What's this all about?
The business of banking isn’t cheap. If it was, everyone would be doing it. However, those banks operating on legacy systems really need to innovate if they want their cost ratios to be sustainable now and in the future. In the following article, Content Editor Joe O’Connor looks at why operating on a cloud-native, end-to-end, software-defined platform can help banks not only dramatically drive down costs but truly embrace the future of banking.
Read on if you:
- Want to understand where the real costs for traditional banks lie
- Have an interest in the future of banking
- Are considering modernising your bank
While they might not all be capitalising on it, banks handle and manage huge swathes of data on a daily basis. That makes banking one of the most IT-intensive sectors there is.
According to Accenture, 20 per cent of a typical retail bank’s costs are incurred by IT departments, with a large chunk of that expenditure going towards the maintenance of legacy systems. To put that in perspective, it compares to a cross-industry average of just 7 per cent.
And guess what? Intensive use of technology comes at a high cost. That makes banking a hell of a pricey business, presenting cost ratios that are simply unsustainable for some legacy banks given increasing capital requirements, declining margins, rising operational costs and the yet-to-be-determined ramifications of a global pandemic.
Remaining stagnant brings added pressure. Deloitte estimates that the annual costs of non-transformational change for a mid-sized retail and commercial bank operating on legacy systems is likely to be over €100 million. Operational and IT costs are estimated to be of a similar amount.
In short, banks with legacy systems need to act if they want to not only innovate but make savings too.
Where the real costs lie
So what’s behind the massive costs of operating in a legacy environment? Well, it’s driven predominantly by ageing infrastructure made up of hardware and software that have been bolted on to systems over many years. It’s a practice that we call ‘wrapping’.
Makeshift, bespoke solutions hold them together, but these technologies were not designed to work well in unison or to last indefinitely.
In addition to being costly to maintain, legacy systems are often constructed by a complex web of code written by developers who have long since moved on and who left behind little information about how to navigate it.
Costs related to banking in a legacy environment can be categorised into three areas:
1. Cost of Maintenance
Merely keeping these Frankenstein-like systems operating comes at a massive cost. This is because the systems were developed with technologies that are no longer well supported and do not have large pools of talent that can manage them. Choosing to continue ‘wrapping’ these systems instead of replacing them only kicks the can down the road when it comes to cost. Additionally, the legacy technology costs and process workarounds consume resources that could otherwise go towards improving customer experiences and innovating products.
2. Cost of Change
Legacy systems don’t take kindly to change. As the industry advances at pace – from regulatory compliance to security updates – this technology fails to be flexible. While modern systems are entirely built around the ability to deliver lots of small changes quickly, legacy systems are based on older ways of working that have long development and release cycles, and which cost an arm and a leg.
3. Hidden Costs
Using outdated, disparate systems has many hidden costs too, such as staff retention, talent acquisition and company reputation. Consider back office operators ever-frustrated by lagging technology that turns simple tasks into problem-solving exercises. Then there’s customer dissatisfaction – think bad publicity through social media that can greatly damage your bank’s reputation.
How LEVERIS does cost-saving
Turn all these costs on their head and you’ll get a picture resembling that of an end-to-end, software-defined bank.
The LEVERIS platform is cloud-native so it’s built to take advantage of the efficiencies inherent in the cloud. A platform that vastly improves operational expenditure because you pay only for the cloud space you use. It’s a system that requires you to increase your cost base only as and when your business grows. A technology that is implemented with virtually no capital expenditure. A system that allows you to understand precisely the cost of each activity for every customer.
While it’s true that core banking migrations are a high-risk business and the effects can be significant (Eoin Fleming, our Chief Information Security Officer, compares it to getting spinal surgery whilst juggling bundles of burning dollar bills), with the LEVERIS platform, you can take advantage of a range of features that allow you to start cutting legacy costs at the post-implementation stage.
Here’s where savings are made:
Using automation to build, deploy, operate and change the service wherever possible, as well as improved employee productivity, means a reduction in manpower requirements. Empowering customers to self-serve through our white-label mobile app or web portal generates labour cost-savings too.
Operational savings come from launching new products at a reduced time to market. Fast clearing, settlement and reconciliation also bring down operational costs.
3. IT Maintenance
Operating on an end-to-end platform allows banks to cut down on IT maintenance costs (e.g. integration and third-party upgrades), which results in vastly improved back-office performance.
The cost of deposits is greatly reduced as a result of improved operational efficiency.
5. Cloud Elasticity
Cloud elasticity allows you to scale your footprint to meet demand while never paying for unused capacity.
Short-term costs for long-term gains
There’s no doubt that the payback period for core banking transformation can take time, however, the savings made thereafter are significant and worthwhile.
The benefit of switching to a platform like LEVERIS Digital Bank is that you can start to see savings at an early stage while your banking capabilities are completely transformed. We don’t charge any upfront licensing fees for use of our software. Instead, we seek to keep the cost of getting to market as low as possible. We achieve this by taking a consumption-based approach – the price for software only increases as our clients grow their business and gain more customers.
That all translates to running your bank for as little as €5 per account, operating it in CIR (Cost to Income Ratio) somewhere in the low 30s, and having a live full-service digital bank up and running within 12 weeks and for under €1 million.
LEVERIS offers banks an environment where innovation flourishes and where savings are made. It gives you a clearer picture of your IT costs and allows you much greater control when it comes to expenditure.
In essence, you’ll be transforming your bank without having to break it.