The investment banking sector is wasting millions on underutilised and badly managed software, according to an industry insider.
Moreover, following a period of macroeconomic uncertainty, investment banks are cutting IT budgets and placing greater emphasis on return on investment (ROI), according to Julien Villemonteix, the chief executive officer of document automation business UpSlide.
“The last few years have proven challenging for investment banking globally with macroeconomic and geopolitical factors weighing on confidence,” Villemonteix stressed.
“While we’re seeing conditions improve and deal flow increasing, confidence is still muted and strained budgets are leading to a greater focus on ROI,” he added.
Because of this increased focus on ROI, many QA teams and IT professionals face budget cuts this year.
In fact, Villemonteix discussed a recent survey carried out by his firm which found that out of around 600 IT and innovation professionals in the investment banking industry UpSlide’s team spoke to, 94% said they are facing budget cuts this year, with one-third facing cuts of more than a fifth as investment banks scale back in the face of ongoing uncertainty.
In addition, more than a third believe these cuts could impact business performance, while close to half saying they could impact the quality of customer service.
At the same time, as investment banks are scaling back IT budgets however, current software spend is not being used effectively.
More than two-thirds of IT leaders surveyed believe firms are wasting over a quarter of their remaining budget on underutilised and redundant tools.
Half of investment banking IT leaders with £10 million+ budgets meanwhile, report that half of that is wasted on redundant or underused software.
“It’s unsurprising therefore that, faced with tighter budgets and IT waste, more than half are looking to establish stricter SLAs with software vendors and that ROI has become the most important metric when it comes to choosing providers,” Villemonteix said.
Asked what factors are hindering ROI on software spend, two thirds of respondents identified poor training while half identified integration with existing tech as an issue.
“Software and tech remain one of the biggest areas of investment for the investment banking sector, as firms look to compete in new technologies ranging from AI to automation,” Villemonteix continued.
“These technologies are crucial to gaining a competitive edge, for example by allowing analysts to deliver pitchbooks both at speed and without inaccuracies,” he continued.
“The scramble to innovate and onboard new tech has come at the expense of proper integration and deployment and firms are wasting millions on underutilised tech every year.”
“A simple solution for IT leaders in the sector faced with budgetary constraints is to make sure that the tech they’ve already onboarded is being used effectively and is integrated fully into wider systems and processes,” Villemonteix argued.
“Longer term too, there is growing importance of ROI and onboarding when it comes to SaaS in the investment banking sector and the growing role that APIs will play in helping IT leaders build coherent tech ecosystems,” he concluded.
Digital infrastructure
Despite the findings, modernising and upgrading digital infrastructure is increasingly becoming a strategic imperative for many financial institutions, particularly as the banking landscape evolves rapidly.
More and more banks are starting to recognise this, with hundreds of financial firms currently in the midst of revamping their QA approach, or looking to do so.
In fact, 98% of all banks in the world’s key economies are planning to upgrade their core banking systems to accelerate digital transformation within the next three years, according to data that was recently shared with QA Financial.
While close to three-quarters of banks globally continue to run on legacy core banking systems, IDC researchers found that the banking space is now fully aware of the need for a digital upgrade.
Michael Yeo, an associate research director at IDC Financial Insights examined core banking transformation and data migration strategies, sharing findings from a study of banking executives to understand their current core banking system challenges and priorities.
He defined the characteristics of fourth-generation cloud-native core banking systems, emphasized the imperative of a data migration strategy, and outlines implementation considerations for banks.
Yeo, while highlighting a number of challenges relating to legacy core banking systems, noted that most systems struggle to keep up with the demands of real-time, flexible, and innovative banking products and services.
In fact, just over half of all banks said that major restrictions continue to impact the delivery of new digital products and efficiencies in operations, necessitating major upgrades to their core banking systems before they can introduce a new product to market.
Meanwhile, 65% of banks identified the absence of real-time capabilities as a key challenge with their current core banking systems, while nearly half of the respondents pointed to “inflexibility to configure or customize existing products or create a new product” as a major issue.
Legacy core banking systems
Automating processes within banks’ digital infrastructure is a top priority when it comes to transforming their core banking systems, the researchers said.
To address these limitations, more than 9 out of ten banking executive teams indicated their core systems are in need of an upgrade
Moreover, banks also acknowledge the value of the cloud in realising their digital ambitions, with more than half of all large banks globally looking to deploy over 40% of total workloads to the cloud.
This puts the ‘fourth-generation cloud-nature banking systems’ on the radar of many banks, meaning a drive for flexibility and control, real-time processing capabilities, resilience and availability, as well as operational efficiency.
“These systems allow for the creation and modification of banking products, such as payments and accounts, with significantly reduced timelines,” the researchers wrote.
They also contain low-code product configuration, allowing for quick, independently-controlled changes, and offer elastic scalability to easily adjust resources based on demand.
Fourth-generation cloud-native core banking systems also enable real-time access to transaction data, facilitating immediate customization and pricing at the point-of-sale.
This means response times can be upped, fraud detection improved and potential threats be spotted earlier, thereby reducing potential losses as well as avoiding customer frustration.
But perhaps most importantly, according to the report, fourth-generation cloud-native core banking systems enable banks to decommission their legacy software, which means their associated fees and maintenance efforts can be dropped.
“This helps reallocate resources from core maintenance to value-creating product initiatives,” the report found.
“They also improve workflows with greater flexibility, reduce timelines, and enhance data segmentation and analytical capabilities,” the authors wrote.
Strategies
Finally, the researchers set out a software testing strategy that may help banks to speed up the modernisation of their core banking systems.
The first approach entails a gradual transition, with specific business function modules from legacy platforms to modern ones using an incremental approach.
“The advantage of this approach is that it allows the bank to modernize in a phased manner, reducing risk and disruption to operations. However, the disadvantage is that it can be a slower and may take several years to complete,” the researchers wrote.
The second strategy, the ‘greenfield digital bank approach’, involves creating a parallel new digital banking unit that operates independently of the bank’s core business and serves a new customer base.
“The advantage of this approach is that it allows the bank to rapidly create and test new products, services, and propositions that the legacy core cannot provide. The disadvantage is that it can be challenging to run two parallel cores,” according to the report.
Finally, banks could opt for a ‘big bang’ strategy, which involves a full core replacement of the legacy platform with a new, modern, cloud-native platform.
“The advantage of this approach is that it allows the bank to completely modernize its core system in one go, removing all legacy issues and starting fresh,” the report read.
However, “the disadvantage is that it carries a much a higher risk of disruption due to its complexity, limited testing and the possibility of delays to the entire project resulting from even a single glitch,” the researchers concluded.
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QA FINANCIAL FORUM LONDON: RECAP
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