Inspired by a wave of disruptive digital innovation, the last decade has witnessed perhaps the most rapid evolutionary change ever within the global banking system. Thanks mostly to a combination of greatly heightened expectations from banking customers and the sustained development of the financial-technology (fintech) sector, banks are now unrolling new, cutting-edge solutions at a brisk pace that continue to enhance the customer experience. But are the legacy systems that remain in place at most banks able to continue supporting this consistently progressive environment?
In its study “Financial Services Technology 2020 and Beyond: Embracing Disruption”, PwC (PricewaterhouseCoopers) identified a handful of key priorities financial institutions must recognise to succeed in this increasingly digitised landscape, such as simplifying their legacy systems, updating their information-technology (IT) operating models, taking their software-as-a-service (SaaS) credentials beyond the cloud, adopting robotics and artificial intelligence (AI), and preparing the architecture to connect to “anything, anywhere”. But given the rapid pace of development that the industry is undergoing at present, legacy banking systems across much of the world are regularly found lacking. It would seem that the digital-first generation of young, tech-savvy customers along with the proliferation of new, creative fintech start-ups are exposing such legacy infrastructure as being incapable, inefficient and inflexible in both meeting the demands of today and anticipating the trends of tomorrow.
There are a multitude of reasons why banks ought to modernise their legacy banking systems—for example, by moving away from legacy mainframe platforms towards cloud-based technologies. “There’s a wealth of unlocked value to be extracted from banks’ operational systems, but releasing and optimizing that value depends on the bank’s ability to use digital technologies,” said Alan McIntyre, a senior managing director at Accenture and head of its global banking practice. “The challenge lies in the banks’ legacy systems, which can impede a bank’s ability to improve operations and prepare for the future.”
Newer systems are more capable of supporting the latest digital products, services and applications that banks seek to provide to their customers. This means that by shifting towards such systems, banks can more easily optimise the user experience as well as operate in a more flexible and dynamic manner. In Accenture’s 2018 North America Banking Operations Survey, 74 percent of bank operations leaders say that customer experience is their top strategic priority.
Most banks will also want to streamline their operations by reducing the considerable costs of maintaining such systems. Such costs only grow the longer they remain without any updates, as technologies designed to support them grow obsolete and become more expensive to operate. And they will want to adopt the latest technologies simply to benefit internally from the improvements that those innovations offer in terms of utility as well as reduced risk and bolstered security.
But implementing such migration is easier said than done. Legacy systems are often complex in nature, having been built on outdated architecture. Should the bank wish to implement change, moreover, it may have a significant impact across various processes. Indeed, legacy systems are often referred to as a “big ball of mud” in that they have little in the way of coherent architecture, and, as such, their ability to integrate modern technologies and processes is severely hampered. “Continuous extensions with new features and stand-alone solutions, as well as interfaces to other applications in legacy IT, have often created a jumble of dependencies over the years, with no transparent structure or logic,” wrote Stephan Kliche, a client technical architect at knowis AG, a German specialised software vendor for the banking industry. “This increases the complexity and leads to an intricate system landscape that resembles a plate of spaghetti. An uncomplicated migration to new versions or other providers is hardly possible.”
And with much of the legacy core-banking system architecture not directly connected to customer interfaces, the process of completing tasks that eventually end up improving the customer experience on the frontend is wasteful, time-consuming and inefficient. This ends up causing development cycles to take much longer compared with modern technology, which is often explicitly designed to deliver quick updates and releases.
Such inflexibility can severely inhibit the customer experience. For example, customers are increasingly expecting that they can set up an account on the spot, without having to wait for days or weeks for final approval from their banks. But on the whole, lenders continue to find this a challenge to provide, especially as many still rely on the paper trails and data that exist on their legacy systems. According to a 2019 survey of 2,000 adults in the United Kingdom by Censuswide on behalf of core-banking technology provider Five Degrees, 43 percent expect to open an account instantly, but only 37 percent of traditional banks and 40 percent of challenger banks offer this service. “Our research shows that the majority of traditional and challenger banks in the UK are currently lagging behind customer demand for an instant account set-up, and so risk missing an opportunity to attract new customers and retain existing ones,” said Peter-Jan van de Venn, Five Degrees’ managing director of business development.
The need to update legacy banking systems is further compounded by the increasing shortage of the skills that are required to operate and maintain these core systems. Legacy business and technology experts are now at the retirement age, leaving a major skill and knowledge gap. Coupled with the fact that younger generations of IT talent are simply not enticed to work with legacy systems, banks find it increasingly challenging to find the quality and quantity of human capital necessary to ensure legacy systems continue to thrive.
“Modernization helps address the talent shortage by creating an IT environment that is attractive to younger workers, and by shifting much of the talent burden from your in-house IT department to external IT vendors with adequate resources,” observed Deloitte in its paper “Modernizing Legacy Banking Systems”. “Modernization also captures the priceless institutional knowledge that is locked up in your legacy systems—and in the heads of employees who support those systems—and transfers it into more advanced solutions that can propel your business into the future.”
What’s more, it is worth banks asking themselves whether their legacy systems can survive the myriad of mounting external pressures, mainly from the fintech sector, that is driving many of the advances in agility and innovation—but also from regulators who are increasingly factoring in fast decision-making and tighter security requirements, based on modern technologies as the standard. It is no surprise, then, that many believe that these outdated systems are reaching their breaking points. Whether it’s from the point of view of customers, regulators or, indeed, their own cost structures, it has become an urgent requirement for banks to adapt and update their technology-management credentials.
So, how exactly can banks begin to modernise their legacy systems? Deloitte has identified a handful of key practices that they can adopt today, including:
- Implementing a creative, cost-efficient funding model, and reinvest the generated savings into further modernisation;
- Focusing on delivering solutions quickly, such that modernisation processes don’t end up taking years;
- Focusing on value creation that improves business processes and enables creative advantages, rather than simply on replacing technology;
- Accelerating the migration using the latest digital tools and automated APIs (application programming interfaces);
- Implementing a migration that minimises disruptions to the business;
- Focusing on business impacts such as market changes, new regulatory requirements and rising customer expectations, not just technology features and cost;
- Extending the modernization philosophy beyond just the IT function, such that it represents a strategic business issue rather than simply a technology issue.
Even in 2020, the prospect of going fully paperless remains an unrealised ambition for many financial institutions. And it ultimately means that neobanks and challenger banks, which by definition exist without bearing the burden of paper-based processes, can position themselves at a distinct advantage.
Nonetheless, should a dramatic overhaul remain infeasible, banks can still focus on the customer experience by combining key technologies that they can implement today, according to Accenture’s McIntyre. “For instance, by using cloud, robotic process automation and artificial intelligence, banks can plug-and-play new customer-facing apps and processes within or around their existing legacy systems. We believe that this approach can, through revenue and productivity gains, increase a bank’s return on equity by as much as seven percentage points.”