A recent IBM study revealed that community banks are struggling to achieve their goals and meet customer expectations while facing technology modernization challenges. These businesses find themselves constrained by clunky legacy systems, hindering their ability to compete with non-traditional competitors like FinTechs and comply with regulatory demands. Moreover, banks that are slow to modernize their systems struggle to provide clients with the security, customer experience, and digital banking experience that their clients have come to expect.
“It has never been more critical for banks to focus on how financial institutions can increase their competitive edge and improve the experience they provide their customers,” says Hans Tesselaar, Executive Director of the Banking Industry Architecture Network (BIAN). “Before they implement real changes to their service offerings, they must first … adopt a coreless banking approach to transformation. This will help the industry benefit from each and every technological development to create the bank of the future.” Wondering if it’s time to update your core banking systems? Here are the top signs technology is hindering your business growth.
1. Lack of Operational Efficiency
Outdated computer hardware or software can lead to slow performance, frequent crashes, and workflow bottlenecks, making it difficult for banks to satisfy clients, seize growth opportunities and build their brands. Legacy systems pose significant security risks, being frequently targeted by cybercriminals, and often lack adequate support from vendors. This makes them susceptible to the sophisticated tools used by cybercriminals. Also, the risk of data loss is heightened because these systems are not backed up and supported by the up-to-date security protocols of modernized technology.
The transition to modernized systems offer better scalability, as these systems are designed to adapt to evolving business needs, positioning organizations for growth.
2. Inability to Develop Innovative Products
Insights from the IBM survey, which included over 1,000 senior banking leaders, revealed that 70% of respondents indicated that modernized systems could help them compete against FinTechs by helping them leverage the potential of emerging technologies, such as APIs, artificial intelligence (AI) and machine-learning applications. Banks investing in legacy system modernization are more likely to innovate faster and capture customer loyalty and market share while contenders struggle to keep up. Updating legacy systems also provides easy access to data across their systems.
3. Failure to Meet Customer Digital Banking Expectations
Digital banking has evolved from a luxury to a necessity. For the fourth consecutive year, most Americans bank through mobile apps (48%) or computers (28%), according to a survey conducted by Morning Consult on behalf of the American Bankers Association. The rise of digital banking coincides with a decline in traditional banks – more than 2,500 branches closed in 2023, as reported by the Federal Deposit Insurance Corporation (FDIC).
Customers now expect the ability to bank anytime, anywhere, get customized service, and experience a seamless digital experience. However, old systems, which are often difficult to customize and incompatible with newer software and technologies, make it difficult for banks to meet these needs and could lead to losing customers.
4. Integration Challenges and Inefficient Data Management
Most customers expect banks to provide them with the same digital conveniences and benefits that businesses in the eCommerce sector do. The World Retail Banking Report 2022 (WRBR) highlights a significant issue: 95% of top global banking executives revealed their core banking platforms are failing them. Outdated software disables banks from integrating third-party APIs that enable clients to execute diverse financial transactions (including AML) through secure and ready-to-use channels.
In that same WBR report, more than 70% of banking executives believe traditional banks lack the data and analytics capabilities that are essential for actionable insight into improvement areas and critical for informed decision making.
5. High Operating Costs
In contrast to the more cost-effective “Pay-as-you-Go” concept of next-generation core banking platforms, traditional core banking systems experience high initial development and maintenance costs. A significant portion of these expenses originate from failed software development projects and cybercrimes caused by exploitable software vulnerabilities.
Supply chain problems with third-party components and technical debt (i.e, cost of rework in software development) factor into expenses. The Synopsys report, The Cost of Poor Software Quality in the U.S., revealed that poor-quality software cost American companies about $2.41 trillion. The operation and maintenance of these systems are expected to become increasingly challenging and expensive.
Customer preferences are also shifting. Over a year ago, 75% of customers surveyed by the Capgemini Research Institute expressed a preference for the seamless and cost-effective services of fintech over traditional banks. Age-old traditional systems tend to be slow, frustrating to use, insecure, and lack the convenience of digital banking. For owners, costs of repairs and updates are continually rising, as obsolete systems attack their innovation capabilities and threaten their growth.
Develop an IT Strategy to Meet Your Business Needs
While IT modernization can be overwhelming to consider, banks that fail to adapt are at risk for losing business to competitors who leverage their platforms for market leadership and innovation. At Hartman Executive Advisors, we specialize in helping community banks make the right technology investments to achieve better business outcomes. We understand your industry and provide the unbiased expertise you need to select, implement and optimize IT solutions.
Our dedicated team will help you embrace and leverage technology to enhance your operational efficiency, improve customer experience, and safeguard the longevity and profitability of your bank.