According to a recent survey by consultancy firm A.T. Kearney, one in ten banks will disappear in the next five years. This is due to tight margins as a result of competition from new players, like online banks and big techs, who do not suffer from legacy systems. After all, banks have built up layers of old technology over the past twenty years: through acquisitions, partnerships and internal developments, different systems have been sewn together. This has resulted in an inefficient infrastructure that is difficult to replace or adjust.
In the past, IT teams from traditional banks had time to find new payment solutions with a release cycle of 18 to 24 months. This was possible because these functionalities were used for years. Nowadays, however, the technology adapts much faster to the requirements of the customer. In addition, many IT teams are busy with compliancy and regulatory updates at the moment, due to the arrival of regulations such as PSD2 and GDPR. That is why IT departments are missing the resources to meet the requirements of customers in a high-tech environment.
Integration in old payment ecosystems
Many industry consultants advise banks to partner with fintech companies or to set up their own fintech department. This is not a bad idea, but sooner or later a bank will run into an old problem: new solutions must be integrated into the bank's old payment ecosystem. In many cases, legacy IT systems or legacy payment service providers are unable to implement rapid and innovative changes. A small business change turns out to be a life-changing project because of outdated systems.
In order to prevent old systems from hampering new innovations, it is important that a bank is able to implement changes quickly and locally without this affecting the entire IT environment. This can be done by modulizing the IT environment and the system infrastructure. As a result, a bank's infrastructure has to be decomposed and afterwards rebuilt so that changes in the future will affect only one module (such as the fraud risk department or scheme, payment and processor connectivity) and not the entire organization. In other words, adjustments in the future will have an impact on a smaller area, making the bank more flexible so that it can compete with new (technological) parties. With this flexibility, it is less likely that a bank will disappear in five years' time, as mentioned in the above survey.
Banks should carefully think about which modules they want to control themselves and which ones they want to outsource to third parties. What banks could keep in-house are the areas where they can make the biggest difference for their client base. Furthermore, don't forget that control over an outsourced environment can be as efficient as having your own development team. I would recommend looking at the compliance burden for each of the functional modules as well. If a department is mainly focused on compliancy instead of business value and innovation, banks should consider having a payment service provider do the work.
Long term customer benefit versus “the pain” of making big changes
A bank can make a difference for its customers, especially in the front-office areas. That is where the focus should be. Components such as unified client handling (including systems and human interaction), service content and new offerings, banking integration and data management should not be outsourced but tackled in-house if possible. Be advised that elements of the payment systems may, over the years, have been integrated with the core of the banking solutions, making them difficult to change, replace or modularize. A poor situation for the business, because switching technology or the solution provider is hardly possible without substantial switching costs: the infamous technology and vendor lock-in.
A bank wants to prevent this lock-in situation. No matter if it is old technology or a vendor not evolving with the market demands. That is why it is better in this situation for a bank to make a radical decision once, instead of slowly adjusting the systems. By modulizing now, the bank will experience a brief interruption in the development plans. After that, however, the bank will be assured of freedom of movement. After modularization of both its technology platform as well as its sourcing strategy, the bank is able to choose the best alternative service provider when improving certain elements in the payment environment. This gives a bank the much-needed flexibility that is necessary for a bright future in the world of payments