Banking architecture – Driving value with simplicity

“Large banks are reluctant to undertake core modernization projects due to the risks and complexity of the effort. By componentizing their products, core vendors are providing banks with the flexibility needed to develop phased implementation plans that reduce this risk. Moreover, componentization allows banks to prioritize their efforts, improving the business case for core modernization by focusing on functions that provide the greatest short term benefits”– Robert Hunt, Senior Research Director, CEB TowerGroup, Launch of Finacle 11E, 2013

While progressive banks are making huge strides in the digital space, the outdated banking architecture has come under the scanner and banks are looking at ways to circumvent this barrier to achieve a truly digital transformation. The situation is perfectly summed up by Tom Groenfeldt, contributor to Forbes, “When 40-year old legacy banking systems meet the two-month old iPhone 6, the results aren’t pretty.” In this era of any-time banking and instant gratification, most banks aren’t able to keep up and deliver contextual customer experiences due to a complex IT landscape.

According to various industry researches about 75-80 percent of annual IT budgets are spent on supporting existing business operations and driving organic growth, which leaves very little room for business transformation and exploration of new revenue streams. Maintenance costs are high for such complex IT landscapes that have a few hundred applications residing in siloes. In our survey done few years ago, 79 percent of bankers feel that the biggest barriers to core infrastructure transformation is the complexity of current IT systems, and inadequate skill-sets within their organizations. The situation hasn’t changed significantly since then for most of the banks, particularly in Europe and Americas.

Considering the disruption banking industry is going through and consequent need to have an agile technology foundation to keep pace, simplification of the complex IT landscape can deliver massive advantages. To begin, banks can simplify the challenge of infrastructure maintenance by leveraging cloud technologies, and by introducing elasticity for increased demand.

Most progressive banks have already started leveraging cloud for non-mission critical applications. Taking the journey for core applications, we recommend banks to follow a three phase strategy. The starting point could be to implement cloud for testing & development purposes. Banks can then implement hybrid cloud models to process peak loads with cloud-burst techniques, while continuing to process routine operations in-house. Eventually the final phase would be to gear up to move production environments on cloud. During this journey, banks must take cloud-first strategy for all new processes and applications.

A complex IT landscape with a few hundred applications, which are sometimes duplicated across business groups, is a harsh reality today. In such a scenario, rationalizing applications by leveraging enterprise-class components offers a great opportunity to reduce IT costs and increase business agility. These enterprise components will allow banks to boost operational efficiencies by centralizing business operations across various product lines. These components will also reduce technology management costs by replacing multiple systems that are currently doing similar tasks, with a single one.

Similarly, the pace of technology innovation demands rapid modernization and upgrades. Most progressive banks and vendors have turned towards componentized applications design instead of the traditional monolithic architecture. The componentized structure with an expanding set of exposed micro services will allow banks to fully de-couple back-end and front-end capabilities and innovate rapidly across layers. The bank’s core services thus can be reused, shared, and monetized through open APIs. They will allow banks to extend the reach of existing services and create new revenue streams. These open APIs will also enable banks to collaborate with the external developer ecosystem for accelerated innovation.

Standardization will also be a critical focus area to enable plug and play applications, and reduce technology implementation and maintenance costs. Organizations like BIAN are creating interoperability standards so that banks can integrate solutions with the rest of the enterprise applications with greater ease.

As 2017 progresses, progressive banks will focus on simplicity in their architecture to drive operational efficiency for a greater innovative capability and compliance. This agility to innovate will in turn might just turn out to be the banks’ greatest competitive advantage in this disruptive environment.

Vivek Jayaraj-Trends-17