How Can Financial Institutions Manage Risks During Core Conversions?

Core conversions for financial institutions are a critical strategic decision that impacts all business units, employees, customers, and external auditors conducting financial statement audits. These conversions also often involve long-term contracts that can span decades and cost millions of dollars.

Therefore, it is essential to carefully evaluate the risks, impacts, and mitigation strategies before moving forward. This ensures that the decision is well-supported by a solid business case and that the new processing technology is implemented efficiently and effectively for all stakeholders involved.

In this article, we will discuss the significant key risks, impacts, and considerations when onboarding the following:

1. A new core processing vendor
2. Employees
3. Customers
4. Customer information
5. External audit implications

1.     Onboarding a New Core Processing Vendor

Implementing a new core provider introduces strategic risks, such as potential misalignment with long-term business goals, operational disruptions, and increased vendor dependency. It is essential to assess how the new system affects growth, scalability, and competitive positioning to ensure it aligns with the organization’s strategic objectives and provides ongoing value. Key areas to evaluate and support through careful strategic and project planning include:

• Data Security & Compliance: Ensure the provider’s platform meets stringent data security standards and compliance requirements, such as the Gramm-Leach-Bliley Act (GLBA) or the general data protection regulation (GDPR). Any breach could result in severe financial and reputational damage.
• Vendor Stability & Reputation: Evaluate the financial stability, market reputation, and longevity of the provider. A vendor at risk of failure could jeopardize your operations and require an unplanned transition. There should also be considerations for how the new platform aligns with current and future regulatory requirements. Failure to comply could result in penalties and legal consequences.
• Scalability & Flexibility: Consider whether the platform can scale with your financial institution’s growth and adapt to future technological changes. Inflexibility could limit your financial institution’s ability to innovate and meet evolving customer needs.
• Integration Capabilities: Analyze the platform’s ability to integrate with your existing systems and third-party applications. Poor integration can lead to inefficiencies, data silos, and increased operational costs.
• Cost Structure & Total Cost of Ownership: Understand the full cost of the platform, including initial setup, ongoing maintenance, and potential future upgrades. Unexpected costs can strain your budget and impact financial performance.
• Customer Support & Service Level Agreements (SLAs): Evaluate the quality and responsiveness of the provider’s customer support. Inadequate support could lead to prolonged issues and operational disruptions.
• Data Migration Risks: Assess the risks associated with migrating existing data to the new platform. Data loss or corruption during migration can have serious operational and legal implications.

2.     Onboarding Employees

Onboarding employees to a new core platform involves strategic risks, such as inadequate training, resistance to change, and potential workflow disruptions. To mitigate these challenges, it’s crucial to provide comprehensive training, clear communication, and strong support throughout the transition.

This approach ensures that employees stay confident, capable, and engaged as they adjust to the new system, while maintaining productivity and morale during the process. Below are key risks and mitigation strategies to support the successful onboarding of internal stakeholders to the new platform.

• Insufficient Training & Support: Provide comprehensive training programs, including hands-on workshops, documentation, and ongoing support to ensure employees are fully equipped to use the new platform effectively.
• Resistance to Change: Engage employees early in the process, communicate the benefits of the new platform, and involve them in decision-making to increase buy-in and reduce resistance.
• Increased Workload During Transition: Plan the transition carefully to minimize overlap between systems, and provide additional resources or temporary staff to help manage the increased workload.
• Potential Job Role Changes: Clearly communicate any changes to job roles, offer retraining opportunities, and provide support to employees affected by these transitions to help ease the process.
• Data Entry & Operational Errors: Roll out the implementation in phases, providing close supervision and support to identify and resolve any issues early on. Foster a culture of double-checking work during the initial transition to minimize errors and ensure smooth progress.
• Disruption of Established Workflows: Map out new workflows in advance, provide clear instructions, and be available to help employees adjust to the new processes.
• Communication Breakdown: Maintain open, frequent, and transparent communication throughout the transition, ensuring that employees know what to expect and where to go for help.
• Reduced Employee Morale: Recognize the challenges employees face during the transition, provide positive reinforcement, and create opportunities for feedback and support.
• Risk of Knowledge Loss: Ensure that key processes and knowledge are well-documented, and promote knowledge transfer through mentoring or shadowing programs to retain institutional expertise.
• Inadequate Post-Implementation Support: Establish a robust post-implementation support system, including a helpdesk, ongoing training sessions, and regular check-ins to ensure employees can continue to adapt and improve.

3.     Onboarding Customers

For customers, onboarding to a new core platform carries risks like service disruptions, data inaccuracies, and communication failures. To effectively manage these risks, it’s crucial to provide clear and timely notifications, ensure smooth data migration, and offer responsive customer support. These efforts help support a seamless transition, which is vital for maintaining customer trust and satisfaction.

