KUALA LUMPUR (July 29): Some 95% of banks in Asia are using second and third generation banking technology, severely limiting their ability to innovate, while increasing their costs, according to a new report.

An International Data Corporation (IDC) sponsored report by Thought Machine entitled, “Digital Core — Now Is the Time” released today said with the average age of core banking technology in Asia at 20 or more years, the imposed technology gap for infrastructure is increasing banks Cost-to-Income (C/I) ratios by 3% - 5%.

Thought Machine is a cloud-native core banking firm with its APAC headquarters in Singapore.

The report said limited ability to automate processes and decisioning adds another 4% - 7% to the C/I ratio.

The report added that banks that are not ready to migrate to fourth generation organic digital core technologies are unlikely to meet their digitalisation objectives and will become vulnerable to acquisition by more digitally advanced banks in the next two to four years.

It said the major reasons banks are hesitant to replace and upgrade their core banking infrastructure to the fourth generation includes newly replaced core systems, resource constraints, and an (incorrect) assumption that digitalisation is fulfilled by the adoption of internet and mobile banking.

The report highlighted that while many banks are hesitating, several dynamic mid-sized banks are moving quickly in adopting fourth generation core banking systems.

It said these banks will experience true digital transformation, increased business productivity, adaptation without disruption and easy integration to external and internal systems.

The report said acceleration in digital transformation, opportunities to monetise IT assets, partnerships with challenger banks and fintechs, cost effectiveness of migrating to organic digital core platforms and risk of acquisition are the key drivers for banks across the region to replace their core banking today.

Thought Machine’s Singapore-based APAC managing director APAC Nick Wilde said the Asian banking sector is experiencing rapid and radical innovation.

“Technology is at the core of that innovation, especially cloud platforms, allowing new digital banks to be built with cloud technology from the ground up, providing reduced costs, increased flexibility and product innovation.

“That is putting pressure on incumbent banks, weighed down by outdated technology and rigid silos, to find solutions to help them stay in the game.

“Thought Machine enables financial institutions, neo banks and challengers in Asia to rethink core banking offerings, serve new market segments and bring hyper-personalised products to market with agility and scalability,” he said.

Meanwhile, IDC Financial Insights Associate Vice President Michael Araneta said financial service institutions need to prioritise core banking technology migration discussions, so that other initiatives like digital innovation, customer-centric offerings and personalisation can truly take centre stage in their future strategy.