Consumers increasingly want to move money with their mobile phone and see their account balances adjust immediately. Unfortunately, many financial institutions don’t have the infrastructure to provide the always-on experience their customers expect.
That has left many banks and credit unions at a technological crossroads. They can retain their core systems and update them on a catch-as-catch-can basis, or they can rebuild from the ground up. A recent whitepaper from Javelin details a third option, the “digital twin” approach, which gives institutions a new way forward to a modernized payment experience.
A Difficult Dilemma
The dilemma financial institutions face is exacerbated by emerging payment methods. Instant payments have gained traction in markets like Brazil and India much faster than they have in the United States. Banks in those markets have felt the strain of using outdated systems to process high volumes of real-time payments.
Although the current methods have functioned reliably at scale for financial institutions for decades, they will not be sufficient to accommodate real-time payments and settlements. As payments platforms like FedNow and Zelle gain traction in the United States, American banks and credit unions will begin to feel the same strain their foreign counterparts have endured.
“The issue facing financial institutions dealing with major systems overhauls is the cost and complexity,” said James Wester, Co-Head of Payments at Javelin Strategy & Research. “They are quite expensive and can take years to accomplish. Plus, the systems they are replacing are often still serviceable, just not adequate for the direction payments and financial services are heading.”
One alternative to a costly rip-and-replace effort is a gradual shift to payments modernization. Unfortunately, a piecemeal approach often results in long timelines, multiple vendor interactions, and inefficient parallel core systems.
The Middle Ground
The digital twin approach is a middle ground between total core system replacement and incremental shifts. A digital twin can be established in a secure cloud environment. DDA balances are replicated to the digital twin, and when customers send or receive money, the twin authorizes the transactions in real time and updates account balances. The core system then credits or debits accounts in the system of record or, if the core is down, transactions are queued and executed when the core is back online.
Digital twin technology that leverages API and event-driven architecture can facilitate real-time functionality. The result is customers get a more efficient payment experience while banks take the initial steps toward modernizing their payment platforms.
“To this point, there hasn’t been an ‘in-between’ step that allows banks to do the necessary upgrades to core systems to meet the evolving requirements in payments but continue to use existing platforms while they do it,” Wester said. “The digital twin approach does just that; it offers banks the ability to use their existing platforms to connect to open, modern tools while they do the necessary upgrades to their core systems.”
A Foundation and a Framework
The digital twin approach won’t solve every issue of an outdated core banking system because it’s not a replacement. It does, however, offer financial institutions significant immediate benefits. It takes the load off a bank’s core systems and makes them a stable, secure environment for maintaining balances.
The digital twin approach also gives institutions a foundation from which to build. Payments and financial services continue to evolve through new technologies like real-time payment rails and artificial intelligence tools. The digital twin can be a connection point for data across disparate systems, making it ideal as a framework for use cases like future AI integration into payment data applications.
“A big problem for financial institutions looking to upgrade their core systems is their marginal returns on investment are often far into the future,” Wester said. “That means they can’t realize any gain until they finish, and even then they will have to wait until they’ve launched new products after the upgrades are complete. With a digital twin approach, they can test and launch products almost immediately.”
A digital twin can also be a proxy to control account balances across siloed lines of business, which gives institutions and customers immediate visibility into balance changes. It can likewise reduce the customer friction that often results when banks implement new payment methods. A better user experience means customers are more likely to purchase additional services.
A Cloud Strategy
Because most core systems are housed in a data center that is onsite or managed by a third party, there are significant energy needs and maintenance requirements. Regardless of whether there is peak demand or a slowdown, the bank must constantly provide the same data center resources.
The digital twin can be the first step in implementing a cloud strategy. A cloud-based solution greatly increases an organization’s speed of deployment, its capacity to scale to meet changing demands, and its ability to vary costs according to volume.
In addition, the digital twin’s cloud environment means there will be reduced software and maintenance costs. Financial institutions will also be able to gradually migrate to a modern tech stack without disturbing the user experience.
Movement Toward Modernization
Many institutions are waiting to see where payments technology will go before making a significant investment to update their systems. However, the hastening emergence of financial technology means banks and credit unions can’t delay their digital transformations.
As financial institutions in Brazil and India have discovered, it’s better to institute flexible, modern core systems before instant payments volume takes off. Increasing consumer demand for real-time responses will likely accelerate U.S. instant payments adoption in the coming years.
Due to emerging technology, some banks might feel pressure to replace their systems altogether. However, the digital twin’s cloud-based solution can be fully implemented before new payment methods gain traction. For many banks at a tech crossroads, the digital twin approach might be the most prudent way forward.
