Why now is the time to move away from legacy payments infrastructure.
Technology is moving at a remarkable pace – by the time something has been built and launched it already feels outdated. So it may come as a surprise then that many European banks are still using systems that were originally implemented several decades ago.
The introduction of open banking (PSD2) in 2015 has questioned the speed of innovation and technology adoption among financial institutions and signalled the start of the disruption era. Fast-growing, agile fintechs have since entered in droves, highlighting the underlying problems with legacy banking technology and offering new, digital banking models for both businesses and consumers alike. But banks are fighting back.
Digitalisation on steroids
The growing need to remove the Band Aid and completely overhaul critical payments infrastructure in the UK is now critical, as newspaper headlines about another wave of online ‘outages’ at large banks proliferate.
Across the financial world you will be hard pushed to find a bank that is not undergoing huge digital transformation. The level of investment by banks from a time, resource, money and regression-testing perspective is substantial. These transformation projects are often very complex and, given that legacy systems are largely built on monolithic architecture as opposed to a modern microservices counterpart, requires both a leadership mindset and organisational shift to embrace a new, better way of working – even before the new technology is implemented.
The true cost to banks
IBM reports that 92 of the top 100 banks in the world continue to rely on mainframe legacy IT systems because of their proven processing power. However, the ongoing costs to maintain these systems are extremely high. In addition, banks typically spend 80 per cent of their IT budgets on legacy technology maintenance. A tier one bank could easily spend up to £250 million a year on existing software that needs regular updates in order to meet regulatory requirements and manage the ever-growing list of security threats.
As fintechs and other challengers continue to onboard new customers, there is growing pressure for many financial institutions to tackle their back-office legacy systems. Where challenger banks excel is their agility and speed of innovation – keeping the needs of their clients at the centre of their proposition while building credibility and solving real-world problems.
All of this is done using next-generation, cloud microservices technology and robust APIs that can be auto-scaled as capacity demand grows, with updates deployed incrementally without any downtime or disruption to the rest of the service.
Papering over the cracks
Pressure to innovate at speed and digitalise means that soon, banks will have little choice but to invest the required resources to evolve with the new digital economy.
Some have already made significant leaps with mixed success, creating new challenger digital-only brands within a bank, such as Hello Bank (BNP Paribas) and Atom Bank (BBVA).
The problem is, in order to be agile and innovative, a bank needs its underlying systems and infrastructure to integrate with these new technologies, and many banks simply do not have the in-house expertise to undertake these endeavours.
Building something from scratch is high-risk, costly and slow. So banks are looking to fintechs to partner up with, that have the technical and payments expertise, resources and capacity to solve problems quickly. Furthermore, working with fintech companies massively de-risks the time, cost and complexity of transformation projects.
However, simply handing over your critical payments infrastructure to a cloud solution is not so straightforward, and requires both parties to be fully immersed in the project at every stage, with full commitment and support across the organisation on both sides.
The rewards, however, are huge. Removing the burden of maintaining aging payments architecture, mitigating threats and the need to keep up with scheme and regulation changes will dramatically reduce capital expenditure and improve operational efficiency, enabling teams to innovate and deploy new propositions and service their customers quickly.
Despite the Covid-19 crisis, banks are still progressing their strategic priorities and platform transformation projects due to ever-increasing digital demands from the financial community. Now is not the time to stand still but to make strides in pursuing digital transformation and collaborating with partners to remove the burden of critical payments infrastructure to a cloud-based fully managed service.
As business and consumer expectations increase, the need for real-time payment processing, transparent data reconciliation and low-risk, low-cost payments infrastructure is more important than ever.
One thing we do know is that the more we continue to paper over the cracks of legacy systems, the harder it will be to mitigate threats, outages and the competition, and the more complex the change will be in the longer term.
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By Andrew Frost, Customer Success Director, Form3