Advances in technology and rising customer expectations have led to a rapid evolution of the banking industry, which continues to accelerate. Such is the scale of change that banks are having to reassess their systems, as well as their strategies for optimizing, upgrading and transforming them – all while under pressure to deliver short-term cost savings.

While leadership teams understand the benefits of new technologies, potential for significant long-term IT cost savings, and the risks of falling behind competitors, they also face real-world complexities associated with large-scale transformation programs.

 

Key challenges with platform modernization

Introducing or upgrading systems is fraught with difficulties that go beyond the typical concerns of selecting the right platforms and adhering to timelines and budgets over multi-year periods. Numerous other obstacles can arise.

These include ensuring platforms are future-proof, align with strategic goals and integrate seamlessly with existing technologies. Additionally, issues stemming from the organization itself – such as legacy systems, culture and capabilities – can be underestimated, even though they are critically important.

For example, our research in partnership with the University of Oxford’s Saïd Business School indicates that focusing on a range of complex human factors can increase the likelihood of a successful transformation to over 70%.

Moreover, the pressure on senior executives to adopt a tough approach to cost-cutting and deliver immediate savings can deter them from pursuing necessary transformations, given the associated costs.

However, many leadership teams are now questioning whether they can afford not to modernize their systems, considering the competitive advantages and the potential for enhanced resilience and sustainable IT cost reductions.

 

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Common pitfalls in core banking transformation

Throughout various transformations, we frequently see the same problems recurring. Awareness of these pitfalls and their root causes can help organizations avoid or mitigate them. Typically, these issues stem from various factors, including:

 

Overemphasis on new technology

While banks often focus on the advantages of new technologies, they may underestimate the implementation work required. As they transition to cloud-based platforms and technologies like banking as a service, it is crucial to develop and follow a well-defined cloud readiness strategy to help ensure seamless integration and maximize benefits.

 

Underappreciation of legacy systems

A successful transformation program must consider the challenges posed by current legacy systems. These can include incompatibilities with modern technologies, issues stemming from previous customizations, data inconsistencies, regulatory compliance requirements, and the complexities of integrating new products and channels. It is therefore essential to complete sufficient “big design” work upfront, even within an agile hybrid delivery model, to facilitate a successful transition to a simpler IT landscape.

 

Underestimating strategic vision

Leadership teams often recognize the need for a clear vision and strategy at the outset of a transformation. However, ongoing strategic thinking and course correction are necessary as projects unfold, especially given multi-year timeframes, potential complications from legacy or new technologies, and the need to orchestrate overlapping transformation elements.

 

Box-ticking mentality

While methodologies like agile working and continuous improvement offer clear benefits, embedding them takes sustained effort. Organizations must embrace the full spirit of these approaches rather than just going through the motions. Cultural change and commitment are essential; for example, a daily scrum meeting will not achieve much if participants lack understanding or dedication to this style of working.

By recognizing these dangers, leadership teams can make more informed decisions that align with their organization’s needs, capitalize on opportunities, and reap the benefits. An effective transformation can even catalyze broader cultural change and customer centricity across the organization.

 

Steps to drive success

There is no one-size-fits-all solution for successful transformation. Leadership must consider a range of factors to navigate the complexities involved.

Based on our experience with numerous banking transformation programs worldwide, we recommend seven often-overlooked considerations for leadership teams:

1. Determine the right strategy

Recognize the strengths and weaknesses of available options. Leadership teams typically face three main approaches: total replacement, which has clear advantages but is high-risk and costly; component-based replacement, which upgrades specific components and serves as an interim solution; and augmenting or building a parallel core, which involves creating a new core system alongside the legacy one, allowing for gradual migration but potentially higher operational costs.

2. Select appropriate platforms

Many banks use a combination of technology platforms. However, leadership teams often evaluate options from a pure engineering perspective, with insufficient focus on the current state of the organization, broader IT strategy, and practical challenges of transitioning to new systems.

3. Balance business and IT perspectives

In today’s environment, where technology is expected to drive business advantage, organizations must adopt a unified team approach that incorporates both business and IT representation. This collaboration helps align goals, foster agility, optimize resources, facilitate effective testing, and ensure appropriate trade-offs between priorities.

4. Invest in a strategic project management office (PMO)

While many transformation projects recognize the value of an effective PMO, a major transformation requires one that drives change over the long term and plays a strategic role. A strategic PMO should ensure proper planning and budgeting, navigate risks, anticipate issues, and adjust delivery roadmaps accordingly. We liken this to a modern air traffic control service, coordinating numerous moving elements to ensure safety and efficiency.

5. Prioritize legacy decommissioning

Although transformation teams are aware of the importance of decommissioning legacy systems, this step often gets insufficient attention and resources, leading to incomplete transformations. Teams should define an account migration strategy early and execute it promptly, as this critical step can be more challenging than anticipated and requires specialized expertise.

6. Emphasize continuous improvement

Although the benefits are intuitive, many transformation projects neglect retrospective reviews, lessons learned and investment in forward-looking research. This oversight limits opportunities for improvement and diminishes the potential to leverage technological advancements.

7. Adapt to a data-driven customer focus

While banks see the benefits of a data-driven approach, success hinges on the right infrastructure and joined-up business strategies. Organizations must ensure that data and algorithms are used effectively, now and in the future, particularly as services such as agentic AI evolve. A full understanding of the data issues and a clear plan for progress are essential for future-proofing the organization.

 

Contributors:
Craig Munn – Partner, Technology Consulting, Ernst & Young Tanácsadó Korlátolt Felelõsségû Társaság
Alice Gardeisen – Partner, Technology Consulting, Ernst & Young Advisory