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Time to move beyond legacy. Is on-prem, hosted, SaaS or BPO best for your bank?

How reliant is your bank on legacy? Which services could be moved, which need to be moved and which can stay? Is there an optimal deployment model?

Toms Jansons / May 11, 2021

We’ve moved into the age of standardized software. Vendors specialise in developing industry-specific software and services so that banks can concentrate on their core activities, rather than putting valuable resources on developing standardized code. Why? Because from an investment perspective, it doesn’t deliver return on investment.

A bank’s time is better spent focusing on the customer experience – where it can differentiate itself in the market.

In our experience, too many banks and financial institutions are sat with aging, legacy in-house systems, leaving them with little choice but to develop their own, resource-heavy code. Just maintaining these in-house systems can drain budgets leaving limited resources for developing new customer-oriented features. Many of these systems are so old that the little documentation that exists is no longer relevant due to the number of patches that have been implemented over the years. Unfortunately, this may leave a bank in the hands of a limited group of key people that know or understand the system. In short, a risky policy in a risk-averse industry.

Technology-based competitive advantage

If you recognise this issue in your operations, you will also be aware that new, agile players and competitors that have transitioned their systems are beginning to chip away at your revenues. They don’t have the burden of paying for the upkeep of an old system, since they’re using tailored software to target value-adding services at your customers. Technology has given them a competitive advantage - a proven vendor solution can help you get this back.

Outsourcing the front and backend

Vendor solutions offer many benefits, no matter if they are on-prem, hosted, SaaS or Business Process Outsourcing (BPO), or on the front or backend.

We often see banks outsourcing front office (online) services to vendors to reduce the cost of managing regulatory, security, and international card organisations’ requirements. On the backend, reducing costs is also one of the main drivers for many banks when they migrate from legacy inhouse systems. Big savings can be made when you don’t have to allocate IT resources to ensure regulatory compliance with GDPR, PSD2, PCI DSS as well as any local requirements. And as we all know, regulations will continue to get stricter and stricter, which will further stretch resources. Add to this the regular updates from international card operators and it becomes clear why these costs are better shared among multiple banks and financial institutions through a vendor model.

What our clients say

We spoke with our clients to find out their key drivers for transitioning from a legacy system. Many of the answers were the same regardless of the deployment model.

  • Co-sharing of development and regulatory costs with other financial institutions
  • Complying with regulatory and security requirements
  • Resource constraints
  • Difficulty in finding skilled IT team members
  • Faster time to market – not held back by legacy codes and systems
  • Reduction of legacy system maintenance and management costs
  • Early access to proven new initiatives
  • Flexibility of new functionality, open and testing approach

Which deployment model
The arguments for replacing legacy systems are obvious - but choosing which model of service delivery is right for your bank will depend on your market and digital roadmap.

In the Nordics, for instance, SaaS and BPOs are commonly used by banks when outsourcing. In this mature market where the main differentiators are the terms of the card and the customer interface, resources are freed up to focus on other financial services. Thanks to the service maturity level, on-prem is on par with the other deployment models.

Looking beyond this market, we see clear differences. In countries where cards are a relatively new and a fast-growing business, the card business can still provide a competitive edge as financial services are. This offers an opportunity for banks to invest early in a vendor platform, where the infrastructure may be better suited for hosted or inhouse services.

Then there are large banking groups that often choose to consolidate card processing in one location. Those who don’t outsource services, often still look to gain the benefits of vendor solutions in the form of inhouse management of services. This can be done through their own processing centres based on legacy upgrades.

Flexibility is key
When choosing a deployment model, it’s essential to remember flexibility is key. After all, the market we know today will not be the market we will know tomorrow. There is no one-fits-all solution, no single right way how to deploy software. Each bank has their own path and it’s not uncommon to choose a combination of options. Your provider should be able to provide you with each option and advise and support you with deployment to ensure you remain competitive, reduce costs and maximize revenues.
In conclusion…
No matter how mature or immature the market is, or how big your bank group is, you will have to compete with the ever-growing number of neo-banks and fintechs. They can’t and won’t offer all the service you do. But they will cherry-pick, and legacy systems are simply not competitive in such a landscape.

If your bank continues with a legacy approach, you should at least consider migrating the core functions to vendors. That way you can focus resources on the customer experience, the customer interface, and any value-adding services on top of core card functionality – such as mobile apps with personal finance tools. That’s the best way to compete with the neobanks.

Related blogs:

Bringing lost revenues back to the cards business via credit services

The Fintech dilemma: how to evaluate and collaborate to bring added value to the cards business

Tokenization: the secure way to support merchants, consumers and IoT payments


Learn more on Card and financial product management related blog and insight series, case studies and more - click here.

Toms Jansons
Lead Payments Offering Manager

Toms Jansons currently holds the position of lead strategic product manager and has over 15 years experience in card and payment product development.

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