talk about a lot of domains like CRM or business process management and beyond. And then you have what we call as the banking codes or the processing codes, right? Not just banking. There is a mortgage code or the credit card code. So I think it's important that you take a step back and look at the entire financial institution from that lens and work your way top down, work your last mile connectivity in the customer layer and get that all sorted out in terms of point of sale systems, member channels, digital channels, then move your way back into the central layer of the process orchestration, the CRMs, the rules engine, the product pricing, offer management engines, and then start to make your way back to what I personally also think is the hardest work, modernizing your transactional banking codes, right? So keep that overall big picture in mind. Ensure that people are inspired to the broader cause, and we also need to ensure that we have a business to run. So it's a bimodal kind of setup during the transformation, right? So as long as we are keeping all of those big pivots or guardrails in our mind, I think the other end is full of success.
And Clive?
So I would agree with all of that, but I think if we're kind of talking about personal perspectives on it, we're two years into our journey. I'm privileged enough to have started the journey, or others might think differently at OSB, but we did a year of planning and strategic thinking and in essence building a business case to convince the board to start the journey. We're now in the second year where we're getting close to our first MVP, but I think if I look back over those two years and I look forward to the next few years where we move forward, from the people perspective, which you can tell I'm quite passionate about, you need to be courageous, you need to be brave, and above all, I think you need to be resilient because it's going to be choppy. You don't get everybody on the journey day one. I think we've got a bigger group of people who are seeing the value of the journey now than we had six months ago than we perhaps had a year ago. And you're always going to get people who are sitting on the side trying to say that isn't going to work, that isn't going to work. But as time goes by, they're realizing that they're being proven wrong. So you've got to be resilient, you've got to have some energy, and you've got to be ready for some setbacks, but you've got to have the endgame in mind as well. I mean, we talk about sprints, but it is a marathon in the end. It's a series of sprints, but in the end it's a marathon, and you need to carve up before you start, I guess. You can tell I'm a bit of a fitness person, but yeah, it's a marathon.
Right, and reaching that minimum viable product, or MVP, for the first time certainly is a big milestone and perhaps will help turn some of those doubters into champions. So Dave, how about you? How do we put this into some final perspective?
Listen, I think at the end of the day when people are talking about a core modernization and taking the approaches that Savan and Clive have described, they're doing this to, one, tackle some challenges that have been in the business potentially for decades that just can no longer not be tackled. And they're doing this to future-proof them going forward. And just as kind of Clive said, it's a journey. Our belief is as you do it, it is critical for all your groups, your stakeholders, your teams, your people to design an approach where you are demonstrating incremental value, especially in those early years. These are significant programs. These are board-level topics. These are board-level programs. And in some cases, these are the largest cash outlays for a banking institution in a period of time. And so thinking about how to demonstrate value and take that organization on the journey by actually putting things into market are absolutely critical for making these types of programs a success.
That's fantastic. Dave, Clive, and Savan, thank you all very much for joining us today in what has been just a fantastic conversation.
Thank you, Laura. It was a pleasure.
Thank you. Thanks for the opportunity.
Yeah, echo that. Honored to be invited. Thanks very much.