Let’s make no mistake, the burgeoning ranks of fintech start-ups pose a threat to banks. Our partner Accenture estimates that up to 30% of banks’ revenues could be lost to new competitors by 2020.
But banks still have plenty of competitive advantages – the trust established through hundreds of years safekeeping customers assets, access to customers’ transactional data, the ability to offer a full range of services, to name just a few.
The real threat to banks comes from their ageing IT systems
The systems banks use were built for 9 to 5 branch banking. They were also built for specific purposes – term deposits, standing orders, credit cards, etc. without regard to the holistic customer relationship.
The problem is that banking is now 24/7, delivered increasingly over digital channels and customers expect an e-commerce-like online experience that is rich and immediate.
This situation presents banks with four major issues
- Risk and complexity. A typical universal bank runs more than 180 applications, written in a piecemeal fashion over decades in languages now not easily supported. This obviously greatly restricts flexibility, but it also creates thousands of points of failure.
- Scalability. Systems can’t keep up with the exponential growth in volumes. As banking digitizes, consumers are interacting with their banks more often (Barclays, for example, has gone from 2 branch transactions per month to more than 30 interactions per month through Pingit, its mobile app).
- Opportunity cost. According to Celent, the cost of maintaining ageing legacy systems eats up more than 75% of banks’ IT budgets, leaving little for value-enhancing expenditure.
- An expectations gap. Ageing IT systems can’t provide the rich banking experiences that customers want. Customers want banks to perform the role of infomediaries, helping them to make better financial and commercial decisions. To achieve this, banks need modern architected, integrated and real-time systems.
Where to start renovating
There is growing realization that banks need to remove their IT straightjacket, but where to start?
The truth is that banks can start anywhere. There are multiple implementation approaches, such as build & migrate and progressive renovation that allow for de-risked and gradual replacements of banks’ ageing infrastructure.
But back office replacement is fundamental. You can only create seamless and instant gratification where the transactions are processed in real-time and with 99%+ automation. This is why McKinsey says that the best returns on digital investment come from back office automation.
How to ensure positive RoI
IT renewal is essential, but how do you stop the project going the way of so many others and failing to deliver significant RoI?
We believe the key is stop building proprietary systems, whether these are internally developed or sourced from third parties. Doing this introduces too much risk, is too slow to deliver value and is legacy from day 1 if it can’t be easily upgraded every few years.
Instead, adopting leading, upgradable packaged software, bringing together best practice from the world’s leading banks, is what drives superior returns. This explains why year after year Temenos customers outperform their peers, with on average an 8.1 percentage point lower cost to income.
How to stay ahead
This is a job for us.
We’re investing more than 20% of sales in R&D, drawing on the expertise of more than 2000 bank customers.
We are also running events, hackathons, sponsoring an incubator and a whole bunch of other activities to ensure that once you’ve caught up, you never fall behind again.
If you’re ready to ditch the legacy and want to put your organization in a position to succeed through the digital revolution, why not have us give you a call to discuss next steps.