Retail banking is in various degrees of flux yet it is becoming clear that payments have fast become the differentiating factor for success.
While much of the noise around modern service offerings centre around the customer experience – and rightly so – it is helpful to define what exactly constitutes good customer experience.
Open Banking-based embedded finance and payment gateways are the highest strategic priorities, according to a report by Endava (2024 Retail Banking Report), covering the state of legacy modernisation, the role of data among just under 500 decision-makers at financial institutions across Europe and North America.
Eighty-one per cent of organisations rank these high or very high priorities.
Open Banking being mandated in Europe has made it a naturally higher priority in this region compared to the US; the report stating US banks being “far more possessive over their customers’ information”.
With the increase in real-time and cross-border initiatives on both sides of the pond (RTP and FedNow most recently in the US), we can still expect payment trends to travel to some degree – if not as fast as an instant transfer.
Equally compelling, as per the report, is the degree to which banks face a very uphill struggle to tap into and take advantage of new payment offerings on account of slow legacy modernisation projects.
And it illustrates the pressure, jeopardy and existential challenge banks face.
It was found that 75% of FIs surveyed stated they need to modernise their core, with 67% saying they were (still) heavily reliant on legacy systems.
At the same time, 79% stated their technology was ahead of competitors, suggesting a hint of bravado if not outright delusion.
Slow and steady does not always win the race
By far the most popular approach to modernising a core banking system is a piecemeal one. This is less risky, less resource-heavy and less upfront-costly.
The latter point highlights the potentially false economy when comparing costs to an outright rip-and-replace job, however, the risk and customer disruption elements of this would have to be assessed through cost-benefit analysis.
And there are simply very few executives with the long-term vision and conviction to undergo such a transformation: 13%, according to the report’s results.
A somewhat overlooked aspect of incremental modernisation is that it does require elements of complete migration or transformation and cannot be an endless stream of digital wrapping – due to the simple fact that technologies have a shelf-life and can become obsolete.
This means that at a certain point there may not be anyone left who can understand, let alone code or develop in the language the core is programmed in.
A stepwise approach can thus spell great jeopardy.
Most interesting is that newly added architectures and open API-based systems don’t seem to be enough to implement all the Open Banking payment innovation that both banks and their customers would seem to want.
Tentative steps towards cloud and AI
So, what is the way forward?
Well, respondents are placing high value on AI and cloud to expedite their journeys.
Despite the perceived barriers to implementing cloud-based core systems: competing technical priorities (40%), lack of technical resources to manage (37%), implementation taking too long (32%), a lack of ROI or executive sponsorship hardly ranks, suggesting organisations are on the cusp of implementing cloud-based cores and may be riding out current economic conditions or tidying up some existing technical debt in the coming months.
As for AI, this was pegged as the top area for investment (50%), with data analytics coming second (45%).
These two investment pieces can be seen as going hand-in-hand- the former being the technological means to realise the insights and, hence, value, that the data can yield.
And this potent duo can be put to work across the board – from fraud management to personalisation of services, and perhaps most importantly, to inform evolving strategy through greater knowledge of the customer and control of data and funds.
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