How banks can activate greater value in the cloud along their modernisation journey

Three decades into the digitisation journey of the financial services industry, there is one continuous accrual that even the most optimistic banker can’t spin as a positive: tech debt.

Tech debt comprises the accumulating costs of outdated, inefficient, or poorly designed IT systems that have built up from the various transformation projects in banks over those 30 years. As all of these digital elements have been piled upon one another, performance and innovation have stalled, and the prospect of true modernisation has actually gotten further away.

Tech debt is particularly insidious in the financial services space, where 71 percent of the value derived from business transformation is dependent on technology. Many banks are playing catch-up, particularly those still grappling with their move to the cloud during the last revolution more than a decade ago.

Today, those banks are trying to build atop an excessively complex architecture – and at far higher costs than they ever expected. This is why banks need to prioritise a new approach to cloud modernisation – one that starts to pay down their tech debt and sets them on a more agile and valuable path forward. Here’s how they can do it.      

Background: Banks' Legacy Systems Aren't Meeting the Moment

What’s behind this buildup of tech debt? A tendency to take shortcuts. Instead of approaching modernization from a long-term, big-picture perspective, many banks have instead opted to tackle hundreds of complex applications and processes one at a time. Now, it’s nearly impossible to sync those piecemeal digitization efforts in any meaningful way. 

While many businesses face similar tech debt issues, the imperative for the banking industry is particularly acute. The massive, lumbering legacy systems upon which many banks are built is a big part of the issue, of course. But banks are also facing dramatically heightened expectations amid competitive disruption in areas including:

The demand for more modernization and convenience in these areas is largely coming from customers, who are accustomed to such advances in other areas of their digital lives. When they don’t see similar strides from their bank – who either won’t, or more commonly can’t, respond – they’re more likely to turn to fintech alternatives.

Set the Foundation for Cloud Modernisation

Part of banks’ sluggish approach to cloud modernization is rooted in the risk-averse nature of the business itself. But the biggest roadblock remains the bloat of tech debt that comes with running a patchwork of huge legacy systems. After all, few banks are excited to jump into projects that might involve years of disruption and hundreds of millions of dollars.  

But tech like generative AI can be a game-changer for banks looking to set a foundation for cloud modernization. Put simply, Gen AI has the ability to greatly simplify the back-end work that has been holding banks back. The value isn’t necessarily in rolling out a new customer-facing AI teller, for instance, but rather in building an architecture for analyzing and modernizing legacy code.

Take a bank still running COBOL for some of its systems, for example. Who in the institution still understands that code or actually knows what the different parts of it do? Probably few, if any, of your current IT pros – and no bright young stars are coming in touting their COBOL bona fides. But Gen AI can run through millions of lines of code and help make sense of it quickly.

It’s not a flashy Gen AI use case, but it’s a highly effective one in the context of cloud modernization. When legacy code is validated with AI, it can be used as documentation for future projects – and form the basis of a more modern, cloud-native architecture that is…

• More scalable than traditional legacy infrastructure.
• Less expensive than a more manual and time-intensive review.
• Easier to update and tweak as changes become necessary over time.         

To make this architecture sustainable, though, banks must embrace a new way of thinking about cloud modernization that supports long-term innovation. We’ll explain why in the next section.

Adopt a Value-Focused Modernisation Mindset

One of the benefits of building a more modern architecture is reducing the cost of digitisation. But the broader goal should be a change of mindset around cloud modernisation – from cost to value generator. And that value lies in a newfound ability to react quickly and make the kinds of incremental changes that really resonate, such as deploying new features or rolling out new ways to move money.

This value mindset can manifest in everything from how the bank plans for its future to the number of projects it undertakes. For example, maybe instead of doing one big project every three years, you’re now doing five or six different small projects. And based on how customers are reacting to those projects, you can continue building on the successes.

Ultimately, this type of incremental approach makes it easier to execute the ongoing modernisation work that banks need to stay competitive. You can focus on immediate wins that take a couple of months to complete and deploy instead of glacial, patience-testing shifts that span years. An eye toward quick, realistic milestones can help your bank become truly agile.

One of the best parts about this current moment? There’s a whole ecosystem of experts designed to help banks along this path. Many cloud providers and other hyperscalers these days have pivoted from a so-called "lift-and-shift" model to a more consultative end-to-end partnership approach to modernisation. From early financial investment to general guidance, these partnerships are helping banks understand the landscape of opportunity and support on their cloud modernisation journey.

The goal is to get banks to consider how they operate in the cloud, and to focus on shifting to a more modern platform that allows them to leverage their data more efficiently. This helps support all kinds of digital innovation – from Gen AI use cases to whatever comes next – and allows for built-in scalability, greater flexibility, and greater control.

What banks get in the end: the technological foundation they need to be a leader in today’s crowded financial services industry.

The Future of Banking is Built on Speed and Agility

The cloud enables capabilities for banks to increase their speed and agility, but that’s a technological shift at the platform level. The other big piece is often a more complicated lift for many banks – changing their culture and mindset. 

In other words, what we’ve described throughout this piece is essentially a startup mentality. It’s something that many banks probably aren’t entirely comfortable with, but also something that is no longer optional. Because given the pace of change and the increase in competition across the industry, banks that fail to act now risk losing touch with the expectations of the next generation of potential customers.

But the good news is that projects that may have seemed complex, expensive, and intimidating in the past can be much more streamlined and manageable today in a modernised cloud. And the value they can deliver is far beyond what was once possible.

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