April 17, 2024

Agile Achievements Unveiled

Pioneering Success in Business & Finance

Innovation and transformation in banking

4 min read

It’s difficult to gauge the health of the banking sector as a whole. On the one hand, the failure of Silicon Valley Bank and near collapse of Credit Suisse have sent tremors through the industry. On the other, UK banks have profited handsomely on the back of rising interest rates.

But the increasing cost of borrowing represents a double-edged sword. Even as its Q1 figures surpassed analysts’ predictions, Lloyds recently warned of stresses ahead. The bank predicts a significant growth in the number of customers defaulting on their loan repayments.

Against this uncertain backdrop, it may not seem like the most opportune moment to consider significant investments in new technology. But some experts believe that this is exactly what banks should be doing.

“Any good financial institution is taking advantage of the economic downturn by performing two important activities: creating products that serve customers better and seeking opportunities to improve operational efficiency,” argues Andrea de Gottardo, CEO of digital bank Kroo.

The rationale here is that, in straitened times, banks need to be fitter and more agile than ever. The right tech, carefully implemented, can improve their efficiency, reduce their costs and help them to stay profitable even if their revenues decline.

The challenge of legacy technology

Achieving that goal that is nowhere near as simple as it sounds, of course. Traditional banks often struggle to make the best use of new tech. For instance, 38% of banking transformation leaders surveyed by EY at the start of this year reported that their companies’ digital transformations had failed to deliver the benefits expected of them.

The emergence of digital-first challenger banks and the fintech sector over the past decade forced them to modernise customer-facing services and embrace a world of apps, open banking and digital customer experiences. But in many cases their internal systems remain relics of a pre-internet age.

Igor Pejic, author of Big Tech in Finance (Kogan Page, 2023), is an experienced senior manager at one of the largest banking groups in Europe. He compares the task of upgrading these core systems to “swapping a jet engine while 10,000ft above the ground”. 

He continues: “Starting in the mid-20th century, banks were among the first to invest in computers and build overarching and highly specific computing infrastructure. These systems are at the very core of their business and have thus been tricky to upgrade, let alone exchange.”

Banks are heavily regulated, so any system upgrades need to be very carefully thought out

Professor Lily Fang is dean of research and Axa chair in financial market risk at Insead business school. She points out that some bank software is still based on systems that were developed 50 to 60 years ago. And that isn’t the only obstacle.

“Banks are heavily regulated, so any system upgrades need to be very carefully thought out,” Fang observes.

For some financial institutions, there may be further complexities to deal with, such as mergers and the existence of localised and fragmented IT decision-making. These factors have left many large players with divergent and overly complex back-end infrastructure.

Creating efficiency

While all this shows the scale of the challenge facing banks that want to modernise their systems, it also hints at the potential rewards. If they could replace their legacy tech, that should vastly improve the efficiency of their processes. A digital transformation has the power to automate numerous basic tasks, accelerate the gathering and analysis of data and enable people to focus on more value-adding work.

Some progress has been made in recent years, often by banks working with (or buying out) fintech firms and absorbing their technology. Pejic talks in particular about the adoption of application programming interfaces (APIs) and microservices, which allow one application to access another’s functionality.

APIs enable internal systems to speak to each other, letting disparate applications share data. This is incredibly useful, which is why every bank will be deploying them to some extent.

The promise of emerging technologies 

The ability to extract value from data will be key to the sector’s further digital transformation.  With more integrated systems, the use of data-gathering and analytics tools can grant a bank a competitive edge – if it can use them well.

After that, numerous emerging technologies show considerable promise, according to Pejic.

I see the most potential in centralised blockchain and artificial intelligence

“I see the most potential in centralised blockchain and artificial intelligence,” he says. “Both are ground-breaking general-purpose technologies that will improve and automate processes across the organisation.”

AI can enhance the efficiency of software development, as well as automating processes ranging from conducting credit checks to answering customer queries. Centralised blockchains, meanwhile, remove the middleman from digital transactions, increasing efficiency and slashing costs in areas such as payments and settlements.

Integration or bust

Replacing or upgrading internal systems will succeed only as part of a carefully planned transformation strategy, says Fang, who stresses that none of this work should be done in silos.

“These cannot be isolated pieces, as they all need to fit together and be well integrated,” she says. “The software and hardware capabilities are all parts of the overall system – and they need to operate as such.”

A digital transformation requires strong leadership, meticulous planning and full commitment from all involved if it’s to deliver all that’s expected of it, then. It also needs significant investment. A bank may be understandably reluctant to dedicate all these resources in uncertain times, but the ROI for properly replacing legacy systems could be immense.


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