Why are banks so scared of changing their tech?
Banks are having a midlife crisis. Their tech is at that stage where it’s old enough to gather regrets. Lots of them.
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Traditional banks were among the first institutions to make use of new technology. The first credit card came about in 1950 as a Diners Club. The first ATM was installed in London on 27th June 1967. By the time the internet was here, these institutions were already mammoths. One thing that most people don’t realise is that over the course of every bank's life, they have always, without fail, adopted the latest technology. But due to their size and the fact that they started so early, that adoption takes a long time to ripple through the entire organisation.
In these vast ecosystems, you can find mainframes and cloud tech side-by-side, COBOL and React Native programing languages both being used and monolithic applications and federated API gateways living together.
This amount of diversity comes with its issues: High cost for any change, slower time to market, vendor lock-in, etc. Making decisions in complex systems isn’t easy - you have to understand the issue very well, find the cause and the most likely solution plan, isolate a starting point for that plan, AND, most importantly, decide on the time. When is it the right time to fundamentally change? Too early and you potentially waste money, too late and you might be out of winning the race.
I believe we’re living in the days where we can’t deny that fundamental change needs to happen. It’s the inflection point and it’s scary. It’s obvious that something has to change, but how?
I believe we’re living in the days where we can’t deny that fundamental change needs to happen.
In the face of a mammoth problem that’s yet to be solved, banks are taking different actions. It strikes me that most spend their time trying to emulate new tech companies, younger ones. Naturally, they’re fast, agile, growing exponentially and attracting the admiration of the most new (and not so new) clients. These clients are the future.
Nobody wants to feel left behind, but banks that have been around for a while have to understand that that time in their lives has passed. They can’t just turn back the clock. Nobody can.
If you look around, you’ll notice a trend. Google got hot in the 2000s. After their search engine was launched in 1998, it grew aggressively and amazed us for years. By 2019, the engine was amazing us with the amount of issues it had: Deindexed pages, selecting unrelated URLs, not fully rendering pages, wrongly marking pages as unverified or non-news related content popping in the news section. Facebook was the thing. Now, it struggles to curb fake news. Amazon used to be one of the most trusted online shops, but it ended up wrestling to remove counterfeit products. All these companies were promising a future when they started from scratch, but got in their own way when they hit incumbent status. It’s part of the process of growing up.
Today, fintechs boast about how fast they grow, make changes, add new products, adapt to market shifts, all because of their cloud-native, microservices infrastructure linking to easy-to-swap SaaS providers. They seem invincible.
Banks should stop obsessing about the past and start to put their capital to use:
Let’s face it, there are few things on this planet that it doesn't cost to improve. Banks have very deep pockets that raise the possibility of transformation, if only they could decide what to transform into.
Most banks are actually ecosystems, and combined they have huge customer bases that can be used to cross-sell.
Arguably, customer data is fragmented and held hostage in different systems, but, with some investment, it can become the basis for next generation financial AI.
Sooner or later, regulation comes after everyone, and most fintechs are simply unprepared for this. Banks have vast experience in highly-regulated environments.
Banks have strong relationships, including relationships with customers, regulators and, very importantly, other players in the ecosystem.
Banks have a lot of trust, even among millennials who use the fintechs but keep their current accounts with a traditional bank.
For the reasons above, banks have enough runway to steadily and safely dissipate their tech nightmare. And while they might not be a silver bullet or flawless, there are ways you can change large legacy tech systems.
My unfiltered opinion
I’m convinced that banks need to make a big change now, but not by chasing fintechs. They’re growing fast but your bank doesn’t need to, it’s already big and was growing quickly at one stage. They don’t need to concentrate on being the fastest and strongest in the media, they’ve been there, done that.
I’m convinced that banks need to make a big change now, but not by chasing fintechs.
From here, banks can start thinking about what they want to become as an institution. And if tech stands in the way, they can always break monoliths by using the strangler pattern, start decoupling by targeting the middleware or using the ‘slicing model.’ To aid the tech redesign, they can always pair it with redesigning the business model from funding projects to products, using embedded finance and open banking for new revenue streams, etc.
I believe a big old institution can be wildly successful in ways that aren’t possible for a newcomer yet, but they have to do it by evolving, not mimicking, by sorting the issues, not hiding them.