The pace of change in financial services is accelerating due to the growth of new digital channels, technological capabilities, and an increasing array of vendors. No corner of financial services today is untouched by these changes.

As a result, there are now major opportunities for growth. Financial organisations that can innovate and offer smarter, better, faster financial products and services that are relevant to both consumers and business customers alike will achieve greater competitive differentiation, revenue growth and market share.

However, the demand for innovation poses a significant resource management challenge – one made worse by an ongoing reliance on legacy architecture and an extremely competitive market for technical staff.

So how can financial institutions (FIs) rapidly innovate and avoid the next legacy tech trap?

The pace of change is fast and the generational gap is wide

FIs are struggling to keep up with evolving customer expectations for new and innovative products and services.

A major reason is due to generational differences in willingness to adopt new technology emerging in the financial services industry, with millennials being more open to using new technologies and partnering with fintech companies. Aite-Novarica Group research indicates that 70% of millennial-run SMEs currently partner with a non-bank fintech company for some form of financial service capability. This compares to only 30% of boomer- and senior-run SMEs reporting that they are currently working with a nonbank fintech provider.

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Non-banks can either be a threat or friend to banks. Banks need to change the fintech delivery model to encompass embedded finance so they can enable non-banks rather than risk being disintermediated by them.

The difficult fork in the road to innovation

FIs face challenges in innovating and launching new products and services due to limited resources and sourcing technology talent remains a major challenge. Despite changes in how vendors work, many FIs still prefer internal development, but this resource-intensive approach is not scalable and risks creating new technical debt. As technology becomes more interconnected, data-driven, and cloud-based, bespoke solutions risk becoming the next form of legacy platform that does not integrate well with other emerging technologies and services.

When it comes to looking externally for partners, this brings its own challenges. Many organisations lack the internal resources to manage these partnerships efficiently. As a result, FIs tend to rely on a small handful of vendor partners, limiting their access to innovative capabilities and best-in-class providers. Legal and commercial agreements can further compound these challenges. Overall, managing these relationships remains an intensive and multistep process that requires the right internal skill set and processes.

Replacing the core won’t fix everything

Many FIs are turning to core replacement as a key part of of their modernisation and innovation strategies. However, this process is complex and risky, with three primary strategies: full rip-and-replace, greenfield launch, and wrap-around or core-hollowing. While modernising the core can provide greater flexibility and security, each approach has its own challenges and potential disruptions. Core replacement is not a silver bullet solution to fixing innovation challenges in the financial industry.

Although core modernisation is important for FIs, it can draw attention and resources away from new product and service deployments and innovations. Much like the legacy infrastructure it is intended to replace, FI core modernisation programs are unique in their implementation and prone to significant challenges—even outright failures. Moreover, it is typically time consuming, sometimes taking years – this is time banks can’t afford to lose. FIs need to innovate fast to keep up with market demands and customer expectations.

McKinsey reports that only 30% of core banking system transformations are successful in fully migrating ledgers and products to a new system. Additionally, core modernisation programs that inadequately plan for connectivity and interoperability across the stack lower their innovation efficiency and effectiveness. Therefore, it is important for FIs to find ways to innovate rapidly and immediately in parallel with broader infrastructure initiatives.

Paving the path to innovation

New approaches to rolling out financial technology – fintech enablement platforms – provide FIs with the ability to innovate and launch digital products and services without sacrificing existing infrastructure. This approach includes pre-built components, data models, and software-as-a-service ecosystem connectors, which can be quickly deployed to accelerate the launch of financial solutions and new customer journeys.

Crucial to success are platforms that can provide the security assurances and compatibility FIs require in their broader infrastructure. Plug-and-play solutions from third-party vendors and emerging fintechs can often lead to due diligence problems in terms of legal and technical compliance. These risks can be reduced when FIs have the tools to develop and manage innovations and new customer journeys themselves.

The recent growth of no-and low-code capabilities further adds to the potential benefits of fintech enablement platforms, empowering less technically adept staff to handle development and a more iterative flexible design approach.

Embedded finance and open banking are driving the need for FIs to shape unique customer journeys with potential partners. Fintech enablement platforms provide the tools necessary to build innovation in flexible and agile ways that can use, but are not reliant on, existing infrastructure. This helps break down technology silos, increases speed to market, facilitates innovation, and provides a more customer-centric approach to products and services.

Why banks need to avoid the new legacy trap

The barrier to success is legacy technology and escaping the legacy trap requires FIs to adapt their business models to enable innovation. Delivering features in the legacy-rich incumbent banking environment is risky, slow, and expensive. The path to modernisation is complex and it’s therefore vital for FIs to not fall into yet another legacy tech trap that has already held them back for so many years.

FIs need to be ready for quick market shifts and new fintech enablement approaches provide the capabilities to modernise, innovate, and manage their products and customer journeys in a more rapid way, providing a clear competitive advantage.

Teodor Blidarus is CEO and Co-Founder at FintechOS