Can financial institutions afford to stay with legacy systems?
Three unstoppable forces are changing how all financial institutions must operate in the future. This is particularly true for those responsible for payments and transaction banking. Some institutions are already racing ahead and identifying what they need to do to ensure they are ready. Many are still lagging behind and putting their profits at increasing risk. What, then, are the risks?
The first is the increasing investment in new technology. The second is the impact of Open Banking and the final factor is changing consumer habits. This article explores how financial institutions can ready themselves for these changes.
According to Statista, $705bn has been invested in fintech companies worldwide since 2016. Venture capitalists have been falling over themselves to invest in companies aiming to disrupt the industry with new technology. Over the last three years Statista also claims that there have been 74,312 fintech start-ups. While impossible for them all to succeed, some will create new ways of operating that will change the industry.
If you’ve been in the industry for over five years, there is every chance that you’ll have read more Open Banking articles than you’d have liked to. There has been endless speculation about how it will change the industry but, so far, there have been nothing other than a few smart servicing propositions.
However, capability and opportunities are gathering pace and we are starting to see the emergence of credible propositions including new ways to pay, which will have a significant effect. Accenture released a report this summer analysing the predicted changes which Open Banking could bring to the industry. Their findings, based on data from 20 of the largest economies responsible for over 75% of global GDP, are that the open data era will put at stake as much as $416 billion in revenue. Accenture believe that in some markets, financial institutions have become complacent about the threat that Open Banking poses to traditional business models.
There is increasing demand from both businesses and consumers to adopt new payment options. Capgemini’s 2021 World Payments Report analysed the growing desire for ones which are convenient and embedded. One piece of research in the US found that merchants experienced around 25% more conversions and an approximate 65% increase in average order value by adopting Buy Now Pay Later (BNPL) features. Repeat business improved by up to 20%.
Many are predicting that these behavioural changes will continue, and that financial institutions will also need to change to service their customers effectively.
Can technology cope?
The simple answer to this question is ‘no’. Many banks and financial institutions are reliant on technology which was built in an age where BNPL, contactless, QR codes and even the internet was nothing more than an idea. Although this technology is stable and does not fall over, it is inflexible and unresponsive to change.
Decision makers, responsible for setting long-term strategy, are faced with big decisions. To continue to invest in existing technology, bolting on new elements to cope with advances in the industry feels safe but, in reality, creates more risk. The hope is that these mainframe systems, built in the 80s, will continue to function. However, hope is not a viable business strategy and the use of new platforms, designed for the modern world of payments, is gathering pace.
The concerns about changing core banking technology are very familiar to people in the industry. Technology migrations evoke images of system failures, trending social media complaints and national news headlines. There is no doubt that any change opens the door to operational risk.
But in our experience, this risk is negligible in comparison to the operational and commercial risk of trying to service customers in the post-pandemic era on technology which is now over 40 years old.