Legacy Platforms are a Big Challenge for the BFSI industry - Vivek Kulshrestha, Synechron

By Vivek Kulshrestha, Director – Technology, Synechron

The transformations and tales of the BFSI industry are in abundance and the bird-eye view poses a plethora of ifs and buts. This dynamic yet essential industry is the backbone of global economies and has passed the baton of progress to the fintech players. What is interesting is that the trends and possibilities for the BFSI have amplified because of the pandemic.

The Technology Trends

Organizations are increasingly transitioning towards adapting a cloud-agnostic system by moving towards hybrid cloud services and are largely trying to make their applications a part of a cloud-neutral solution by spreading critical functionality across cloud providers. This primarily helps in mitigating the risk from outages on a particular cloud. It also allows flexibility in dealing with providers and the ability to switch business volumes across the cloud options.

Another key trend is that BFSI businesses are more interested in buying platforms, rather than building them. This is to keep technology debts and the high maintenance costs at bay. These debts result in higher future cost due to adoption of complex platforms. Additionally, banks are also strategically working with multiple fintech vendors to optimize productivity by segregating tasks between them and acquiring the ability to switch business volumes between vendors for managing redundancy and resiliency.

We’re also aware of the global data abundancy, which needs to be sourced, stored, and analysed. The ability to shift through this huge amount of data and gain intuitive insights is a massive task. This incorporating automation for data-driven decision-making is the trend supported by an event-based architecture, and this will continue to be a crucial milestone for the BFSI world.

Containerization of applications is another key trend to transform legacy platforms. It involves decomposing platforms into loosely coupled isolated modules. By encapsulating a unique functionality in a microservices based ‘container’, enterprises will save cost, reduce application dependencies, and improve time to market. Containerized application modules can be migrated across platforms, retired, and have their functionality outsourced without impacting the rest of the applications ecosystem.

The latest and the hottest trend relates to the impact of COVID-19. It has not only accelerated adoption of innovation but also created an urgency to leverage fintech, review infrastructure deficiencies, and augment the capabilities of cloud and data center providers. Additionally, the work-from-home system has proven that skilled and innovative talent can operate from any corner of the world. Hence, future leaders of the industry will choose to work with organizations that are flexible, and have an inclusive work culture.

The Fintech Challenges

Stickiness towards legacy platforms is a big challenge for the BFSI industry. Several businesses still operate on legacy platforms because their replacement comes at a high cost; this is a key reason why stakeholders keep postponing the due transformation. It is a vicious cycle as the delay causes more technology debt to pile on. Unfortunately, only emergencies are prioritized, such as fixing a bug, responding to security breaches or adding new business functionalities. The transformations are also borderline tricky because the existing legacy platforms were erected by dedicated leaders, and these platforms have served the business well, hence getting the buy-in and cooperation of such leadership can be challenging

Another challenge is the organization’s lack of confidence in the outcome of adopting new technology. This attitude makes some businesses adopt a “wait and watch approach”. Unless there is a commitment from the highest level, tech leaders are hesitant to experiment. This is especially true when the limited funding available is often prioritized for immediate business functions. It is perhaps correct to say that banks will only adopt proven technology and are usually not in the business of helping technology evolve.

The evolving fintech market also poses another key challenge as it expands. There are many innovative vendors, offering similar functionality with different underlying technologies. The analysis and research required to find the optimum fit for one’s platforms is challenging. Banks are wary of partnering with newcomers and need to put their money on the right vendor and technology stack. There is expected to be consolidation among the fintech players and not all will survive.

As the BFSI industry progresses, we’re also looking at a probable pool of digital fraudulency due to the reduction in physical verification of people and documents, and the introduction of faceless endpoints and gateways, which collectively increases the risk of fraud and digital theft.

Get Smart: Incubate Innovation

A smart way of dealing with the fear of transformation is by incubating innovation labs for gaining confidence. Most banks want to “feel the water before taking the plunge”. Small, modular functionality provided by fintech companies allow them to test the feasibility of new modules without fully investing in their development and infrastructure, such as fintech labs and accelerators allow research and validation at a quicker pace with little upfront cost.

