Updated: Apr 2, 2021
The onus on traditional enterprises to reinvent and compete with peers is greater than ever. Incumbents across industries are investing to transform their legacy platforms, redesign business processes and continuously innovate their business models to stay relevant. However, transformation strategies aimed at designing modern software applications fail miserably during execution if the road to modernization is not thought through well at the outset.
Having spent more than 20 years at the convergence of banking and IT, starting at a time when a large part of capital markets were primarily physical, many of us, who have traveled this journey, have been a part of teams engaged in transforming such legacy business models, which were on one side of the spectrum being fully manual, slow and inefficient compared to how we experience them today. In this journey, I have often experienced that successful transformation endeavors are more bottom up than top down. Which means that the approach must be to keep business or process need of transformation at the center and move towards the end goal, rather than technology centric approaches, where the means to achieve a target is conceived before the objective itself. I am often intrigued, to be a part of conversations on legacy transformation in banks which are often very technology focused (only) that leaves such initiatives struggling and sputtering in between. And therefore I have a strong opinion that no transformation can be successful unless the below 3 important and connected pillars, which drive modern banking are considered in tandem.
Let's see how these three get connected:
Legacy Business Models: Should they exist? Will they survive the onslought from fintechs which are thought to be fast disrupting this space?
For incumbent financial institutions, there is definitely an opportunity loss associated with not being able to adopt to newer business models as fast as the Fintechs. There is also no denying the reality - that banking value chains are being unbundelled fast by FinTech's. And where the barriers to entry are lower, we are seeing FinTechs emerge fast. However we see this happening mostly in retail and payments space. If we were to consider a few FinTechs which are fast disrupting banking, some of the obvious names that would come to our minds are - Revolut, Monzo, Google, Facebook, Alibaba, and closer to home, Paytms of the world. The question which banks face today is, should they chase the fintech space like an end of the world scenario? The answer is not an obvious YES. Because the banking ecosystem is not only about these segments which the FinTechs are disrupting. There are more complex business demands surrounded by a maze of regulatory edifice which act as significant barriers to entry for FinTechs, which legacy banks will continue to serve.
As a result, banks will continue to bear such costs of legacy business models which are not easy candidates to disrupt, and till such times banks have legacy business models, we will continue to have many of our complex processes running on technology which will progressively and incrementally get modernized, however they will not see horizontal shift of change in business frameworks.
And where it comes to the fintech space, most legacy banks are steadily moving, not with the intend to reinvent the wheel of transformation which fintechs have created, but align with them in partnership models. As we will most likely see, a large section of fintech businesses merge with legacy banks. Revolut and Monzo looking out for consolidations in the open banking space in UK are good examples of such moves.
Legacy of Business Processes which sit on top of Business Models: There is surely a lot to redefine, re-imagine, re-model and re-architect in this space, given that technology is allowing banks to do the same at a much faster pace than ever before. In-fact the cost of not transforming our processes is in higher transaction cost, inefficient systems that is leading to lower margin for banks. But again here, many legacy process transformation efforts fail when (only) technology is kept at the center and not business or the process needs. Process led approach focuses on specific inefficiencies that can be identified and resolved in certain key processes helping banks to:
Study the current processes in terms of full value chain analysis.
Measure the time taken to complete each flow in the context of value, and non-value added activities as part of the processes in the context of cost to run such processes.
Re-imagine such processes based on lean principles.
Implement such re-imagination, that must ultimately enable efficiency keeping internal and external customer value creation at the center.
Technology transformation associated with legacy technology: Legacy application modernization, in most cases would be an iterative approach that may demand transformation of a large part of IT ecosystem based on current and future business needs , helping banks build a flexible foundation for future innovation. The cost of not having an eye on this results in an increase in total cost of running such applications. Which includes license cost, maintenance cost, labor cost etc. And the key to optimize such legacy technology cost is in fast adopting to technology standards which today provide a significant potential of cost reduction. Such as going to cloud or going virtual, going open source. Going from enterprise license midels to software as services models via consumption of micro-services. And to do all these, banks must not consider working in isolation, but with all partners whose products they use.
Also it is imperative that application modernization doesn’t happen with a blow. Instead, it’s a journey, an incremental process that may vary by complexity plus duration to implement, because its often not one but involves implementation of a combination of tools and technologies, such as cloud, mobility, advanced analytics, intelligent automation, and cybersecurity.
The summarize therefore - While on one side, legacy modernization has become imperative and not a choice anymore, however the journey to do so in most complex industries (including banking) should not be by focusing on technology only, but in having a collective view of business, process and technology (all together), none of which can be separated from the other. And when done right, such shall drive business benefits around customer experience, product innovation, operational efficiency, time to market, reduced risk and operational resilience.