Today, banks face the challenges of updating their business models, technology and processes to respond to the digital age. But legacy systems are a hindrance to innovation, often slowing down the innovation cycle on the back end in order to deliver the new products and services banks need to remain competitive.
Moreover, in the world of Google, Apple, Facebook and Amazon, consumers expect flexible, real-time solutions anytime, anywhere and on any device. To compete effectively, banks must evolve their services and respond to customer expectations in the same manner as these forerunners of the platform economy. Banks are increasingly recognizing that they cannot do this on their own.
Short of a costly overhaul of legacy systems, how can banks meet this challenge? A more collaborative, cloud-based approach inspired by the platform economy can help.
Legacy Systems Translate to Legacy Mindsets
Most established banks today are still entrenched in legacy systems, many of which have been in place since the 1980s.
Historically, developing new applications to sit on top of these systems involved working with new file formats, programming languages and standards. The consequence of these incremental additions is that many banks now find themselves with an intricate framework of isolated and undocumented solutions that require constant maintenance to ensure that mission-critical systems are always on. As a result, legacy system maintenance now consumes around 80 percent of most banks’ IT budgets.
Banks are right to be wary when it comes to their digital transformation strategies, as they must be mindful of their legacy structures. One day’s outage could cost billions of dollars and cause significant reputation damage. However, most banks realize that improving the customer experience is vital to their survival.
According to a 2018 report by Accenture, 75 percent of operational leaders at banks say they need to focus on customer experience more than on efficiency — and the modern frontier of customer experience is the digital landscape. Understanding this is key to changing an internal culture that focuses on precious legacy at the expense of innovation. At a time where competition is growing in the financial services industry, collaboration must become an essential part of the innovation strategy.
The recent explosion of fintechs and new challenger banks has shown that markets in which established banks once maintained dominance, such as payments and loans, can no longer be taken for granted. Regulators and legislators around the world are also increasingly incentivizing banks to open up to collaboration and competition in these areas.
In Europe, for example, Open Banking and regulation such as the second Payment Service Directive is encouraging collaboration between banks and third parties on a grand scale, while in the U.S. the Consumer Financial Protection Bureau has released an advisory framework on data-sharing for financial institutions.
All of these factors are collectively loosening the grip banks have on the customer relationship, which is why they must create value in order to hold their own.
Financial IT Leaders Should Get Their Heads in the Cloud
The benefit of a Platform as a Service model, which is fast becoming the financial services industry’s biggest trend, is that it meets the challenge of innovating services for customers without creating new isolated solutions that require in-house maintenance, further eating into already stretched IT budgets.
Crucially, a platform-based approach allows banks to benefit from modern development techniques and speedier deployment. While core system development within banks will continue to move at a slow and steady pace, innovation outside the organization will be moving at three orders of magnitude faster.
A platform-based approach allows banks to combine agile development techniques — in collaboration with partners outside the bank — alongside the more traditional waterfall approach used for updating and maintaining legacy systems. Approved fintechs and independent software vendors can communicate with banks’ legacy systems via open APIs, without the risk of altering them or causing costly outages. This means they can build upon pre-existing applications, accelerating the innovation cycle and delivering real-world value for bank customers at pace.
Seek Banking Technology Evolution, Not Revolution
The willingness of smaller technology providers to collaborate with banks should not be underestimated. It is often assumed that these more agile entities are out to compete with banks, but in the majority of cases, this is not true. What they are looking for is primarily a distribution channel — and the banks, who already have the customers today, are the fastest way to get that.
Most fintechs are first and foremost technology providers, and they are eager to have their technologies leveraged by banks. They are agile by nature and often at the cutting edge of new technology, meaning they are able to rapidly experiment with new customer solutions, such as mobile apps and self-service tools that deliver comprehensive insights across accounts and services.
PaaS provides banks with the facility to innovate from the outside, using the skills and technologies of these agile third parties while also retaining complete operational ownership of their proprietary systems. This gives banks the opportunity to gradually evolve their systems over time while delivering new products and services that improve the customer experience.
So, when it comes to innovation, banks require an evolutionary — not revolutionary — plan of action, as they must protect the relationships they have with their customers today. Revolutions are synonymous with upheaval, which is a frightening concept when you have billions of dollars and major business processes tied up in your legacy structures. Evolution, on the other hand, speaks to an organic, natural process of improvement over time. Collaboration facilitates this evolution, and a cloud-based approach can provide the ideal ecosystem for collaboration.