Why Banks Stumble in Modernization

Since the global financial crisis, the banking world has realized that the key to remaining competitive – and profitable – is to modernize its aging IT systems and processes. 

In Asia, just like in other regions, international banks want to ensure they stay relevant by keeping major applications such as switching, cards, banking and other core systems current in today’s digital world – while also staying ahead when it comes to efficiency, security and risk.  And they want to know how to do all this without blowing up budgets.

But the path of progress hides a number of pitfalls which banks, with their need to demonstrate short-term gains, tend to fall into. 

Embarking on the Upgrade Path          

It is helpful to look back a few years to understand the route many banks have taken to transform their systems. What follows is a scenario typical of how many international banks have embarked on their modernization programmes.

Let's look at a generic example, BankX. Several years ago, BankX decided to implement a critical software product from a respected software vendor. Investing between USD 20 and 40 million, BankX installed the first version of the software which provided the functionality, performance and efficiency they required. During the next six months, the software vendor delivered minor version updates and kept the system current and efficient.

During the first year of operation, BankX committed to a synchronized approach with the software vendor. But things started to change as soon as the ink was dry on the contract. BankX had to focus on competing projects and faced budget challenges.

As a result, they decided to opt only for the next version upgrade because the full upgrade looked too expensive. This is the moment the bank’s transformation momentum halted as its product roadmap took a detour down a route very different from the software vendor’s upgrade path. And this has enormous implications for the Total Cost of Ownership (TCO) associated with the software over the longer term. 

Transformation Derailed

Time passed for BankX.  A few months later, vendor updates included a more comprehensive upgrade from a major version – let’s say from 1.0 to a 2.0 – representing significant changes and enhancements.

If BankX kept the code vanilla – or if it had synchronized with the vendor software code – they would continue to see performance enhancements, including critical regulatory and security compliance updates. The risk would remain low, and cost would remain transparent and under control.

But BankX took a divergent path and decided to make changes on their own to save on the full upgrade. Over the next 18 to 24 months, the chasm between the BankX system and the vendor-supported system grew. This resulted in substantially increased costs, higher risks and limited abilities to meet new demands and requirements. Core systems for switching, cards processing, and other banking applications can cost as much as USD 10 million each year to run and maintain – let alone innovate.  But BankX now has a system that is neither the vanilla version nor the fully-vendor-supported application.

Costs Can Skyrocket Without a Long-Term Strategy

From a financial perspective, most banks will generally commit to staying in synch for about twelve months, having committed USD 20-$40 million on an original version 1.0 system investment.

Typically, after a bank makes that commitment, things begin to change as they did for BankX.  Original project teams change or disband, and often the strategy and roadmap are unclear. IT skillsets for product implementations and changes are hard to find – further contributing to escalating costs as these skill sets are in low supply and high demand.

Compounding these issues, banks continue to cut costs and, as time progresses, they move further and further away from the vendor-supported system, ultimately finding themselves potentially forced to invest $20 million to return to the current vendor version. This happens because banks tend to be driven to make short-term decisions without a complete and long-term view of TCO.

Solution: Capitalize on Knowledgeable IT Partners to Modernize and Control TCO

Banks aiming to control TCO can optimize costs and at the same time maintain performance and currency by choosing knowledgeable partners with the management capability to oversee entire IT operations and by empowering them to invest on behalf of their clients.

These IT partners work on a shared service model, so the core applications run in data centers which keep the software updated to the latest version with minimal risks to security and compliance. By smartly managing the underlying infrastructure, not only are overall costs saved, but the bank can modernize, make the system more efficient and reliable, and has the headroom to innovate.

Anita LeMaire, SVP – Delivery and Operations, Cards International Markets at FIS contributed this article.

The views and opinions expressed in this article are those of the author and do not necessarily reflect those of CDOTrends.