Managing Modernisation
Key considerations for banks undergoing digital transformation
Globally, banks are currently under significant pressure to evolve, amid growing competition from fintechs and increased regulatory pressures. This calls for a modernisation of existing processes and infrastructures on several fronts, including operational resilience, artificial intelligence (and specifically, newer iterations of artificial intelligence such as generative AI) and environmental, social and governance practices (ESG).
However, banks face the long-standing dilemma of to what extent they should transition away from existing legacy architectures towards new, modular workflows at the expense of monetary costs, time and expertise. Given the current landscape, where banks are seeking to cut back on their technology spending, as shown in our recent post, this problem is more acute than ever before.
Additionally, when banks do take the leap with modernising their core technology systems, such as utilising public cloud infrastructure, they often face a balancing act between a product’s features and their architectural principles - should a bank prioritise a product's alignment with business needs over adherence to their typical architectural standards?
Regardless of what solution the bank decides to implement, the core focus should be on striking a balance that not only delivers an exceptional client experience but also ensures system stability and reliability. In making these decisions, banks should consider various factors, such as:
Integration Capability: How well a solution can integrate with existing systems and future technological advancements;
Scalability and Flexibility: Assessing whether the solution provides the scalability and flexibility required to adapt to changing market needs;
Long-Term Vision: How the choice of technology aligns with the bank's long-term strategic vision and objectives and;
Customer Experience: The extent to which the technology enhances the customer experience in meaningful and sustainable ways.
In implementing a new system, it is important for legacy systems to be considered, as these store essential data, intellectual property and functionalities that cannot be immediately discarded and forgotten about even if the bank opts to use an entirely new system. Banks may also chose to maintain existing products in legacy systems while launching additional offerings on a new platform alongside it.
However, it is important for banks not to let legacy systems overly influence the scope or vision of the new ‘modernised’ system. Over-reliance on legacy systems can restrict innovation and lead to merely replicating old systems with new technology, defeating the point of modernisation by not adding value, while needlessly incurring higher costs. According to industry research, 70% of digital banking transformations surpass their initial budgets, with 7% ultimately costing more than twice the initial estimates, so it is vital that banks don’t heap additional costs on an already expensive endeavour.
In fact, modernisation initiatives require many decisions to be made, and an important one that should be asked early in the review process is the question of whether to buy a solution from a third-party vendor or to build one in-house, which can involve the development of existing infrastructures. This is not always a straightforward question to address, and answers may vary from firm to firm, and even project to project, as there are many variables to consider, and it may not always be a strictly binary choice.
In general, there are a number of benefits and drawbacks to either approach. It tends to be quicker, cheaper, and easier to buy an off-the-shelf vendor solution. Implementing an out-of the-box solution, however, can result in unexpected costs that were not included in initial vendor quotations. This risk is harder to anticipate and mitigate than it is for in-house.
In contrast, the obvious benefit of building a software solution in-house is that it will be entirely bespoke and address every single business requirement, while ending reliance on third-parties. Over-reliance on third-parties can often result in slow changes or less than ideal upgrade schedules. However, off-the-shelf solutions allow banks to tap into the specialist market and product knowledge of the vendor, so choosing to go it alone in their product development will forego this aspect.
While acknowledging the significance of legacy systems in shaping a new solution, banks should, where possible, take on a forward-thinking approach that challenges existing paradigms, allowing them to meet the growing technological and regulatory demands of today’s world. The choice of modernisation strategy should align with the bank's strategic goals, operational needs, and risk appetite.