It's Time for Bankers to Make a Technology Priority List, and Check It Twice

If bankers want to survive, they cannot afford to choose complacency when it comes to technological innovation. In fact, they should bet their careers on replacing outdated systems and solutions. If a banking core doesn't allow for innovation – the continual updating of capabilities, channels, interfaces and processes – it needs to be replaced. Otherwise, the financial institution handcuffed by it will soon be replaced with another bank or credit union, by consumers who vote with their feet.

Many banks and credit unions are still encumbered by legacy core technology systems that were designed in the 1980s and 1990s. These rigid technological structures were built to handle the entirety of a financial institution’s needs, and they can be slow or nearly impossible to change. Without an interface that translates communication between the core and new applications, modern technology is out of reach.

According to McKinsey & Company:

• In planning technology investments, many banks have deprioritized modernizing their core systems in favor of the technological front ends, including websites, mobile apps, and channel experiences. Several have been “hollowing out” the core, or extracting smaller apps and services to extend the service life of their existing core banking system. Very few have truly moved to a more flexible back end. That prioritization may now need to change.

The banking landscape today looks quite different than it did 30 or 40 years ago. The closed systems of yesteryear – with each institution managing the provision of services directly to its customers or members – are being replaced by a larger ecosystem in which players make their products and services available through other participants’ channels and deliver third-party solutions through their own. In this open-architecture paradigm, financial institutions must be able to give other players access to their core systems, as well as utilize outside components. Because the industry has increasingly embraced this open banking model, implementation of a new core is no longer a luxury for financial institutions; it’s becoming necessary for survival.

According to McKinsey’s Global Payments Report, modernization of banks’ technology stacks can reduce operating costs by 20 to 30 percent and halve time to market for new products. Customer interactions can be significantly streamlined by next-generation, front-end technology, too. And research shows that treating consumers right is well worth the investment: Banks that lead in delivering a strong customer experience have a recommendation rate that is 1.9 times higher than institutions at the other end of the spectrum; their share of deposits is 1.9 times higher; and their customers are 2.1 times more willing to take up new products and services from their bank, per an analysis by marketing insights company Kantar. On the flip side, banks that let their customer experience decline risk losing up to 12.5 percent of their share of deposits.

Not only can a financial institution with an updated core better compete with the biggest banks and the most agile fintechs, it can also facilitate greater speed to market for new, more innovative products and services, simplify compliance, increase efficiency, and decrease operating costs. Stunningly, the operating costs of fintech banks powered by next-gen core platforms are around 10 percent of the operating costs of traditional banks.

Regardless of McKinsey’s imperative, making the full move to a more flexible back-end may be out of reach for some banks and credit unions in the near-term, particularly amidst economic uncertainty that is squeezing wallets and the banking industry, as a result. An alternative for many financial institutions with outdated cores is to take advantage of an open API digital gateway that unlocks the ability to access data and innovate by enabling the integration of payments, customer experience (CX), and other digital financial services platforms. Technological monolith, no more.

If bankers do nothing to change the way things have always been with their technology systems, they could be headed for early retirement (they’ll only draw a paycheck as long as the institution lasts). Because one thing is for certain: Banks and credit unions with consumer clients have no choice but to bank on innovation…consumers in today’s digitally-driven world won’t accept anything less.