In today’s rapidly evolving financial services landscape, the need for banks to modernise has become urgent. Iman Ghodosi, Managing Director Australia and New Zealand, Backbase, says modernisation not only ensures a competitive edge but also ensures alignment with evolving customer expectations.
In Australia and New Zealand, legacy technology at the major banks poses significant technical risk, requiring substantial investment in core platform upgrades. The drive for simplification is essential, as innovation is hindered by fragmented back-office systems.
Many local small and mid-tier banks, which depend on all-in-one, generic solutions from established providers, encounter distinct but equally limiting challenges. As they seek to accelerate growth, there is increasing awareness that these platforms often lack the flexibility and innovation necessary to meet modern customer expectations, particularly in digital engagement.
Furthermore, rising consolidation in the small to mid-tier banking sector is accelerating modernisation thinking, with banks seeking to maximise the advantages of merged entities by streamlining and enhancing technology to deliver improved digital experiences.
Simplification goes beyond reducing complexity—it’s about building a foundation for future innovation. This dual focus on mitigating technical risks and fostering innovation is essential for banks to stay competitive in a fast-evolving market.
Among the several paths to change, one strategy stands out: progressive modernisation. This approach strikes a balance between speed, cost, and risk, making it a preferred choice for many financial institutions.
There are three main strategies for banks considering progressive modernisation: journey-based, segment-based, and headless approaches:
- Journey-based modernisation:
The journey-based approach focuses on modernising specific customer journeys, starting with those that offer a high return on investment (ROI) or a significant impact on cost.
For example, a bank might begin by revamping the customer onboarding process, ensuring a smoother, more user-friendly experience from start to finish. This method is particularly advantageous because it allows banks to focus on discrete areas of their operations, enabling incremental improvements without overhauling their entire system.
A typical mid-sized bank has over 1,500 customer journeys (across business units, product lines, and customer interactions) according to a recent report from McKinsey. Every journey needs to count.
- Segment-based modernisation:
The segment-based approach focuses on specific areas of a bank’s operations, such as the onboarding or servicing segments, replacing older applications and services with modern alternatives. This approach is broader than the journey-based model, as it targets entire operational segments rather than individual customer journeys.
While the segment-based approach often requires more resources and coordination, it can deliver significant improvements in functionality and efficiency. This method is particularly useful when banks need to enhance operational areas that affect multiple customer journeys. For example, a bank might modernise its entire lending process, from application to servicing, providing a seamless experience across different product lines. - Headless modernisation:
Headless modernisation involves a fundamental shift in a bank’s digital architecture. It focuses on separating the front-end and back-end systems, allowing the bank to adopt a digital banking platform that powers different channel applications. By decoupling these two layers, banks can reduce the duplication of logic across their technology stack and improve the flexibility of their entire core systems.
This approach is ideal for banks with a high level of IT sophistication. These are often mid-sized or larger institutions that can manage the transition to a unified digital platform. The headless model enables banks to deliver a consistent user experience across various channels – such as mobile, online, or in-branch – by leveraging a central platform that supports all customer-facing applications.
Headless modernisation offers several strategic benefits, including the ability to scale digital services more efficiently and reduce time to market for new features. It can also lead to substantial long-term cost savings by minimising redundancies and simplifying the maintenance of digital assets.
Choosing the right approach
Selecting the best path for progressive modernisation depends on several factors, including a bank’s specific needs, size, and available resources.
Each bank has unique challenges and priorities that will shape its modernisation journey. For example, a bank aiming to improve a specific aspect like an outdated loan book might find a journey-based approach most effective.
In contrast, if the primary goal is to integrate and streamline diverse customer-facing systems, a headless strategy may be more suitable. Banks must define their goals clearly and establish incremental objectives to guide their modernization process.
The scale of a bank’s operations can also greatly influence the choice of strategy. Smaller banks may find it easier to implement a journey-based approach, as it allows for targeted improvements without the need for a large-scale overhaul.
Larger banks, with more complex structures and greater technical capacity, may benefit from a headless approach to unify their operations across various channels.
Thirdly, resources – both in terms of budget and technical expertise – play a crucial role in determining the feasibility of each approach. A journey-based model is generally lower in cost and risk, allowing banks to start small and expand their efforts over time.
Conversely, segment-based modernisation requires a more significant investment, as it often involves replacing legacy systems with modern solutions. If a bank has ample resources and a skilled IT team, a headless approach can offer the most comprehensive benefits, though it comes with higher initial costs.
Taking a progressive path
While there is no one-size-fits-all solution for progressive modernisation, banks must evaluate their options carefully to choose the approach that aligns with their strategic goals and capabilities. By assessing their needs, size and available resources, banks can embark on a modernisation journey that not only meets today’s demands but also prepares them for future growth.
Progressive modernisation offers banks a flexible path toward building a resilient and future-proof institution. Whether opting for a journey-based, segment-based, or headless strategy, the key is to move forward with a clear vision and a willingness to adapt.
As the finance services sector continues to evolve, those that embrace these strategies will be best positioned to thrive in the digital age, offering their customers a seamless and innovative banking experience.