EXCLUSIVE: “The stealth approach to transformation” – Kunal Galav, Mambu and Akhilesh Khera, PwC in ‘The Fintech Magazine’

Banks aren’t interested in hugely disruptive (and hugely expensive) rip-and-replace technology programmes. But what’s the alternative? Kunal Galav from Mambu and PwC ’s Akhilesh Khera discuss a cunning plan…

“Legacy estates are a drag on cost, resilience and change agility.”

This is a quote from a recent joint paper by software-as-a-service platform Mambu and accounting giant PwC, which pretty much sums up the challenges currently faced by incumbent banks.

Digitally Reframing Legacy Transformation gives an insight into the sector as it stands today but also, crucially, provides a roadmap for CIOs to use when defining their transformation plans. As the saying goes, ‘times they are-a-changing,’ with traditional financial institutions painfully aware of the progress made by newer, more nimble competitors, and, at the same time, being squeezed by the ever-increasing demands of a customer base that wants and expects more from their banks, at a rapid pace.

There are also cost implications of maintaining legacy systems. According to the paper, just running-to-stand-still means that UK banks will spend between £1billion and £2billion over the next three years on resiliency alone. So, what are the solutions?

Certainly not simply ‘bolting on’ new technology to existing legacy systems and hoping for the best. Kunal Galav, global head of partnership development and advisory at Mambu, believes that a ‘greenfield on top’ approach, whereby there’s an orchestration layer of tech that allows a bank to access its existing systems while integrating them with third-party providers, is the solution for many legacy institutions.

“In researching our paper, one thing we discovered was that nobody has the time or the appetite to do a five-year transformation,” says Galav. “And there’s no golden ticket answer – ‘here’s a five-point checklist, go decommission your legacy’. The way to do it is with progressive modernisation – a ‘greenfield on top’ approach.”

“Most banks approach digital transformation in terms of their existing business moving on to a new technology. But that doesn’t really make sense. You need to also innovate your business model when trying to implement new technology”

Akhilesh Khera, PwC

The joint paper recommends adopting a step-by-step process, which can be summed up as: decommission the legacy selectively; build an integrated ecosystem as a greenfield platform on top of your legacy tech; orchestrate the servicing of legacy products via the digital channel and bring all customers on to the platform; selectively refactor critical legacy functionality; and, finally, kick the legacy platform out from underneath you.

“The advantage of having the Cloud and software-as-a-service (SaaS)-based offerings is that you don’t need to build; you can take the licences, you can try things,” says Galav. “You can offer propositions to your customer, change your proposition and transform your stack. Such a greenfield-on-top approach enables you to innovate really fast, get to customers quickly, and gradually look at what’s working in the market.”

It’s a kind of stealth approach to transformation – less disruptive and less costly, and at pace. But it’s apparent that real transformation is as much a case of changing the mindset, as it is of changing the tech. Getting under the skin of end goals and real priorities, honestly evaluating your business model and generally improving your customer offering is a business and customer conundrum, with technology as the enabler – not the panacea.

Akhilesh Khera, partner at PwC UK, says a more root-and-branch understanding of what technology can – and can’t – bring, requires a different approach.

“We see that there are three broad challenges that exist out there,” he says. “The first is that most banks and financial services institutions approach digital transformation in terms of their existing business moving on to a new technology.

But that doesn’t really make sense. You need to also innovate your business model when trying to implement new technology. Change should be based on the overall customer experience and the expectations that you are trying to meet, rather than changing technology for technology’s sake.

“The second thing that we see banks struggle with is the impact that a digital transformation programme has on their operating model. You can’t sustain your existing one, based on a waterfall methodology – managing and launching new customer experiences and products has to be ongoing. This is something that quite a few of our clients sometimes forget.

“And the third challenge that I see, typically, is prevarication – essentially a ‘do nothing’ scenario. This is probably the worst of all, saying ‘it’s too big of an issue for us to solve, so let’s not do it now, let’s do it later’.”

The market says – both anecdotally and backed by data – that slow digital transformation at legacy banks is contributing to a drop in customer retention.

The rise of neobanks and their more customer-centric approach certainly hasn’t helped, with incumbents’ lethargy when reacting to new customer trends brought into sharp relief. The buy now, pay later (BNPL) experience is a good example of that.

Turbo-charged by the pandemic, the likes of Klarna, Affirm and Clearpay have prospered in the point-of-sale instalment loans market, which is predicted to reach almost £420billion in 2023, while banks largely looked on. Belatedly, in 2022, Virgin Money announced a BNPL credit card, NatWest launched a BNPL credit scheme and Monzo unveiled a BNPL product with a £3,000 limit, but many financial institutions have yet to show their hand. While the adoption curve on this payment method may have flattened a little – although this year’s introduction of Apple Pay Later shows there’s still healthy interest – the journey on BNPL is illustrative: there is an obvious need for better technology and a new and improved mindset to match among ‘legacy’ providers.

“There’s no golden ticket answer: ‘here’s a five-point checklist, go decommission your legacy.’ The way to do it is with progressive modernisation, a greenfield-on-top approach”

Kunal Galav, Mambu

Galav says that putting yourself in the customer’s shoes rather than simply selling products is key. He cites an example of how Mambu helped the Commonwealth Bank in Australia launch Unloan, its next-gen digital mortgage brand.

“This was an incumbent bank, with a significant market share that decided to re-pivot, to answer its customers’ needs on their home-buying journey. It’s a subtle difference, but instead of thinking about a mortgage as a product, it said ‘what goes through a customer’s mind when they want to buy their home?’,” recalls Galav. “They were able to get to the market in about six months, with one of the most outstanding digital innovation products in Australia right now. It shows that, with a change in mindset, with a change in business model – if you stop trying to lift and shift, ‘we’ve done this a hundred times, let’s do it again’ – you can innovate, using new technologies.”

This is but one example, though, of an incumbent benefitting from taking a neo approach. There have to be far more, says Galav. Banks not only need to be aware of their goals and appreciate how the underlying technology can help reach them, but also be willing to move a hell of a lot faster.

“It’s very much about the speed of implementation and innovation,” agrees Khera. “Not everything is about getting it right the first time. You might get it wrong, but you should be ready to fail fast. Digital banks and challengers release customer features on the app on a weekly basis. When you look at monolith institutions and legacy banks, it takes them a six-monthly cycle before they release even a single feature. That simply has to change.”

At the heart of all this is the customer. On-demand services permeate every aspect of their life – be it Netflix, Amazon Deliveroo, Uber, Airbnb… the list goes on – and consumers are accustomed to tailor-made solutions and personalised content. Their habits have irrevocably altered and traditional banks are now tasked with meeting those different needs.

“Think about the traditional operating model of a bank – it has had a lending P&L and a deposit P&L. Right? But that’s not how customers view their lives,” says Galav. “Customers are expecting banks to become their personal CFOs. They have needs: ‘I want to buy a car, I want to save for my kids’ education, I want to buy a house. Help me’.

“Customers are now used to Facebook and Google, their data being utilised to give them insights. They are expecting the same from their banks: ‘Treat me like you know me. You should know what I want, before I want it’.”

This article was published in The Fintech Magazine Issue 29, Page 51-52