It is no secret that banks’ core platforms are decades old, or that maintaining these systems consumes a significant proportion of time and IT budget. Against a backdrop of constant industry change, both regulatory and innovation-led, the banks are struggling to keep up with new market players, who are unencumbered by such issues. The solution to upgrading platforms is not easy; in fact, it could be considered as fraught as open-heart surgery. So, how should incumbents proceed?
Like a heart, an organization’s platform is the instrument through which everything flows, especially data. This platform needs regular maintenance so it can continue to meet ever-growing regulatory and compliance demands, to integrating new technology or methods of working.
Yet we know that many incumbent banks’ platforms are practically celebrating their 30th birthdays; and by banks' own estimates, spend around 80 percent of their investment budgets on keeping those platforms alive. But like blood passing through a heart, the pressure will only increase over time, until, at a critical moment, it will stop working.
Challenger banks like N26 and Revolut do not experience such problems, as they are running on far newer and leaner technology infrastructures. Their platforms can process same-day payment transfers without the need to establish additional ‘shadow’ booking systems. Customers have become accustomed to these instant, ‘always on’ services through the likes of Amazon’s same-day delivery solutions and will come to expect the same from banks over the next few years.
The regulators, meanwhile, have their own expectations from banks; namely, to share reporting information that is both timely and detailed. For banks on older platforms, there tends to be a lack of data integration across workflows, and as a result they struggle to deliver.
This is going to become more of a challenge as time passes. Not only is regulatory compliance becoming increasingly complex but retaining skilled employees who have the required knowledge of these age-old systems is a recognized industry problem. Indeed, junior developers do not tend to learn to code in Cobol or C++ anymore, and many banks incentivize their workers with early retirement schemes. Without the necessary talent flowing in, how will banks keep these legacy systems ticking over?
So, if those systems are indeed a health risk, what should banks do about them now? A swift upgrade to a new system may seem like the sensible option, but this is easier said than done.
After all, platform migration is a high cost operation, often spanning years and with significant risk implications. It doesn’t help that managers are typically incentivized on a short-term basis, and some banks even ask for positive business outcomes within the same year, preventing investments in future-oriented architectures. For this reason, getting the necessary buy-in from decision-makers tends to be a challenge.
But incumbents must be brave. Let’s not forget there are also options when it comes to reducing the budget, complexity and risks associated with a transformation. Modularization, software-as-a-service, ITO and BPO are just a few examples of options to be considered.
Once the decision has been made, open-heart surgery can begin. The old platform must be kept (a)live to ensure ‘business as usual’ while the build and implementation of the new infrastructure is conducted in parallel. This approach will minimize day-to-day disruption to employees and allow different areas of the business to migrate stepwise, as and when the new infrastructure is ready.
For this, you need specialist surgeons, people who have done this kind of operation multiple times before. It is unlikely that a bank will have enough employees in its organization who have been through such a transformation, let alone have the expertise, time or resource to deliver ‘surgery’ end-to-end.
A consultancy like Capco has both the expertise and experience of helping banks deliver the best outcome for their business models, while also managing third-party vendor relationships where required. Capco can provide a comprehensive market overview of potential software providers, as well as support in finding the best solution for the specific scope of work, may it be the decision of make versus buy, in-house hosting versus outsourcing or finding the right license model, etc. And they can offer further support to define the ‘target state’, the different intermediary steps and required delivery timeline.
The speed of innovation across most industries has increased significantly over the past few years, and financial services is no different with the emergence of new entrants and evolving incumbents. It’s survival of the fittest. Banks - is it time for a health check?
Find out more about how we are helping organizations to prepare for the future of banking by contacting Oliver Geiseler.