Technical Debt. It sounds like the name of a 90’s heavy metal band: Technical Debt! The term actually describes what results when IT development teams write code to expedite the delivery of a piece of functionality that later needs to be altered or updated to continue working properly. It is often the result of prioritizing speedy delivery over code quality.
Technical debt is a metaphor used to explain the cumulative buildup of deficiencies in code quality that make older, legacy platforms unmanageable in a dynamic digital environment. The extra effort required to add new features to an older platform is similar to the interest consumers pay on credit card debt.
Legacy platforms and technical debt in banking
Legacy platforms and technical debt are common in the environments most core banking systems operate today. Many banks have grown over time through acquisition and product expansion, so it is not uncommon for them to be running multiple core systems to gain a 360-degree view of their clients.
The Citibank model of the 1980’s and 1990’s acquired and cobbled together back-office functionality through data aggregation instead of system integration. Picture the Wizard of Oz. You did not want to look behind the curtain on that operation. The problem is once you build up that degree of technical debt, it’s hard to fully come to grips with the timeline and financial impact of a full platform replacement.
Centralized platforms and core systems
With the pandemic’s impact on society and business, banks and financial services enterprises are seeing with new eyes all their legacy platform deficiencies. We live in a dynamic environment that demands access to and analysis of data to drive a positive customer experience. Without a centralized platform to consolidate and analyze data in real time, the financial institution is climbing an uphill battle to compete. Millennials, along with Generation X and Z, have created significant purchasing power that demands a digital engagement model and immediate responsiveness. These characteristics are essential to compete in today’s rapidly evolving marketplace.
An additional factor that is driving change is the heightened merger and acquisition activity across the financial services industry. Do institutions continue to bolt on acquired platforms or bite the bullet and address the challenge of a new core system? It may sound like an easy decision, but the scale of this kind of change is tremendously disruptive to ongoing operations and will be an expensive investment in technology. Additionally, do these banks and non-bank financial institutions (FIs) have the personnel and technical expertise to effectively execute this strategic initiative?
Banks and non-bank FIs are evaluating the necessary steps to modernize their core and other bank platforms to position their institutions to compete. This is a multi-faceted challenge for their IT infrastructure, operations and product delivery teams as well as payment and settlement networks – both domestically and on a global basis. Gaining perspective on the broad array of strategies and execution models is essential in developing an action plan.
How to address the challenge of aging legacy platforms?
What are the options to address the challenge of aging legacy platforms? One that must be considered is to stay the current course and continue to pay to maintain multiple antiquated platforms and cobble together information on your clients’ activity to manage the bank’s portfolio. This decision will ultimately mean the bank/non-bank FI is unable to effectively compete and will lead to lost market share, profitability and potentially inexorable decline.
After years of delaying and patching together the core systems that run large financial institutions, banks have realized that the second option – consolidating to a single, modern core – may be critical to compete in today’s digital marketplace. Now that the pendulum has clearly swung to the side of modern technology over legacy platforms, the next step is developing and executing a plan for the next generation of your institution.
Designing a strategy for a modern core
There are a number of differing strategies that can be considered once you have made the commitment to adopt a modern core platform. One dictates that a transition of the older legacy cores to the single modern platform occurs sequentially. This is recommended for banks that have grown through large acquisitions and run individual cores to manage legacy portfolios, since this approach allows for a programmed migration to the new operating system. It would, however, require accessing multiple platforms to gain full visibility on your clients’ activity while the transition period is executed.
A second strategy is to migrate all legacy platforms simultaneously in a “Big Bang” approach. This strategy is attractive because of the expedited path to overall expense reduction, but has a longer preparation path to transition, since all activity is driven to the new core once the transition date arrives. Employee preparedness and training, exhaustive testing, robust risk management and strong organizational communication – a list that tends to deter many financial institutions – are the keys to an effective “Big Bang” transition.
Whichever strategy is deployed, it’s clear that all financial institutions understand the importance of modernizing their core platforms to meet the ever-increasing demands of customers, enable faster product development and launch and, ultimately, reduce technical debt. Better make the most of that 90’s heavy metal now before it’s too late.
There are many ways ISG can assist and support a client through this transformation. From primary research into the core and service provider space, to critical benchmark data to ensure your institution is accurately pricing the new model, to sourcing a new platform and/or managed service provider. Contact us to find out how we can help you.
About the author
Jay Woldar is a Director and senior account manager in our Banking and Financial Service group. Jay is responsible for a portfolio of the largest banks in the US across the broad spectrum of ISG’s offering.