In the face of the aftershock of the financial crisis and the past few years of the ‘fintech revolution’, traditional banks have managed to preserve their dominant role in the global financial services industry — for the moment. According to the Digital banking adoption statistics by Finder.com, 51% of responders prefer personal interactions compared to online accounts and chose to remain with their current traditional bank for this reason.
On the other hand, fintech and challenger bank apps are gaining increasing market share and rapidly becoming the primary choice of managing finances — not only for the next generation but also for many consumers that have developed an unfavorable opinion about traditional banks. Today’s banks are facing increasing challenges due to higher customer expectations, competition with lower rates and lower-barriers to entry, and most importantly: outdated technology compared to modern fintech companies.
According to a Bloomberg article, the COVID-19 pandemic has further exposed aging, inflexible technology at the heart of the US economy, along with a shortage of experts to fix the problem. The main reason fintech companies have been able to scale up at such a rate was due to their strong focus on innovation and the fact that they had no legacy infrastructure to drag them down. As artificial intelligence, machine learning, and biometric technologies will soon be integrated into the way we handle our personal finances, rapidly catching up with modern technologies will be inevitable for banks that want a second chance to make headway.
The majority of traditional banks are still lacking the agile infrastructure to perform rapid iterations. One of the main issues when it comes to technology is that core banking systems often do not run in real-time and do not use contemporary technologies either. According to a 2019 article on Financial Express, 43% of US banks still use the Common Business Oriented Language (COBOL), a programming language dating back to 1959 — before computer science was even taught at universities. Another article about the complexity of old systems still being used in traditional banks quotes) Antony Jenkins, former chief executive of Barclays PLC: “Legacy systems from different generations are layered and often heavily intertwined.”
There are several disadvantages of using COBOL: it is difficult to learn and was not designed for the era of the internet, let alone the era of mobile phones. Due to the aging pool of people who are able to use COBOL, there is a general shortage of human resources, and consequently, limited training opportunities. Moreover, COBOL-based legacy systems do not play well with contemporary tools and programming languages, and neither do they appeal to the new generation of programmers.
It does not come as a surprise that last year, the U.S. Government Accountability Office mentioned COBOL 26 times in a report that urged multiple agencies to modernize critical legacy technology. A CNBC report shows why the stakes are especially high for the financial industry, “where an estimated $3 trillion in daily commerce flows through COBOL systems. The language underpins deposit accounts, check-clearing services, card networks, ATMs, mortgage servicing, loan ledgers, and other services.”
It is precisely this outdated technology that causes banks to lag behind modern fintech companies and challenger banks. Furthermore, most traditional banks are burdened by heavily bureaucratized organizational structures, complex processes, and strict regulatory frameworks. In a 2018 report, Gartner even predicted the extinction of 80% of legacy financial service providers by the year 2030, unless they manage to catch up with the digital revolution in the industry led by mobile-first disruptors.
It’s becoming clear that these banks that still operate on legacy infrastructure cannot afford to delay upgrading their core platforms any longer. In the next few years, most incumbents will have to face the fact that the outdated technology they use is no longer sustainable. It looks like change is on the way, however: according to the 2020 banking and capital markets outlook by Deloitte, roughly half of banks’ IT spending will be spent on new technology investments before 2022, and they will most likely start to follow the path of fintechs by adopting a technology-forward mindset.
In order to lead the way, banks will have to rapidly adopt agile methodologies and implement a DevOps toolset that facilitates automation, collaboration, and the continuous delivery of value to end-users. Modernization will directly contribute towards cutting costs and unlock benefits, such as technical flexibility, agility, and a higher return on investment.
If traditional banks can transform their organizational model and technologies to better match the rapidly changing market, it will help them build a system with better access to user data, and consequently, a better understanding of their customers’ needs and behavior. Thanks to these insights, they will be able to continuously evolve, and achieve higher retention rates by providing cutting-edge services for the next generation of customers. The end goal — instead of a product-first approach — is a completely digitalized, user-first approach, where customers can comfortably handle their personal finances, whether they prefer to do so in person, on their desktop, or from their mobile phones.
Authorbio: Nóra Bézi works as a Content Marketing Specialist at Bitrise, a CI/CD platform built for mobile app development. She writes about how developers in startups, unicorns, and enterprises can speed up and automate their app development processes so that they can focus on what’s most important: creating better mobile experiences for their users.