All business begins with customers, and all companies predominantly focus on understanding their expectations. Today’s customers expect the services of their traditional banking and financial institutions to be as feature-rich and focused on experience as other digital platforms, even those that thrive on innovation and transformation such as Meta (previously Facebook). The implication of this is that customers not only expect to be more supported by their banks but also more engaged. Thus, while banks expected an average increase of 4.3% in IT budgets from 2021 to 2022, there is a shift from spending on legacy infrastructure and data center modernization to legacy application modernization.
This sector may now seem to have adopted banking modernization solutions, but there is really much more than what meets the eye. To the untrained eye, banks today offer customer-centric, progressive mobile/web applications – however, their back-end IT infrastructure landscape is usually decades old, powered by spaghetti-like connections, each string hopelessly intertwined with another. A great example of this would be an Indian bank with one of the largest customer and employee bases in the world – State Bank of India (SBI). SBI has (time and again) engaged with several technology and consulting partners to modernize their legacy systems over the last two decades – implementing centralized core banking systems, digitizing all products and services, and many more crucial changes. Yet, the bank continues to fall yards short of its customers’ expectations, and employee satisfaction. The direction that banks exert their efforts and resources in becomes critical to the success of any modernization initiatives.
Thus, in this blog, we will also examine what goals and banking modernization solutions traditional banks should work towards.
The need for IT modernization for banks
The banking sector, understandably so, remains under constant pressure to modernize its IT for a myriad of reasons, a few of which are enlisted in the image below:
For a long time, banks have resorted to implementing quick fixes and patch upgrades to their core-banking systems in attempts to win the TechFin vs FinTech tug-of-war. However, these short-term advantages are likely to snowball into even more unexpected and undesirable outcomes; as upgrading basic systems becomes increasingly more difficult – further impacting customer interfaces.
Customer experience demands
The advent of the COVID-19 pandemic led to shutting down a large proportion of physical direct banking, but that also came with an accelerated consumer acceptance and adoption of digital banking solutions. While the need to transition to digital banking may have existed for over a decade, the pandemic impressed upon its importance and urgency – setting the stage for the banking industry to experience a sea change through the upcoming decade. An interesting case study would be First Abu Dhabi Bank’s (FAB) ongoing digitization to roll out novel digital banking products to its customers.
As data and digital technologies evolve and customers get accustomed to increasingly intuitive, AI-based interactions, banks risk losing market share to those that have modernized their customer interfaces in time. If this wasn’t enough to break the metaphoric camel’s back, big-tech. too, has forayed into banking. While the market still hasn’t transitioned fully, these tech. disruptors have the potential to raise customer expectations, while simultaneously pushing banks to lower costs.
In addition, there is a renewed push for open banking, by leveraging interfaces such as open APIs. While all banks understand the importance of APIs for business success, most of those with legacy systems in place have ill-equipped, complex systems – making the use of APIs extremely challenging. Although a large proportion of the APIs today are internal, this is slated to change in coming times. Open APIs enable banks to be more agile, reduce costs and complexity, enhance compliance, all while driving innovation.
Thus, banks must aggressively push for application modernization for all customer-facing solutions, though this alone might not be enough as today’s customers are used to greater transparency and information symmetry.
Rising IT costs
IT expenditure often accounts for nearly a fifth of operating costs for traditional banks, and this can only be expected to skyrocket, with the urgent need to adapt to the wave of digital products and services. As recently as 2019, Bank of America embarked on a similar mission, committing over $500 million to modernize its corporate banking technology globally. In fact, those banks that have waited this long to adapt, qualify as the late majority on the technology adoption curve, if not as laggards.
As banks clamor to make large investments and double down on digital modernization, they must institute steady, fast-paced, and staggered improvements to their IT infrastructure – in order to ensure a continuous transformational curve that adds value sustainably. Emirates NBD, another leading global bank that boasts of assets to the tune of AED 700 billion (~$200 billion USD), wisely took on a phased approach to digital transformation efforts, enabling it to reduce global IT costs as well as time to market for its core banking products. Much like NBD, all banking and financial institutions must ensure that the processes they implement are agile, scalable, and have long-term reusability.
