Bridging the Digital Gap: Why Banking Transformation is a Binary Decision

There’s a familiar adage, “If it ain’t broke don’t fix it.” While its origins are unclear, it’s essentially a great excuse for doing nothing. A stark reality is that many banks run on platforms that are older than most of their employees. Why? Because they do work. However, as management guru Peter Drucker proclaims, “If you want something new, you have to stop doing something old.” In this blog we consider why doing nothing is no longer an option for banks in today’s digital age.

Most of the financial world runs on legacy technology. Banks typically spend 80% of IT budgets maintaining mission-critical systems running on outmoded tech.*  Although these technology stacks have served banks well, many core platforms are nearing the end of their useful life. Why? Here’s just a few items to consider from a rather lengthy list:

Competition in global banking is intensifying. Unencumbered by legacy technology, fintechs and neobanks offer a tech-first approach to banking. They embrace modern core  technologies and modern methods that cater to the customer experience. With a next-generation core and modern methods a bank can do more in less time and at far lower cost. While incumbents have generally loyal customers, largely built on trust, they need modern tech to offer an experience that appeals to every demographic, including up-and-coming digital natives. The clock is ticking, which explains why 70% of banks are reportedly reviewing their core platforms. **

The need to do new things, and to do things differently. Legacy technology limits what can be done and how things get done. Banks need to transform from being product-led to customer-led. With legacy technology it’s impossible to harness the power of data, which is essential to deliver personalized services that build customer engagement and loyalty. All banks can tap into a rich seam of customer data but many lack the technology and data science to do so. A new approach is essential to do new things, do more things, and to do things differently.

Joining the open banking ecosystem. At a time when global banking is opening up, there’s a unique opportunity to participate in a growing, vibrant, real-time ecosystem and to build new partnerships and business models. Legacy technology was not designed to be open and lacks the connectivity to enable innovation. A bank with a closed mindset cannot open up to the hyperconnected digital age.

Options for moving to a modern banking platform include:

• Rip and replace the technology stack. This offers the potential opportunity to start again, but in reality, this approach tends to be the most costly and risky, and is increasingly seen as an old-fashioned way to modernize.

• Build a greenfield bank on a new stack. Starting afresh offers the benefit of a new approach that is independent of what’s gone before. However, many greenfield banks fail to match the functional richness of a legacy core and there have been many costly “experiments” in this domain.  

• Progressive modernization. For many banks, progressive modernization is a highly attractive strategy that allows modern technologies to replace part of the legacy stack. Over time, the legacy core is reduced and supplanted by a modern stack. The full transition may take years, but tangible benefits are recognized all along the way.

Cultural Considerations

Although the advantages and drawbacks of each of the above approaches are well documented, perhaps the biggest (and least discussed) obstacle to a successful transformation is organizational culture and the way work gets done.

Incumbent banks have evolved business processes over decades, or even in a few cases over centuries. Typically their business models and supporting technology are managed in parallel and progress is linear, governed by waterfall methods of development and delivery. This is at odds with a modern approach that is progressive and non-linear, featuring the benefits of agile development, DevOps and continuous delivery that fuel innovation and appeal to customers.

As technology moves to the beating heart of everything a bank does, it is often impossible to bridge the cultural gap between the old ways of working and the new. There have been some high-profile disputes when a start-up culture tries to meld with a traditional bank culture.

Bank transformation is not limited to a technology renewal; successful transformations also deliver new ways of working and innovative outcomes that add real value. A blend of old methods and new simply cannot function properly. Moreover, a bank that cannot leave its old ways runs the risk of replicating what’s gone before, albeit on new technology.

A New World of Opportunity

Modern technologies, such as cloud, open up a new world of opportunity for banks to transform. For example, a bank that embraces cloud and modern methods can be freed from the burden of managing servers and can focus on serving customers and reaching new markets in innovative ways.

Each transformation is a unique journey. Successful transformations insulate the bank from change, empower it to participate fully in the new age of open banking, and help future-proof banking operations. New business models, such as banking as a service (BaaS) show how banking and technology have become inextricably linked.

* https://www.fnlondon.com/articles/banks-face-spiraling-costs-from-archaic-it-20170912

** https://www.mckinsey.com/industries/financial-services/our-insights/banking-matters/next-generation-core-banking-platforms-a-golden-ticket#