Indian banks are under increasing pressure to modernize their core banking systems, moving beyond simply adding digital layers to outdated infrastructure. The need of the hour is to adopt AI-native cores that fundamentally transform banking operations, enhance customer experiences, and drive sustainable growth.

The Limitations of Legacy Systems

Many Indian banks still rely on legacy core banking systems developed decades ago. These systems, while stable, are often rigid, monolithic, and ill-equipped to handle the demands of today's digital age. Several challenges arise from using these outdated systems:

• Inability to handle digital transactions: Legacy systems struggle to manage the surge in digital transactions, particularly through UPI, leading to system overloads and downtimes.
• Siloed operations: Information is often fragmented across disconnected systems, hindering real-time data access and unified customer views.
• Difficulty in integrating fintech solutions: Legacy systems are not designed for easy integration with third-party fintech services, limiting banks' ability to offer innovative solutions.
• High maintenance costs: Maintaining old systems requires specialized skills that are increasingly scarce, leading to inflated labor costs and rising expenses.
• Cybersecurity vulnerabilities: Traditional systems often lack modern security protocols, making them vulnerable to cyberattacks and data breaches.
• Regulatory Compliance: Banks find it difficult to update their systems and processes to comply with new regulations.

The Promise of AI-Native Core Banking Systems

An AI-native core banking system embeds artificial intelligence at the heart of its architecture, enabling banks to leverage AI's capabilities across all operations. This approach offers several key benefits:

• Enhanced Efficiency: AI can automate repetitive tasks, streamline workflows, and optimize processes, leading to significant efficiency gains. The Reserve Bank of India (RBI) estimates that AI could improve banking efficiency by up to 46%.
• Personalized Customer Experiences: AI algorithms can analyze vast amounts of customer data to provide personalized financial advice, tailored product recommendations, and proactive solutions.
• Improved Risk Management: AI can enhance fraud detection, credit risk assessment, and compliance monitoring, helping banks make better decisions and minimize threats.
• Faster Innovation: Cloud-native, AI-powered cores enable banks to develop and deploy new products and services more quickly, responding to changing customer needs and market conditions.
• Greater Financial Inclusion: AI can leverage alternative data sources to assess the creditworthiness of borrowers who are new to credit, expanding financial access to underserved populations.

Making the Transition

Migrating to an AI-native core is a complex undertaking, but several strategies can help Indian banks make a smooth transition:

• Embrace cloud-native infrastructure: Cloud platforms offer the scalability, flexibility, and resilience needed to support AI-driven core banking systems.
• Adopt a modular architecture: Microservices-based architectures allow banks to scale individual services without overhauling entire systems, enabling a more agile and cost-effective approach.
• Prioritize data quality: Cleaning and standardizing legacy data is crucial for ensuring the accuracy and reliability of AI models.
• Invest in AI talent: Banks need to develop a skilled workforce capable of building, deploying, and managing AI-powered systems.
• Address regulatory concerns: Banks must ensure that their AI systems comply with relevant regulations and ethical guidelines, such as the RBI's FREE-AI framework, which emphasizes fairness, robustness, efficiency, and explainability.

Indian banks that embrace AI-native cores will be well-positioned to thrive in the rapidly evolving financial landscape. By moving beyond stacked-up digital projects and fundamentally transforming their operations with AI, these banks can unlock new levels of efficiency, customer satisfaction, and sustainable growth.