As the digitisation of financial services continues at pace, accelerated by new digitally native entrants to the market and regulatory changes such as PSD2, incumbents banks have an increasingly difficult problem to solve. Today’s customers are transitioning from hoping to expecting a top quality omnichannel user experience from their bank, and are less brand loyal than previous generations. User experience is the key differentiator for the 21st century customer, incumbent banks that cannot compete on this battlefield are destined to lose market share, or even disappear from the market entirely.
When all of these factors are taken into account a simple conclusion is reached; traditional banks will need to digitise themselves to compete with disruptors, fintechs, and each other in any meaningful way. That being accepted, however, the key question still remains; how should, or even can, this be done?
Essentially opinion can be boiled down to two schools of thought. The first is that legacy banking technology needs to be enhanced through fintech and internal development. If achievable, this is the most desirable solution for banks, as it is the cheapest and least disruptive process to achieve digitisation. The question, however, is whether any digitisation that relies on bolt-ons to core banking technology that in most cases is 30+ years old, and certainly wasn’t designed with omnichannel banking in mind, can ever compete with new entrants who have designed their digitised banking model on a blank slate.
The second theory is that to successfully implement any meaningful digitisation of a core banking system, a traditional bank is compelled to migrate its entire operation to a brand new system specifically designed to handle omnichannel banking. This ‘rip and replace’ approach is a solution intended to circumnavigate the issues of system inefficiency presented by trying to attach 21st century technology to a system that was never intended to accept it. And that is undoubtedly an ideal solution from the perspective of the end result, but is it realistic one?
The scale of the project required to overhaul a bank’s entire IT system, and the volume of variables involved, is enough to impart trepidation on even the most confident fintechs in the market. Throw in the added factor that the speed on technology evolution is greater than the pace a system overhaul can be implemented, meaning that a cutting edge tech strategy on Day 1 of the rebuild might be outdated and consequently require amending halfway through, and the project could turn from dream scenario to nightmare in a hurry.
There is certainly no easy answer to the dilemma, but common consensus remains that finding the right solution is imperative for legacy banks as the threat of financial disruptors continues to bear down on their gates.
Nadeem Syed, CEO of Finastra, is one proponent of the theory that banks are moving away from rip and replace as a serious consideration for banks looking to digitise, citing the complexity of the project and the fact that the new system may be outdated itself by launch as the principle reasons for his opinion.
“There are simply too many moving parts for a wholesale transformation to be feasible”, Nadeem told bobsguide when we sat down at Sibos 2017.
Despite Syed’s reservations, there are a number of high profile core banking system replacements currently taking place, perhaps most notably Temenos’ replacement of Nordea’s core banking platform. The partnership was announced in 2015, and market sentiment may have altered since, but the outcome of the project, namely whether the migration is completed on time and under budget, may sway the debate either for or against rip and replace once and for all.
bobsguide will hopefully be bringing you an update on the Temenos/Nordea project in 2018, until then here are our favourite articles from 2017 arguing the case for either side: