Change projects can be intimidating, but there is a way to manage the journey that will help reduce costs, as well as over-dependence on legacy banking platforms and antiquated technology.
For many big banks, adopting a change strategy is an intimidating prospect. No one knows more than the bank itself what that journey might look like. Operating models can’t be altered at the flick of a switch, yet recent challenges successfully revealed that change is possible and doesn’t have to be arduous.
Many banks enacted change during the first two years of the pandemic, introducing new products like Bounce Back Loans, new operating models for people working in call centres, or providing extra support for bank employees working at home. Banks adapted to change, but needed an inflection point for motivation.
Legacy banking platforms and systems are often built on top of one another and unpacking the many layers of complexity is difficult from cost and resource perspectives. Having the technical knowledge to be able to run the bank while concurrently changing the bank is a common challenge for key decision-makers. Margins are thin, while costs to serve are high. For particularly large, complex banks, change traditionally meant a considerable dent in operating margin. It comes as little surprise there’s reluctance to deviate from the norm.
Resistance to change is also cultural. The financial sector is perhaps less inclined to alter the status quo than other sectors, when it seems nothing is broken. Senior managers know they aren’t running as efficiently as they could, but may not have the knowledge or experience of what an alternative universe looks like. Banks typically have rotating doors of people coming in and out of technology teams, with no one around long enough to get a full picture of what they’ve got and what needs to change. It’s difficult to know what ‘good’ looks like, particularly in the case of new next-gen platforms and systems.
Another significant reason for the absence of change is the lack of senior-level buy-in. It’s reasonable to assume that the head of a big team of technologists might resist change. It could mean the erosion of their position as a significant decision-maker. While technologists could be better utilised solving customer challenges and driving innovation, a change-resistant team leader might inhibit their availability
Even if banks are willing to change, mistakes could be costly. The key is in recognising the significance of people, particularly when we talk about operating models. Changing technology is simple. The temptation (or expectation) when you have so many employees, yet little understanding of the busy network of processes they’re responsible for, is to throw the kitchen sink at developing a solution. Going ‘all in’ on a large-scale implementation of a new core banking platform could compound problems rather than solve them.
So, what are the options? We talk about a bifurcation in the core banking market. In the traditional camp, banks can choose from one of the large single-provider platforms with proven processing capabilities and breadth of product offering, but siloed, fragmented data models running third generation pre-cloud technology stacks. These platforms work, but they are slow and expensive to implement, run and change.
The other option is a modern cloud-native platform that provides a framework (or ‘skinny core’) that can be integrated with a school of specialist vendors that provide the non-core functions. While the superior technology and non-functional capabilities make this the preferred route for a modern bank, creating an incredibly complicated ecosystem requires knowledge, talent, and resource. This looks a lot like the ‘build it yourself’ path, which was likely the bank’s issue in the first place. The new best-of-breed ecosystem will also need to be managed and maintained, compounding resource requirements.
Recognising your options, and the pros and cons around them, is one thing. However, a dominant motivating factor around resistance to change is not knowing where to start. Either path looks so long and difficult, it seems insurmountable. It isn’t.
The solution is to start small and build incrementally. It’s about taking a modern platform, testing it in anger to see where digital innovation can be used within your bank, and up-skilling yourself in the process. What banks should be doing, at least in the short term, is using cloud-native core banking platforms to see what they can do, and educate people about what the future looks like. That knowledge is invaluable, and is a springboard for what real, customer-centric change looks like.
The best way to start small is to work with a technology partner that collaborates and integrates with other best-of-breed technology providers. Delivered as SaaS via a managed service, the entire core banking technology stack is managed in the cloud, reducing cost overheads of data centres, and hugely inefficient teams of underused engineers. The tech partner can oversee and orchestrate numerous things, and use partners where necessary, without the burden of responsibility being with the bank.
Banks may be naturally hesitant to relinquish control over where code sits and how it works. After all, isn’t the idea of engaging a technology partner to own the code and be able to access it whenever you like? It’s tempting to believe the ownership model is the best way forward, yet there are downsides, and the alternative is more compelling. When a core banking platform is delivered as a managed service, the technology partner manages the code. A managed service provides an evergreen platform, and means you see innovation more frequently, and change occurs incrementally, but fast. The new world of cloud-native platforms means you get to market quickly, and it’s comparatively inexpensive to do so.
While core banking is still a technology issue, think of it as being a commodity. When you allow someone else to take care of it, it frees you up to focus on delivering business outcomes. The best-case scenario should be for banks to focus on business problems, not technology problems. This is because banks aren’t technology companies. Their core competency is financial services, so that’s where the focus should be, and there are multiple benefits to be gained from outsourcing the technology part.
Change can be a business enabler that will help reduce the total cost of ownership. The heads of technology at your bank may get bogged down with a potential loss of control or sway over what’s implemented. However, they will instead be able to focus on creating things that are value-add for customers and digital innovation.
Allow the bank to dream big. The whole point of modernisation should be to serve the customer better. It should be about building new propositions, providing customers with personalised services, and having better distribution models, so customers feel valued. To service the customer effectively, you need data. This is the important bit because while banks aren’t technology companies, they are data companies. The real benefit of modern core banking platforms is real-time data published by streaming services like Kafka, giving banks data they can store, query and act upon. This is where technology teams should be directed, and the dreaming that can be done around these types of platforms.
You don’t replace jobs, you replace tasks. Finding the right technology partner to support your core banking platform modernisation means you can start from where you are and get to where you want to be much faster and at a lower cost.
This article is an extract from Finextra's The Future of Digital Banking in the UK report. To read on, please download the full report via the button below.