Security and compliance
As an industry that has historically built itself around the need for security, it is no surprise that the need for better security and compliance is one of the primary reasons for modernizing legacy systems in banking. Recent public memory points towards the Experian data breach in August 2020 and the Equifax data breach of September 2017; which impacted millions of people globally – as examples of why banks and financial services must invest in security control, as well as modernize their legacy systems. It wouldn’t be unfair to say that it was in light of such concerns that Deutsche Bank partnered with Oracle in 2021 to embark on a joint innovation partnership to explore and implement data security technologies.
For those that haven’t already, implementing SecOps may be the immediate next step, in order to add security testing during the initial stages of the application development lifecycle. Those banks that have already made it this far could also look at more advanced solutions like using generative AI for fraud detection, credit risk assessment, and protection of personal identification information.
Another tool that can push banks further in modernizing their data privacy game is the use of synthetic data, ensuring heightened privacy for customers, with the added benefit of predicting outcomes through AI-based data modeling and training.
Limitations to the availability of legacy talent
The need for IT Infrastructure Modernization gets aggravated due to the shortage of a legacy talent pool, making it difficult for banks to maintain their core systems cost-effectively. The use of obsolete programming languages such as COBOL has only made the task of legacy modernization significantly more cumbersome. Existing engineers are overloaded with work on the core-banking front, making any potential migration cost-inefficient. To this end, HSBC took up the challenge of workforce performance head on, undertaking a global transformation initiative for modernization and digitization – through digital HR technology implementation. For other banks, however, the picture isn’t as rosy.
To make matters worse, new talent is understandably reluctant to skill themselves on outdated technologies. The talent pool, thus, grows dangerously shallow. What banking organizations could now do is:
- Outline the changes that would lead to relevant outcomes for customers
- Evaluate the impact of their IT roadmaps on existing and new employees
- Incentivize new employees to skill themselves on existing technologies, and teach existing employees advanced technology skills
The larger goal for banks should be to eventually transition to a cloud-native architecture, allowing for future scaling and enhanced talent productivity. With smaller, highly-skilled teams, and a platform-oriented approach, banks could ensure appropriate utilization of all available talent.
Legacy modernization – A leap of faith
With all the aforementioned factors at play, it’s no wonder that banks have been turning to modernization, instead of spending a large chunk of their IT budgets simply to sustain the existing, archaic infrastructure. Modernization opens the doors to a plethora of opportunities to add digital layers to back-end systems, which is the need of the hour.
Modernization services enable banks to move from monoliths to Cloud-native platforms with APIs, leveraging a microservices-based architecture, and readily available pay-as-you-go pricing models from Amazon Web Services (AWS), Azure, or the Google Cloud Platform. Banks can draw inspiration from how JPMorgan Chase is partnering with Thought Machine for a transition to the cloud, with the distinct goals of innovating, running multiple consumer products on the same platform, improving availability, resiliency, reliability, and scalability, enabling real-time retail banking, and working with embedded banking APIs.
Much like JPMC, the journey for other banks to transform from providing a service, to delivering an experience, is a long one – but it can be made easier through the right approach to modernization. Not only does modernization address the talent problem by attracting top personnel, but it also enhances security, helps reduce expenditure, and improves customer engagement and loyalty.
Making the right choice
Now that the need to modernize has been established, banks must also look at how? There is no one-size-fits-all solution to modernization, and thus, we recommend banks follow the 5-step process below to get started on this journey:
- Initiation: Starting small, banks must conduct detailed modernization assessments to gauge risks, understand the current complexity of the systems, and perform a cost-benefit analysis
- Evaluation: Define a customer journey map and understand the applicability of each existing service to the customers
- Prioritization: Banks must then clearly categorize and prioritize the specific capabilities that need urgent attention in order to enhance the customer journey
- Administration: They must define a change management plan for the sequential evolution of their organization’s operating model and technology architecture
- Implementation: The decision to build vs. buy could be based on the in-house skillset and capabilities of each bank. Some might also look at partnering with organizations and learning from their experience in the space
To know more about how we at ValueLabs have enabled several pioneers in the banking space to become future-ready, for decades, click here.