There’s no shortage of challenges for banks. New technology and start-ups increase customer expectations. Open Banking and PSD2 increase competition. And complex supply chains and cyberhackers increase threats.

All this puts even more pressure on a bank’s infrastructure.

Legacy systems account for over 80% of IT spend, leaving little for innovation. Over 90% of the world’s top banks host critical and core IT on such technologies. This severely limits a bank’s ability to adapt to market dynamics and support the requirements central to digital banking.

So, what are the options for banks that want to become future-ready? How can banks transform to effectively compete in the current environment?

The four digital pathways
According to research developed by MIT-CISR, there are four main routes a bank can take – based on ‘digital pathways’.

Pathway #1 – Industrialisation
This involves a major focus on operational efficiency. The goal is to reduce the cost base by lessening complexity across the IT landscape – using standardised technology, simpler operating models and process rationalisation. It’s about delivering agile architecture, reusable APIs and standard ways of designing, building and running platforms. And strengthening and industrialising development and operational practices through repeatable, tried-and-tested patterns that eliminate duplication.

By embracing industrialisation, organisations can deliver with speed and agility at a lower cost to serve. But this can take considerable time and money – and the business can be left frustrated, as new customer-centric experiences can’t be delivered.

Pathway #2 – Customer experience (CX)
Banks that adopt this route focus on enhancing their CX to respond to the existential threat from challenger brands. This typically increases NPS/CSAT scores but leaves banks wanting more – ‘the addiction trail’. However, it does increase the cost to serve and complexity – not ideal for the agility of the organisation or the employees – while having less impact than industrialisation in terms of margin. And, over time, technical debt can increase, resulting in a higher cost of ownership. As the initial benefit fades, many choose a third way that combines industrialisation and CX in a staggered approach.

Pathway #3 – Combination
This route focuses on operational efficiency, then CX, then back to efficiency – and so on. MIT calls this ‘organisational whiplash’ and sophisticated governance is required to get it right. BBVA has adopted this approach, but it has significant experience in digital transformation.

Pathway #4 – New brand or business
Then there’s the most radical option. Here an organisation accepts that transformation is not possible inside the bank due to a variety of reasons and a new brand or business is built from the ground up – designed to be future ready. One example is Bó, a new service in development by RBS. It’s difficult to integrate such new brands into existing businesses and they often go to IPO or are sold off. However, migration of the existing business into the new organisation over time is sometimes possible.

Overcoming the legacy burden
For many banks, digital transformation looks like a long-term change management programme, where the core banking systems must go through a ‘rip and replace’ cycle. But while changing core systems is possible if you’re the size of Nordea or Santander, it still carries high risk. And it’s associated with long periods of ‘business as usual’ before benefits appear. The recent experience of TSB shows how carefully migrations must be planned and managed. These are critical projects – and not for the faint-hearted.  
 
To reduce risk and generate value quicker, many banks are augmenting traditional mainframe legacy by developing real-time services through API layers. By adopting APIs and microservices banks are starting to build out capabilities that (over time) will reduce the reliance on their heritage systems.

Building APIs on top of new microservices enables the legacy to be safely removed in consumable chunks while continually delivering value into the business. And it mitigates risk by sidestepping the big bang approach – allowing the bank to focus on key priorities without the need for a large and costly change management programme.

Are you future ready?
Clearly, the most suitable route to transformation will depend on the strategy of the individual bank. Ultimately, all paths can pay off, but it pays to choose wisely. And, if you do, MIT CISR discovered the average net margins are 32% higher and revenue growth is 67% higher when comparing firms above and below 50% completion of their transformation programme.

To master modernisation, banks need multidisciplinary teams. Expertise in strategy and implementation is crucial. Design thinking, agile and DevOps skills, a deep understanding of AI, RPA and analytics, as well as change management expertise, should all be part of the transformation process. And cultural change is critical for success too.

Part of the investment needs to be directed towards reskilling employees. However, Accenture research shows that only 3% of banks plan to significantly increase their investment in reskilling programs over the next three years. Our experience is that employees are often seen simply as a cost and improving the employee experience is not a major transformation driver. If you’re seeking to transform, or simply deliver a specific solution, we’ve developed a broad range of skills designed to support you.

Find out how Avanade can help you become future ready with our new banking Point of View.