The safe way to transform banks’ legacy systems

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There is tremendous pressure for banks to adapt to the digital age and an extremely heavy burden resting on the shoulders of the banks’ IT teams. This pressure comes from digital-savvy customers who expect their bank to provide the same transformative experience they receive from Uber in the transport industry, or from Amazon in the retail industry. The smartphone enabled consumer demands a tailored experience, delivered in real-time, at the push of a button or the swipe of a finger. In addition, the pressure for banks to adapt also comes from the market, as agile fintechs look to capitalise on this unanswered customer desire for a banking experience. 

High street banks need to transform, not only to offer their customers the experience they crave, but also to remain competitive. The pressure building is intense, as banks are being disrupted like never before. However, transforming on such a huge scale is easier said than done and can have damaging effects as proved by the TSB outage a few months ago. What kind of transformation is needed? How can banks mobilise huge, siloed amounts of customer data to offer a meaningful customer experience? How can banks change legacy IT systems without compromising safety or business continuity without huge expenses?

Transforming IT infrastructure is key for banks’ future

Many banks continue to operate using the same core banking systems, supporting the bank’s basic functions, which initially emerged in the 70s. Whilst these systems have generally worked for banks until the 90s, the radical change in the IT environment, in addition to the complexity involved in merger activity and the increasing customer demand for access to banking services via mobile devices, calls for a change in banks’ IT infrastructure and operations.

In order to bring personalised experiences to customers and compete with new, more agile players, banks need to stop core transformations and rely on digital cores which easily draw upon the vast pools of data at their disposal, to form better interactions with customers. When data is stored in silos, it is difficult to locate and extract specific data and have a practical overview of each customer. Approaching data vertically prevents banks from gaining customer insights that would help them formulate vital strategies for the future. As a result, the traditional banking infrastructure cannot react fast enough to form valuable interactions in real-time. A digital core will offer the flexibility and efficiency to enhance the customer experience.

The most popular way for banks to achieve digital core transformation is to adopt core banking platforms that are already built on modern technology. This method of transformation remains a pain point for all IT teams and for a bank’s Senior Executives in general as this process presents security risks and could involve losing data. Such a complex operation is also extremely expensive and presents high risks of failure. McKinsey found that less than 30 per cent of first generation Core Banking Systems (CBS) replacements have succeeded. Building these systems in-house can cost organisations anywhere from €50 million ($57 million) to €300 million ($344 million).

UK challenger bank TSB tried to re-platform, moving from its old platform hosted by Lloyds to a new one of its own design. The IT teams had to work under a very tight schedule, budget and pressure from parent company Sabadell. This resulted in an IT meltdown involving some customers being locked out of their accounts, and others having access to the pension funds of total strangers. This issue lasted for months, the CEO’s job was at stake and it eventually resulted in a total loss of £176 million ($225 million). This proves once and for all that the risks involved in the digital transformation of banks and touching critical legacy IT systems are all too real.

Banks have been slow to adapt to the digital world as a result of this IT baggage that is costly and complex to lose. They need to find a new way to approach this issue.

Digital banking without an overhaul of IT systems

The best way to adapt to digital core banking without too many risks and expenses could be to have a system of enablement sitting on top of your core system. This orchestration layer would fill the chasm between the system of records and the system of interactions, drawing relevant and contextual customer data into focus, for a value-added interaction with the customer.

This method would also provide a connecting layer between front-end customer solutions, which need to be dynamic and agile, and the core banking solutions that are driven by stability and efficiency. This would reduce the disruption due to changes in any one layer, maximising benefits while reducing risks considerably.

Instead of undergoing a costly IT project that may never see the light of day, this would enable banks to modernise their core systems without any interruption in operations. However, the benefits would go beyond operational perks, as it would provide banks a single source of truth for all customer relationship data. An orchestration layer would give banks real-time, analytical and holistic data. If it is implemented as part of a customer-centric program, it would allow a faster implementation at a fraction of the cost of other methods.

The middle ground between ‘lift and shift’ and ‘playing it safe’

Banks face tremendous pressure to modernise and adapt to the digital age, but this doesn’t mean that they should undertake expensive IT projects for the sake of an undefined digital experience. A customer-centric transformation, with the clear goal of improving a redefined customer experience is much more valuable.

Failing to innovate and ‘playing it safe’ by remaining passive is not the answer. An expensive and risky “Big Bang” migration to a brand new, agile platform that is not centred around customer needs is not the answer. Adding an IT layer orchestrating data to serve customers, a layer that would take the best of the old and provide the customer experience needed today, may be the best option banks have to answer the pressures they face today.

Madhur Jain, Senior Vice President – Solution Consulting, SunTec Business Solutions
Image Credit: Centtrip