Technology Transformation Challenges In The Banking Industry

By Bhasker Rao, Director – Technology Infrastructure, Deutsche Bank Group

The Banking industry is experiencing a period of slow growth and tightening of margins. A recent Mckinsey report found that global lending by Banks, over the past five years, hit its lowest in 2018, at only 4 percent, lower than the Global GDP at 6 percent, with 60% of the Banks returning less than cost of equity. Consequently, some markets are already experiencing negative interest rates, with investor confidence taking a hit due to the economic slowdown. Whilst the downward trends are broadly dependent on market conditions, scale and risk exposure, new factors are coming into the foreground. FinTechs and large, well-known, brands like Amazon and Google are making inroads into financial products and services. To adapt to changing market conditions, Banks need to redefine and differentiate themselves to be in a position to respond swiftly to increasing client expectations and ever evolving regulatory requirements. Technology is, therefore, driving the need to change and evolve but also providing the solution, if the Banks grab the opportunity.

“With the evolution of FinTech and the crowding of the financial market, the Banks may find it in their interests to collaborate on solutions, accelerating the industry’s transformation journey as a whole”

The well-recognized and established Banks share the common feat of untangling their, often, complex legacy infrastructure whilst being constrained by structural and regulatory inter-dependencies. CIOs across the industry have embarked on multiple transformation journeys to streamline the systems and compete with the ever growing numbers of start-ups unburdened by legacy platforms. The Banks must balance the necessary need of being seen to make progress and be trailblazers in technology adoption whilst continuing to maintain legacy infrastructure to support existing systems. Large investment is required which is often at odds with risk appetite, but on the other side, investments already made are at times not delivering change at the rate required. The CIOs are, therefore, left to balance long term strategy with meaningful short term gain.

                                       Bhasker Rao, Director – Technology Infrastructure, Deutsche Bank Group

Some of the common challenges plaguing the technology transformation initiatives include;

- Inability to remove legacy solutions whilst technology obsolescence and costs rapidly increase

- Complicated and/ or duplicate systems often acquired in mergers and acquisitions

- Regulatory and market restrictions preventing global solution standardization

- Increasing Data Protection requirements, Compliance and Security concerns requiring quick responses

- “Brain-Drain” in key departments as a result of previous outsourcing arrangements

- Frequent organizational and leadership changes creating inconsistent strategies and decisions

- Challenges in attracting and retaining talent required to facilitate the transformation activities

- Pressure from business and investors to see rapid return on investments

In contrast to Banks, FinTechs and platform technology companies are born on the platforms large banks are trying to adopt. Increasingly, CIOs are facing challenges in integrating these solutions, often as a result of business case and assumptions failures during implementation. The key challenge is ensuring new technologies are well understood and carefully adapted to the organization. To enable technology transformation, the below key levers are often employed.

Agile Transformation - Technology organizations, similar to what we see in large Banks, aren’t built for Agile. Federated silos, strict hierarchies and predictable processes are at odds with Agile principles. Whilst there are frameworks, like Scaled Agile, to enable such organizations, it is wiser to carve out specific teams where Agile can work, rather than enforcing change quickly across the organization. Adopting the principles will help the organization address changes quickly, but they cannot be in denial that challenges will automatically disappear.

Cloud Migration – A common misconception is companies operating on the Cloud are futuristic and ahead of the curve and so adopting Cloud technologies will, therefore, solve all legacy issues. In reality, there are stringent regulatory and security challenges that need to addressed. In addition, whilst the Cloud promises scalability, agility and cost benefits, the organization must first transform in order to operate in the Cloud and there are high risks regarding vendor lock-in. Cloud, therefore, requires huge investment in the short term and has a longer realization of benefits.

DevOps / SRE –A successful DevOps team (Development, Testing and Operations) is able to utilize the benefits of the automation and tooling in the Cloud to continuously develop, test and integrate code in order to rapidly deliver business value. Banks are again playing catch-up to the FinTechs in adopting this model as combining the teams without addressing existing structural, cultural and application architecture isn’t possible.

SRE (Service Reliability Engineering), a method of DevOps implementation, aims to reduce manual toil within operations teams via improved automation and engineering practices. The challenge is in infusing such software development capabilities and retraining the resources to operate in SRE mode. Increased pressure to reduce cost and headcount limits opportunity for operations teams to focus on engineering efforts.

Application Architecture –Ability to adopt Agile and DevOps practices and being able to benefit from agility, scalability and reliability solutions from the Cloud, requires fundamental change. Some organizations may find it easier to leverage microservices, ‘decoupled’ and serverless architectures and build the solution upfront using container orchestration. Transforming the applications’ architecture requires large investments, a challenge for Banks already suffering negative growth.

In conclusion, legacy issues will continue to hinder transformation efforts but the Banks do have the ability and opportunity to change. The way forward will be to press ahead in building the firm for the future, whilst ensuring value is realized at key steps to gain business confidence. With the evolution of FinTech and the crowding of the financial market, the Banks may find it in their interests to collaborate on solutions, accelerating the industry’s transformation journey as a whole.

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