The 94% core banking problem

Over the last decade, banks poured substantial resources into cloud-native core banking modernization, envisioning a future of seamless digital excellence. Yet, our research paints a sobering picture: Core modernizations remain mired in pitfalls, from cost overruns and delays to underwhelming returns on investments.

Strikingly, in our examination of desired business benefits—ranging from operational efficiency to enriched customer experiences—less than half of banking CIOs reported meaningful gains.
 

Beyond mere delays and cost overruns, more than half of CIOs report insufficient overall improvements—despite investing substantial resources.

Alarmingly, in some cases, they even suffered a deterioration in operational capabilities. On a relatively positive note, close to 50% report significant improvements when being more aggressive in the “front-to-back” modernization efforts, while carefully calibrating their “back-to-front” transformation approach. These improvements are reassuring, indicating that success is challenging but achievable:

• Improved client experience (49%).
  Cloud-native modernization, particularly real-time capabilities, facilitates more dynamic and responsive customer interactions, allowing banks to better meet evolving client expectations without the constraints of rigid legacy systems.
• Increased frequency of system updates (46%). 
  The shift enables more agile deployment cycles and time to market for new features, reducing the long downtimes associated with monolithic updates.
• More efficient data access (46%).
  Streamlined data handling, such as quicker retrieval and processing via cloud-native analytics, supports faster decisions in areas such as loan approvals or fraud detection.
   

In contrast, more than 60% of banks struggled significantly with system update costs, risk management, and overall platform resilience. For many the road ahead is still uphill.

• It became harder to manage costs for system updates and modifications (73%).
  Vendor lock-in and lack of portability exposed many institutions to unexpected strains when pursuing platform upgrades. Furthermore, the cost associated with core banking customization—which bankers request frequently due to regulatory adherence as well as professional preferences—escalates at the time of system updates due to expansive testing requirements.
• It became harder to maintain adequate risk management (69%).
  The cloud environment introduced complexities in adhering to evolving regulatory standards, such as ensuring data sovereignty or audit trails across distributed systems, which resulted in unexpected reviews and adjustments to avoid penalties.
• It became harder to guarantee system resilience (63%).
  Outages in platform availability due to instability of data centers during high-traffic periods, system misconfigurations, security incidents, and improper patch updates occur repeatedly. This mandates a more intentional approach to operational resilience.

Not even in one category do the majority of banks report modernization benefits.

 
From these shortcomings, CIOs have distilled several hard-won lessons. The imperative is clear: AI must be harnessed to speed up development—combined with industry standards to sort out application chaos—and CIOs must be more deliberate in defining hybrid cloud strategies. They also recognize the power of reimagined operating models with greater business and technology alignment.

Equally important is robust risk management. Without trust and resilience embedded in every step of transformation, AI-driven modernization efforts risk compounding fragility rather than enabling progress. Risk governance thus becomes the bedrock on which these other enablers—AI, standards, hybrid cloud, and modular models—can deliver sustainable impact.

Critical lessons materialize that can accelerate success

Notwithstanding the many challenges, we view the glass as half full for CIOs, not half empty, as clear lessons have emerged that can reshuffle existing approaches and expedite the path to success. The analysis of challenges reveals valuable practices, corroborated by what we learned in one-to-one conversations with banking executives, published in the compendium 2025 The voice of the makers. These emphasize proactive planning and advanced tools to mitigate common pitfalls, fostering more effective transformations.

Hybrid cloud intentionality pays off.
The CIO’s top consideration is to diligently embrace design choices, such as assessing upfront platform suitability for high-frequency transactions and governance models, to support fit-for-purpose setups that deliver true scalability and resilience without unexpected complications.

Intentional hybrid cloud design mitigates overly simplistic industry narratives about the capability of public cloud alone to run extremely high-volume and compliant-rigorous banking transactions.

Industry standards bring business clarity in core banking complexity.
The CIO’s next lesson is the importance of thorough mapping and analysis to prevent surprises during migrations, as legacy systems often hide layers of intricacy that inflate efforts.

Applying industry standards brings clarity to the complexities of technology around business domains.

AI addresses the interdependencies across the application ecosystem.
The third critical lesson addresses one of the toughest hurdles in banking transformation: Managing interdependencies created from years of unintentional application development devoid of causality. It’s particularly relevant given that most banks have opted to both optimize individual components and hollow out services for decoupling from the core.

Harnessing AI capabilities enables automated discovery, simulation, and optimization of infrastructure elements.

Insights from the last decade of tech investments offer valuable lessons to better shape bank spending in the coming years.

This IBM IBV study—based on a global survey with over 500 Chief Information Officers (CIO) and almost 200 Chief Data and AI Officers (CDOs and CAIOs) at banks with more than $10 billion of total assets— reveals the critical factors that have held many banks back.

The study also discusses CIOs’ learned approaches to improve economic benefits. They suggest that to avoid naive scaling assumptions, banks should demonstrate the value of a deliberate approach to hybrid cloud. They appreciate AI’s capability to accelerate IT transformation, improving understanding of application and infrastructure intricacies. They recognize the importance to lead the battle for talent.

What they seem to underestimate is the strategic importance of advanced risk management, which is particularly essential for building trust when scaling AI capabilities across the enterprise. As they prepare to deploy agentic AI for autonomous decision-making, robust risk control and validation are the right first steps to build a competitive advantage.

Banks have entered an era in which AI is poised to reshape the way they operate and how clients access their services. The unresolved core banking modernization highlighted in this study is a concerning impediment to banks’ ambitions with AI. Operating on a flexible and modular system, where back- and middle-office layers are efficiently streamlined and front-office investments grant competitive relevance, is not a choice but a necessity to increase the ROI of AI.

This study explores how to make core banking projects successful: CIOs must transcend mere code rewrites—instead reimagining how the bank and its organization operate, how money moves in real time, and how clients are engaged via timely, personalized touchpoints, both directly and beyond traditional banking.

As competition intensifies within financial services and AI innovation surges forward, successful core banking modernization stands as a decisive watershed between stagnation and growth. Institutions that master this combination of lessons and enablers will liberate unparalleled efficiency and foster exponential growth in an AI-driven era.

Download this report to learn more about how to make core banking projects successful.