This article was originally published in Global Banking and Finance Review.

The idea of buying financial services from a tech firm or online retailer is no longer fanciful –in fact, it’s started to seem like an attractive option for consumers who are frustrated by the traditional banking sector’s apparent resolve to stay stuck firmly in the 20th century.

Retail banking was once the most “unchallenged” of industries, with new entrants to the market facing significant barriers to entry, such as obtaining startup capital and creating a national network of branches. The arrival of Tesco Bank to the UK in 1997 should have raised the alarm, showing how a new entrant could exploit its hundreds of physical stores and enormous financial muscle to provide banking services to its customers. Then came Amazon, which since 2011 has surpassed $3 billion of loans to small businesses through its Amazon Lending division.

It’s not their enormous market capitalisations that make companies like Amazon such a threat, but rather the fact that they have consistently demonstrated their ability to provide fantastic shopping experiences and customer service that puts their High Street rivals to shame. New online-only entrants harness the power of new technology, such as chat bots and predictive analytics, to dispense with the most frustrating elements of traditional banking, such as endless phone queues and long lunchtime lines at the branch.

Losing the race for relevance
Little wonder, then, that almost nine in ten (85%) senior technology decision makers in the banking industry in Europe believe they are being overtaken by disruptive competition. According to Avanade’s latest in-depth research into attitudes towards disruption in the retail banking industry, there is widespread recognition that investment in technological innovation is absolutely critical if established institutions are to have any hope of catching up with new digital challengers.

Established banks are facing a race for relevance, where nimble startups (as well as established giants in the retail and technology sector) are far ahead in delivering great customer experiences and better financial products and interactions.

Perhaps the only positive for the traditional banking sector is that they understand the urgency of investing in technology to improve the services they provide, with 88% saying they need to improve customer experience. This includes factors such as increasing personalisation, providing a more seamless experience across multiple channels, and closing physical branches and embracing online-only services.

Strangled by legacy IT
One of the main factors holding back the established banks from embracing new technologies is the fact that they are lumbered with a web of legacy infrastructure that is strangling any attempt at innovation. The only answer is to cut the Gordian knot, and make significant investment in replacing legacy IT systems. Expensive as this may be in the short term, the only alternative is to continue spending significant sums on administering clapped out, unreliable systems.

This makes poor business sense, with around half of banks saying that they spend more on maintaining their old IT infrastructure than challenger institutions do for their much more modern systems. With almost half of respondents saying that legacy IT costs too much to maintain, and two fifths believing that their IT department spends time on maintenance, now is surely the time for banks to embrace the power of the cloud.

Optimising operations and efficiency
Currently less than a fifth of bank infrastructure is deployed on private cloud, and barely 10% on public cloud. In spite of this, banks realise the cloud is key to achieving operational efficiency, improving productivity, and deploying new services for customers.

Challenger institutions are making great strides with services based on cognitive automation, machine learning, and robotic process automation, benefitting from the scale and flexibility of the cloud. But moving IT infrastructure to the cloud can only be the first step, and almost every bank appreciates that it must engage third party services to access the skills and resources they need to develop and deploy new customer services or boost employee productivity.

Reimagining the customer experience
Challenger banks offer a dazzling array of slick new services, from mobile money management to automated customer chat bots, but the basis of a great customer experience (CX) is actually quite a simple matter. Consumers’ main demand is access to a full range of services and products, coupled with the reassurance that their personal data is protected by industry-leading security technology, along with a desire for engaging digital interfaces on their chosen device.

These goals are highly achievable for any retail bank, with almost nine in ten of our respondents believing that their organisation could improve the way they personalise services for their customers, while more than half plan to remove human interactions from their retail services. Yet 64% admit that they struggle to provide a truly seamless experience – hardly surprising given their reliance on legacy technology and low levels of cloud adoption.

Most banks regularly hear the complaint that smarter, more disruptive competitors outperform them in delivering great customer experiences, and a clear majority (91%) say that they will need to spend more to improve the services they provide. On average, however, only 14% of annual IT budgets go towards enhancing CX – compare that to the 19% spent on maintaining legacy infrastructure, and the cost of old IT systems is put into stark relief.

No one is claiming that updating decades-old IT infrastructure will pay for itself overnight; however, the only alternative for established banks is to sink further into obscurity and irrelevance while their nimbler competitors forge ahead, unencumbered by branches and legacy technology. The one advantage the banks still hold over the disruptors is their large customer base; it’s high time, then, to begin treating them as valued consumers, and investing in the services they crave.