Bank Modernization: Leveraging Technology for Competitive Advantage

In today’s highly competitive business environment, banks are encountering significant challenges that could impact their growth and success. These challenges include tech debt and rising customer expectations among others. As the competition intensifies, particularly with the emergence of neobanks and FinTech organizations, it becomes crucial for banks to address these issues effectively.

Amidst this digitally dominant landscape, the effective use of innovative technology and budgets for sustainable growth is critical. To realize the promise of enhanced competitiveness, performance, operational efficiency, and cost-effectiveness, banks must overhaul their operations and capabilities through strategic investments. Moreover, digital advancements fortify banks' resilience against future adversities, including economic downturns and digital disruptions.

To achieve sustainable transformation, a strategic approach employing the following four potential levers may be necessary.

1.     Cut Costs Through Simplification

McKinsey’s insights show that the value of Generative AI (Gen AI) in banking is already being realized. For instance, leading banks are using Gen AI to simplify user experiences by enhancing customer service chatbots, making them more intuitive and capable of handling complex tasks. This frees humans to take on more strategic tasks while speeding up traditionally time-consuming activities such as drafting reports, increasing efficiency, and reducing operational risks.

Gen AI has been shown to simplify and standardize banking products, processes, and technology, and boost productivity and efficiency. This simplification allows companies to save on overheads, enabling them to continue investing in modern technologies that can help further transform banking. To get the maximum value out of technology investments including Gen AI and deliver customer delight, banks continue their transformation journey and replace outdated, convoluted legacy systems with flexible, modular architecture. Modernization of legacy systems can yield rapid, tangible results including:

• Increased efficiency and reduced operational risks
• Enhanced customer experiences
• Faster go-to-market for new products and services
• Reduced cost of infrastructure ownership
  
  

2.     Use Digital and Data to Connect with Customers

Today, many banks treat Total Experience (TX) as a cornerstone of their strategy to drive overall satisfaction metrics. Digital channels, while functional, lack personal interaction and human empathy. This is exactly where effective use of data, analytics, AI, and cloud can help financial institutions build and deliver tailored banking experiences with the potential to fundamentally transform the banking experiences for customers and employees alike.

Investing in TX can help:

• Increase revenue by building more meaningful customer relationships
• Move from disjointed interactions to seamless conversations
• Offer and enable better, value-added partnerships for customers
• Improve the employee experience with available insights about the customer

Recent insights from Gartner also show that leading banks are now focusing on collective intelligence, a concept where AI and humans collaborate to solve complex problems. To take an example, think of a bank that uses AI to analyze customer data and predict needs. Then, human employees use that information to deliver personalized services. These collaborations improve business outcomes and enhance TX.

While shaping a strategic AI vision, data and analytics leaders are making data AI-ready, which involves cleaning, integrating, and structuring data, so that AI can easily process and learn from it. Governance also continues to be key to AI value, with banks implementing strict data privacy and security measures to ensure the ethical and responsible use of AI.

3.     Technology at Every Level

The top tech priorities for banks include enhanced security, fraud mitigation, and customer onboarding. As such, investing in a comprehensive technology stack will increase flexibility and innovation. In 2024 and beyond, clearing tech debt will be crucial as banks strive to make the most of their limited budgets. Bankers are developing strategies to invest in modern technologies, aiming not only to improve their customers' experiences but also to reduce their technology debt.

Some of these technology investments include:

• Introducing FinTech applications to customers
• Adopting OpenFinance to provide impactful applications and connections
• Fully embracing real-time payments – Zelle, RTP, and FedNow, to name a few – to address use cases such as B2B payments, account-to-account (A2A) transfers, and expedited payroll payments

A 2024 FinTech Magazine article showed that real-time payments are gaining momentum, particularly in cross-border transactions. Banks are focusing on mitigating tech debt and investing in innovative technologies to improve the payment experience and reduce risks. As we move forward, addressing tech debt will also be crucial for banks to improve their budgets and bottom lines.

4.     Modernize the Core

Traditional banks face numerous challenges in their efforts to meet the rapidly evolving customer expectations, adapt to changing regulations, and enhance their stance against digital native FinTech competitors. Legacy platforms, while effective at handling high volumes of critical operations, come with many challenges and expenses.

One of the most significant issues with older platforms is their lack of flexibility, which hinders agility and makes it difficult to deliver the high-quality digital experiences that today’s tech-savvy customers expect. Additionally, maintaining and updating these legacy systems can be costly and time-consuming, often needing specialized knowledge and resources. This can lead to increased operational costs and reduced efficiency, putting banks at a disadvantage compared to their more agile competitors.

To address these challenges, modernizing the core banking system has emerged as a crucial strategic component. Core banking modernization can be categorized into three broad options:

1. Full replacement: Completely replace a legacy system with a new, modern core. This approach enables banks to start fresh with a flexible, scalable platform that can easily adapt to changing customer needs and regulatory requirements. However, it also requires a significant upfront investment and can be disruptive to ongoing operations.
2. Component-based replacement: Upgrade core components incrementally, one piece at a time. This strategy allows banks to gradually modernize their systems, reducing the risk and disruption associated with a full replacement. By focusing on the most critical components first, banks can prioritize their investments and realize benefits more quickly.
3. Wrapping the core: I Implement a new parallel core that wraps around the legacy system and provides modern microservices to interact with other systems. This approach enables banks to leverage the strengths of their existing systems while adding new capabilities and improving flexibility. It also allows for a more gradual transition, reducing the risk of disruption to critical operations.

Modernizing the core is essential for banks to overcome the challenges posed by legacy systems, meet evolving customer expectations, comply with regulatory changes, and compete with digital FinTech rivals. McKinsey recently emphasized the need for next-gen core banking systems that provide agility in a complex world without breaking the bank. Modernization, in turn, will help banks remain competitive and position themselves for long-term success.

Embracing Proactive, Adaptive Technologies for Bank Modernization

The strategic implementation of modern technologies, such as Generative AI, advanced data analytics, and modern core systems, will be the driving force behind banks' success in the digital age. By simplifying processes, personalizing customer experiences with data, investing in modern tech stacks, and modernizing core infrastructure, banks can unlock new opportunities for growth and innovation.

However, the path to successful transformation extends beyond mere technological adoption. It requires a fundamental shift in mindset, culture, and strategy. Banks must cultivate a culture of continuous learning, agility, and customer-centricity, empowering their workforce to harness the full potential of digital tools and data-driven insights. Collaboration with FinTech partners and the development of a robust digital ecosystem will be crucial in delivering seamless, integrated experiences that meet the evolving needs of customers.