Firms need to migrate to cloud-based applications and reduce their infrastructure and environmental expenses. This will also enable faster roll-out of business functionality. Having the cloud privately hosted gives organizations control over their data and reduces down time due to vendor issues. Besides, on-premises solutions are certainly recommended for organizations that are willing to bear the cost and need total control over their data.

As banks develop more and more on the new technology, there is also a possibility of them being threatened by fintech firms taking their market share and disrupting their business model. However, the budgets in which banks function provide multiple options to combat this probable issue. They could sponsor start-ups and integrate with them as they expand and prove themselves. Alternatively, they can also partner with existing fintech players or outsource functionality. In either case, banks can leverage the nimbleness of fintechs to create pilot platforms and scale up after concepts are proved.

Additionally, the industry as a whole would benefit from targeted innovation with prototypes. In the pursuit of winning the trust of stakeholders, solutions should provide tangible benefits and focus on what pain points are addressed and what result is expected. In other words, innovations should not look like solutions in search of a problem.

New Economy, Newer Options

It’s known how enterprises are stuck with monolithic platforms but at the same time, there are never enough funds to replace them. Fintech innovation offers the middle path. Innovation can carve out the monolithic platforms, one piece at a time. Digital capabilities enable enterprises to work on pain points, containerize functionality, leverage fintech vendors, introduce data-driven decision making, automate, and streamline data flow.

The industry is experiencing a surge in new opportunities to transform banking tasks. This comes as a result of the high penetration of smart devices in the hands of customers. Starting from biometric authentication, elimination of plastic cards, AI supported chatbots, and KYC verification, all contribute to reducing queries and cost savings in customer service. The sector is also looking at digital authentication, verifications, e-signatures, self-serving features becoming pivotal for banks and their vendors for large-scale adoption.

It’s also exciting how open banking will continue serving as an opportunity for start-ups to level the playing fields with established banking institutions. Additionally, access to customers’ data along with third party service providers, also offers tremendous opportunity for banks to cross-sell their products to customers and get an aggregated view of customers’ assets and liquidity.

The work-from-home model might have been viewed as a temporary happening, but it’s clear that it is there to stay even after the pandemic. This provides an opportunity to facilitate employees and ensure enterprises are equipped with the appropriate tools and services.

Future outlook for the BFSI sector

The period starting 2020 to 2022 will experience some losses, although short-term, in the lending business. This would especially materialize in categories of consumer loans, credit cards, commercial loans, and small business loans. This will also impact the return on equity (ROE) negatively. However, after 2022 recoveries will fall in place.

The pandemic has changed a lot about how we function and has been an accelerating force for digitization. To catch up, traditional banks will be forced to urgently partner with fintechs and adopt cloud and disruptive technologies faster than they planned to. The BFSI industry will continue to experience an increase in the virtualization of the workforce, which will further cause to enhance cybersecurity, fraud prevention measures and surveillance.

Enterprises will also strengthen their environmental, social, and governance (ESG) commitments to leverage their growing influence. ESG impacts an enterprise’s reputation and is being increasingly considered as a metric for stability and reliability. Regulators in the US and EU have already proposed new frameworks to set expectations in ESG. India can expect more funding and focus as well.

Digital banking sales existed even before the pandemic; however, it never took off due to customer preferences and ever-evolving solutions. Its adoption has been accelerated by the pandemic. Mobile banking apps, payment wallets, and the participation of non-bank players will see new business models and tools supported by mobile platforms.

Remote business models would certainly increase customer retention risks, as switching banks will become effortless and paperless. Banks will therefore need to retain clients by customized offers and inducements. To aid this, big data will play a huge role in providing tailored solutions to customers based on their history and profile. AI-based intelligent chatbot, banking assistants and virtual reality experiences will be used for engaging customers.

By how the ecosystem has adapted to the new normal, it is a given that there will be an increased acceptance of flexible shifts, hybrid work models, reduced working hours, and remote working models. On the flip side, we could expect reduced compensations, need-based hours, freeze on bonuses and promotions, reduction in generic roles like people management, application of a flat organizational structure, to name a few.

The waves of opportunities and drawbacks would be the only constant for the BFSI against the gigantic and mammoth sized changes that are yet to come. The combination of being nimble yet apprehensive makes it tricky but also adventurous. It’s certain that the pandemic has played a pivotal role in fast-forwarding a bunch of transformations and it’d be a journey worth watching.