Traditional banks often do not make the inevitable switch to cloud-based solutions as quickly as emerging fintechs do, something which may come as a surprise to many industry observers. This is chiefly because legacy systems are tried and tested and the switch to cloud core processes offer more questions than answers to many.
To alleviate these concerns, Teun van der Veeken, a Mambu Banking Consultant, broke down why banks are cautious when it comes to cloud migration and why the switch from legacy systems to cloud-backed platforms should now be a strategic priority rather than a lingering concern.
Digitally-native fintechs and financial institutions have proven they can cater to the demand for personalised customer experiences more efficiently than traditional banks can, with data revealing that 50% of UK customers find their bank’s digital experience to be lacking.
It is crucial for banks to focus on staying competitive now more than ever before. In order for banks to compete with nimble fintechs, they must migrate their legacy platforms to new cloud-lite models underpinned by SaaS and APIs as a matter of urgency. This is especially due to the churn experienced by legacy banking institutions, as this process should now be considered a strategic priority.
McKinsey predicted that successful cloud migration will help banks to experience higher growth rates and generate value-creation opportunities of up to $20m. So why are incumbent banks dragging their feet when it comes to cloud migration?
The hurdles to core modernisation
There are four main reasons that core migration would be delayed or derailed:
- Banks or financial institutions may fail to get stakeholder buy-in because the technology transformation journey is perceived as costly and complicated.
- These institutions may already have high levels of technical debt or IT costs which may cause core modernisation to be pushed further down the line.
- Migration inertia, or a fear of making the wrong decisions, demotivates leaders. Many leaders believe that legacy systems aren’t broken and therefore, there is an unwillingness to fix them.
- Financial institutions may have already invested in on-premise technologies and resources.
Overcoming these hurdles can be a difficult task for banks and financial institutions – but it is key to remember that reinvention does not need to be disruptive, expensive, or slow. With today’s cloud-based SaaS solutions powered by APIs, these institutions can benefit from optimised and flexible banking cores without experiencing any major disruption along the way.
Steering clear of challenges to guarantee success
The wrong approach to cloud core modernisation can derail tech stacks. In order to help your migration stay on track, there are some common challenges to be aware of to help ensure a smooth transition.One example is choosing the wrong starting point.
There is a risk of embarking on a transformation project just to achieve technological advancement or operational objectives. Prioritising this over business needs and non-functional goals, such as enhanced customer experience, can result in expensive infrastructure upgrades that will fail to deliver bottom-line value.
The solution to this is using the required architecture to ensure that transformation goals support your business strategy from the start. As more banks look to begin their cloud core migration journey, businesses should aim to be agile, customer-centric, and future-ready.
Another key pitfall is having a closed mindset that stifles opportunities. Many businesses will try to do everything in-house and look to extend their legacy technology estate with new technologies, rather than risk repeating the failures they’ve experienced in the past.
This risk-averse strategy can lead banks to make decisions that end up costing more. The solution to this is encouraging company-wide customer and solutions-focused thinking.
Banks should support cross-functional teams and allow them to focus on creating end-to-end digital experiences and developing agile business capabilities. These institutions should also be prepared to continuously embrace change and be open to the benefits of modern technology and collaborative ecosystems.
A final example is being overly disruptive and going all in, all at once. Complete overhauls strain resources and are risky, therefore, banks should avoid “big bang” core migration. Instead, they should adopt an incremental transformation approach leveraging a dual-core shared legacy platform or an on-the-edge parallel core for a digital speed boat brand. This will allow banks to take the lead and build a low-cost, flexible core in months, rather than years at a much lower cost.
The pros of cloud core migration
One key advantage of cloud core migration is that it can unlock more sustainable operations. The future of core banking migration is SaaS platforms, flexible APIs, composable architecture, and connecting ecosystems. Our customers that have adopted this approach have benefitted from cutting the total cost of ownership of their tech stack by 35% – 50% and halving time to market.
Another key benefit for banks that migrate to a cloud core is improved resilience against disruption. Over the past few years, banks and financial institutions have been forced to operate in a turbulent economic landscape, with the COVID-19 pandemic changing the world of finance forever.
Core flexibility facilitates faster response times and quicker recovery – which are the two key components required to enhance a bank’s overall resilience. Our internal data revealed that in 2021, our customers performed almost eight times better and recovered 3.5 times better than banks and financial institutions without a cloud core.
A final benefit of cloud core migration is enhanced customer engagement and experience. The adoption of cloud core empowers banks to deliver more personalised services, which improves both customer experience and engagement. This is because cloud cores allow banks to quickly scale based on customer demand, enabling them to keep up with ever-changing consumer preferences.
Cloud-based solutions also offer a more cost-effective alternative to legacy infrastructure, allowing banks to invest more in areas that directly affect customer engagement and experience.
With nimble fintechs continuing to come out on top by building their operations around evolving consumer preferences, now is the time for banks to follow suit and embark on their cloud migration journeys to unlock success and agility before they are left behind in a wave of innovation.