Digital transformation is, demonstrably, a job not yet done. Put that alongside a large contingent of technologically nimble new entrants and you have the seeds for a shakeup of the financial services industry in the ways in which it goes about building or re-tooling its digital foundations.
In an increasingly competitive industry in which the barriers to entry are coming down, being a bank is hard and being a bank with ageing infrastructure is even harder still. If you have ever had a conversation about the state of banking, the future of banking or how to innovate in an incumbent financial institution of any sort, you will not have escaped a rudimentary understanding of the ways in which legacy IT infrastructure has acted as a drag on digital transformation.
More recently, COVID – 19 has exposed the extent to which banks’ legacy systems have impeded their ability to serve customers in a time of crisis and rapidly increasing demand. From processing loan applications at speed and volume, to responding to enquiries from anxious customers, as well as supporting a suddenly dispersed workforce, many incumbent financial institutions have struggled to deliver a satisfactory service to customers.
Michael Anyfantakis, Platform & Ecosystem Lead at Amsterdam Trade Bank feels that the “greatest challenge is that legacy tech was developed and procured in large blocks (a bit like buying a house that lasts for ever) whereas the new paradigm is all about development and use of SaaS microservice based components (more like renting a room in a hotel)”. …getting a mix of Houses and Hotel rooms functioning well together is not that easy!”
It is pretty obvious that starting from scratch in building a challenger bank or a FinTech start-up means that you can think about creating or compiling the IT infrastructure in ways that enable all the great goals of modern, digitized institutions – lower costs of operation, the ability to pivot and innovate at speed, greater personalisation, an ability to scale up or down faster and the creation of processes and a culture that aligns with all of those objectives.
As Eelco-Jan Boonstra, Managing Director, EMEA at Mambu notes, “(our) cloud banking platform was built to enable financial institutions to constantly change and adapt. When we started in 2011, this was a foreign concept for banks. Now with the success of neobanks and the threat of tech giants offering banking services, banks have recognised the importance of agility. Mambu helps them rapidly build and scale their banking and lending services so they can meet customer demands and adjust quickly to changing market conditions.”
Established Banks – as is the case with other incumbent institutions – face a broad range of internal challenges. Not only are their systems outdated but their very design was driven by the dynamics of a structurally different age. At retail banks, for example, those systems were set up to underpin branch banking and batch processing. Now customers expect 24/7 personalised service across a range of channels. Delivering that, and keeping pace with the competition, requires very different technology systems, not to mention profound cultural change.
As noted by Liesl Bebb-McKay, Director, BBD, “the requirement of clients for seamless and efficient service with the costs and complexity related to modernizing legacy infrastructures is a great challenge… With so many solutions and vendors, the choices are further complicated and with so much at stake in getting it right, it is often difficult for firms to find an answer that meets their very specific needs sufficiently”.
The scale and importance of the challenge is clear but what is the best way forward in the journey to becoming a modern and future proofed tech-driven organisation? In addition to waves of new challengers, covering a broad range of financial activity, there are a raft of equally nimble and innovative providers of technology and software to meet the needs of an industry in dire need of a tech overhaul. The fundamental question of build, buy or access is both a question of technology and strategy.
When moving to the cloud, Paul Taylor, CEO, Thought Machine, says that “…there is no ‘one-size-fits-all approach’ … as each bank has their own unique technical and business needs. …we have created a hyper-configurable cloud native core banking product capable of supporting any bank on their unique journey to the cloud. Our core banking product Vault supports banks through migration, as well as banks who are launching a brand new proposition on modern systems.”
Bebb-McKay agrees that “there is no one answer to this – each business area or organisation will have different challenges and different needs… ” She highlights that “Rip and replace is daunting and costly, building proprietary systems is risky and requires massive investment and the platform approach brings the challenges of integration and trying to find the best fit. Often it is a combination of these approaches that will make the most sense”
The path to digital transformation is most certainly fraught with challenges and risks as has been seen with high profile tech outages. Risk aversion and sticking with legacy systems may salvage some careers in the short-term but it is not a viable longer-term strategy and the alternatives to risky rip and replace projects have opened up significantly.
As Eelco-Jan Boonstra observes “Now that we are a few years into digital transformation and have seen which projects have had the greatest success and which have stumbled, it seems clear that rip and replace is an ineffective strategy that carries a high level of risk and low probability for success. A platform approach that evolves or augments the existing system is achieving greater success than going big bang.”
Decreasing the risk of technology projects going awry and a broader range of pathways is surely a more appealing route to core banking renewal than the options that faced financial institutions even a few years back. As we’ve seen the platformication of many industries and the key regulatory drivers of PSD2 and Open Banking, the dynamics of the financial services industry may already be pulling transformation projects in a particular direction.
The view of Michael Anyfantakis is that “the only approach that could work, would be to go greenfield and build a completely different cloud native, SaaS based stack, on the side of the legacy, using minimal integrations into the mothership…progressively expand and scale this with new customers, until you can eventually and gradually migrate the legacy customers and records.
In the House vs Room analogy, you leave the houses behind, rent lots of hotel rooms…test them out and change them if they don’t work, and when you are happy with all your new Hotel rooms… leave the old Houses behind…”
With new waves of cutting-edge providers of core banking technology, the choices open to incumbent institutions are expanding and the ability to digitize processes and products provided ever greater. The technology is out there but how financial institutions go about creating the digital dream remains a question of strategy and will be a topic discussed at both FTT Virtual Spring and FTT Virtual North America.