Financial services and fintechs are in a race against time to capture market share. With the rapid pace of change in the banking and financial services industry, the emergence of generative AI tools and new app frameworks are only exacerbating the limitations of legacy infrastructure. The pressure is on to innovate faster as applications such as open banking and headless finance transform the product development landscape. Organizations that postpone modernization and rely on workarounds are only delaying the inevitable and crippling their competitiveness in the meantime.
The outdated core systems of traditional financial services are simply ill-equipped to deal with the demands of always-on banking, micropayments, and cross-border transactions — not to mention data sovereignty regulations. Any reluctance is understandable with transactional databases being so sensitive to downtime and disruption. But fintech companies are forcing more traditional models to adapt or perish.
What’s driving growth in the marketplace?
There are a number of differentiators that are catalyzing growth in the marketplace. Data, data science, and AI can create a better market fit and grow a portfolio of products for both fintech and platform ecosystems. Cloud and mobile reduce the time to market, while open banking and self-service bring more innovation and diversity into the entire space. Of course, all this is happening against the background of AI promising to revolutionize customer service, product development, and risk analysis.
These developments put the onus on incumbent financial services. While they are still navigating the shift to mobile and cloud, they now also must catch up with the shift from centralized, monolithic systems to small and decentralized systems that run on commodity hardware. McKinsey found that only 13% of the financial-services leaders it surveyed had half or more of their IT footprint in the cloud. Migrating soon will help bring them up to speed with what digital-first companies already enjoy: Faster deployment cycles and faster recovery with DevOps.
While businesses may be scared of slowing down their app development, solutions like caching, manual sharding, and in-house replication are only ever a short-term fix. It is also a mistake to see modernization as purely about the tech. It requires organizational change driven from the top. Rather than accumulating expensive tech debt with an ad-hoc approach, I suggest taking the pulse of the marketplace before working out the right tech that will be adaptable into the future.
The biggest inhibitor to organizations modernizing is not the tech itself — it is culture and risk. Companies just got too comfortable with consistent growth rates without tackling the future aggressively. They cannot hold back the tide of innovation, so it is wise to look around the corner and bet on the future. Make this forward-looking approach central to your strategy and part of your operating model.
Best practices for modernization
I tend to make many small bets and double down on them if they are winners. Embedding experimentation as a core part of the culture is crucial, and small bets allow leaders to learn while growing. The issue is that CXOs do not always understand the value and return of modernization and may resist anything disrupting their resilience. A best practice for CXOs is always to take a long term perspective about database selection and implementation.
Their teams have also been trained to maintain the existing technology, which can affect not only productivity but the employment brand. That is why you need incentives and changes to process and personnel. However, cultural and organizational change cannot happen without support from both executives and the business.
I would caution leaders to avoid a slowdown ahead of this work being done. It is not a construction zone. It requires continuously simplifying the steps and leaning into the challenge. To choose the right tech, start backwards from understanding your customers’ needs and move forwards to thinking about where your business will be in five to 10 years’ time.
An incremental approach allows you to go slow then fast; to think small then big. Lift and shift your system to cloud and only then, begin to optimize in small stages, rather than restructuring before the big move. Testing makes a big difference in risk mitigation, so prototype early and often, and then drive repeatability for scale.
On the more cultural side, revisit the org structure and processes to support the new tech while empowering teams with an empathetic approach. Celebrating the quick wins and sharing the quick losses will reinforce the need for accountability and continuous improvement.
Bold visions and the willingness to act on them have continuously resulted in monumental changes. President Eisenhower first had his vision for the Interstate highway system in the 1950s, and it is still serving us well today. In today’s rapidly evolving world, leaders can no longer afford to let risk aversion prevent them from creating agility now that will provide for the future. Similarly, in the dynamic banking and financial services industry, it is essential to be bold in your vision for modernization, adopt a long-term perspective, and then take action.