• Service Disruptions or Downtime: Prolonged system outages during or after the conversion can prevent customers from accessing their accounts, making transactions, or receiving timely customer service. This can lead to frustration, loss of trust, and potential attrition.
• Data Accuracy & Integrity: Inaccurate or incomplete data migration could result in errors in customer accounts, such as incorrect balances, transaction histories, or personal information. This can undermine customer confidence and lead to legal and reputational risks.
• Transaction Processing Delays: If the new platform leads to transaction delays, customers could face late payments, failed transfers, or postponed deposits, which can disrupt their financial management.
• Changes to Customer Experience: If the new platform significantly changes how customers interact with their accounts or alters the customer interface, it could lead to confusion or dissatisfaction. This is especially true if the changes are not clearly communicated or if the design is not intuitive.
• Security & Privacy Concerns: Lapses in security during the transition could expose customers data to breaches or unauthorized access, leading to identity theft, fraud, and loss of trust in the financial institution’s ability to protect sensitive information.
• Communication Gaps: Inadequate communication about the transition can leave customers in the dark about changes that affect them, such as new procedures, downtime periods, or modifications to account access. This can lead to frustration and increased customer support inquiries.
• Compliance & Regulatory Failures: If the new platform fails to meet regulatory requirements, there could be legal repercussions that impact customers, such as delays in service, freezing of accounts, or issues with reporting requirements.
• Availability of Customer Support: During the transition, increased demand for customer support may strain resources, leading to longer wait times and reduced quality of service. Customers may feel neglected if their issues aren’t promptly addressed.
• Customer Notification Errors: Mistakes in notifying customers about the transition, such as incorrect timing or content of communication, could lead to confusion, missed deadlines, or unintended service disruptions.
• Loss of Personalized Services: The new platform may not support the same level of personalized service that customers are accustomed to, leading to dissatisfaction among those who value customized banking experiences.

Mitigating these risks requires careful planning, clear communication, thorough testing, and a strong emphasis on maintaining service quality during the transition. It’s crucial to keep customers well-informed and ensure minimal disruption to their experience – so you can maintain their trust and satisfaction throughout the process.

4.     Onboarding Customer Information

Managing customer data on a new core platform – especially loan and deposit information – comes with risks such as data integrity issues, privacy breaches, and inaccurate reporting. Institutions can mitigate these risks by implementing thorough data validation, strong security protocols, and precise system integration to safeguard customer information and uphold trust during the transition.

Loan Data Notification Errors

• Incorrect Loan Balances or Payment Schedules: Establish robust validation processes to ensure the accuracy of loan balances and payment schedules. Thoroughly test all notifications before deployment and offer clear channels for customers to report any discrepancies.
• Missed Notifications of Rate Changes: Develop a robust system for tracking and communicating interest rate changes. Regularly review and update notification processes to ensure timely and accurate information is sent to customers.
• Errors in Payment History Reporting: Cross-check payment histories for accuracy during data migration and implement automated reconciliation processes. Provide customers with access to detailed payment history for verification and correction.
• Incorrect Loan Maturity Dates: Verify loan maturity dates through comprehensive system checks and customer notifications. Offer customers a review period to confirm the accuracy of their loan details before finalizing the new system.
• Errors in Loan Refinance Information: Ensure all refinance offers and related information are accurately processed and communicated. Implement a verification step for refinance notifications and provide a contact point for customers to clarify any uncertainties.

Deposit Data Notification Errors

• Incorrect Account Balances: Validate account balances through multiple reconciliation stages before sending notifications. Set up alerts for discrepancies and offer customers a means to report and resolve balance issues quickly.
• Errors in Transaction Histories: Implement thorough testing and validation procedures for transaction histories during the transition. Provide customers with access to their transaction histories for review and offer support for resolving discrepancies.
• Missed Alerts on Fee Changes: Ensure that all fee changes are accurately reflected and communicated through well-designed notification systems. Review fee notification processes regularly and provide clear explanations of any changes to customers.
• Incorrect Interest Rate Information: Verify interest rate information through systematic checks before sending out notifications. Implement a review process for accuracy and provide customers with an easy way to verify and inquire about interest rates.
• Delayed or Missing Deposit Confirmations: Improve systems for tracking and confirming deposits to minimize delays. Provide customers with immediate confirmation notifications and establish a support system for addressing any issues promptly.
• Notification of Unauthorized Transactions: Implement strong monitoring and alert systems for unauthorized transactions. Ensure that notifications are promptly sent to customers and provide a clear process for reporting and resolving potential security issues.

5.     External Audit Implications

Core conversions require substantial time and resources, especially from an IT infrastructure perspective. Therefore, it’s important to account for the potential impacts on your financial statement audit engagement. Below are key considerations for auditable evidence and documentation to facilitate a smooth data transition and effective communication with external auditors:

• Completeness & Accuracy: External auditors will need to verify that the transferred data has been tested for completeness and accuracy. Reconciling the ending account balances from the old core system with the beginning balances in the new system can identify discrepancies and provide clear, auditable evidence that the conversion process was accurately handled.

If your financial institution is subject to FDICIA or SOX regulations, ensure that the internal control implications of this transition are thoroughly reviewed. Document and provide evidence of this review, with accountability assigned to the appropriate control operators.

• General Ledger (GL) Mapping: A core conversion may result in changes to GL mapping or new GL accounts. To provide a clear audit trail, it will be beneficial to prepare schedules that illustrate the flow of core accounts of the new system to their designated GL account in such cases.
• Report Mapping: External auditors’ request lists may not always reflect the reporting needed for their audit test work. To streamline the process, provide your auditors with a guide that links reports used in previous audits to equivalent reports in the new core system before they finalize their request lists. This proactive approach helps minimize miscommunications and reduces follow-up requests during the audit.

How Wolf Can Support Your Core Conversions Process

In summary, effectively managing risks during a core data processing transition is crucial for maintaining trust and operational efficiency. By ensuring robust validation, clear communication, and comprehensive support, you can mitigate risks across all areas, including customer satisfaction, employee morale, and more.

At Wolf, we can guide you through vendor selection, data migration, employee training, and customer communication to ensure a seamless transition. By focusing on data integrity, compliance, and audit readiness, we minimize risks and help you achieve operational stability with your new core processing system.

Contact our team today to learn how we can support your financial institution’s core conversions process.