In a new study published recently, we explain how explosive growth in instant payments will create both risk for banks, as well as opportunities for new products and services. However, banking systems need wholesale transformation to fully exploit this second digital revolution in financial services…
Our new report, “Instant Payments: a second revolution in digital finance?” outlines how banks have spent the last 15 to 20 years patching, upgrading and amending their legacy systems in an increasingly expensive and cumbersome attempt to keep up with change.
Studies from McKinsey & Co[1] and others testify to how expensive this is for banks, with almost three-quarters of tech budgets diverted from innovation to support legacy systems, and some core technologies now more than thirty years old.
“It is past time for banks to change their systems. Banks must now move from tactical, short-term thinking to considerations of their long-term strategy.”
However, McKinsey’s study does not quantify the opportunity cost of banks’ reliance on legacy systems – not to mention the increased risk of systemic compromise by malware, cyber-attack and other forms of illegal behaviour.
Furthermore, McKinsey do not consider the limited capability of legacy systems and their inability to deal with the higher volumes and more data-rich messaging that an instant future requires.
In our new study, we argue that arrival of the EU’s DORA legislation in 2025 will expose the resilience (or lack thereof) of banking systems in the face of cyber-threats – as well as their failings from a compliance perspective.
In short, it is past time for banks to change their systems: they must move from tactical, short-term thinking to considering their long-term strategy.
The question is how this should be approached.
In the past, some consultants and software companies have advocated a “big bang” approach to systems upgrades, in which a new, fully-digital tech stack is built and run in parallel with an existing system to enable testing and debugging prior to launch.
However, most banks now find wholesale, one-off systemic transformations too risky and time-consuming to contemplate, despite the fact that their systems may have gone beyond the point of simple upgrades and now risk regulatory non-compliance.
The new research advocates an optimal method for systems transformation that manages risk while effecting wholesale systemic change.
Step-by-step for systems success
By adopting a step-by-step approach to digital transformation, banks can minimise risk while delivering rapid improvements in service and controlling costs.
Transforming core banking systems step-by-step also enables banks to optimise those areas of their business that deliver the best results in terms of cost reduction, greater efficiency or improved client service.
The report explains how banks can deliver quick wins by completing carefully-selected projects in priority areas.
These quick wins lead to reduced overall running costs, which in turn frees up more capital to invest in innovations – such as new products based on the ISO 20022 standard.
As customer service improves thanks to these new products, usage will grow in terms of transaction volumes and values.
This in turn reduces a bank’s costs per transaction and drives greater profitability.
Our next and final article in this series will offer more detail and examples of how to effect full systems overhaul in banking and payments through a step-by-step approach.
Download “Instant Payments: a second revolution in digital finance?” now for more on why step-by-step transformation of banking systems is the right choice.
[1] McKinsey & Company, 2022: “Winning in Digital Banking”
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