What are the 3 best approaches for modernization in banking?

In this blog series, we’ve covered a ton of ground. We kicked things off by analyzing the meaning of digital transformation, then moved on to the importance of banking flywheels, particularly the importance of harmonizing the side that drives customer value with the one that drives business value. And now that we’ve dissected the differences between digital transformation and modernization in banking, we’re finally ready to explore this latter topic on a deeper level.

Like McKinsey, we see three clear paths to modernization in banking, each with its pros and cons:

1. Big bang replacement

2. Greenfield approach

3. Progressive modernization

You just have to choose the route that will be most helpful as your bank conducts a front-to-back replacement, allowing you to improve everything from the customer experience to cybersecurity. Let’s take a look at each so you can select the best approach for your unique use case. 

When you started thinking about modernizing your tech infrastructure, your mind probably went to the “big bang” method. And that’s natural, of course. This approach is flashy, bold, and sure to impress shareholders and customers alike.

By making a monolithic system update, banks can overhaul their user interface, core systems, and integrations all at the same time. That’s why the big bang option is a solid choice for banks with systems that are in urgent need of replacement — or, conversely, banks with a lot of time on their hands.

But take some time to consider whether this method is the best “bang for your buck,” so to speak.

When it comes to big bang replacements, banks put themselves at considerable risk. For one thing, they’re incredibly time consuming, meaning their solution may even be outdated by the time they launch. And don’t overlook the resources required to even pull it off. This approach is by far the most expensive of the three options, and it requires a tremendous amount of dedication from your organization, in particular your in-house teams.

So take the big bang approach with a grain of salt. It’s not all doom and gloom, of course. There’s absolutely a time and place for this method, just like there’s plenty of banks that would do well to select it. But most banks don’t have the time, resources, or risk appetite to do it justice — leading to inevitable failure, sometimes after years of work. And that makes a big bang a risky proposition. 

If you’re primarily focused on speed and delivering value fast, the greenfield approach is the way to go. By reusing elements from your existing infrastructure, you can quickly create a cloud-native tech stack, saving you a significant amount of time and money. And on top of that, you can even eliminate the risk of disruption to your normal operations, and that’s a powerful selling point. It’s a medium-risk endeavor — and a medium-cost one — that prioritizes the speed of product innovation over the potential for data migration challenges.

But make no mistake, there are some real risks.

As CCG Insights notes, the purpose of a greenfield approach is to test new tech and customer propositions, and that means there’s always the possibility that it will fail entirely. While some banks may consider it a solid gamble, others may not welcome betting it all on a single project.

That’s why this method is particularly useful in the case that a major bank wants to create a new offering or sub-brand, one that cuts out the legacy problems that have plagued them in the past. Like JPMorgan Chase and “Finn by Chase,” these banks might not be as badly impacted by a bet gone wrong. But most banks simply don’t have that luxury.

At the end of the day, a greenfield approach is a solid strategy with a lot of positives, as well as a few negatives. In fact, some consultancies, such as Oliver Wyman, consider it the best choice for the average bank. But — spoiler alert — we can think of one that’s more appealing and even lower risk.

Yes, it’s progressive modernization — the middle-of-the-pack option that gives you medium speed and cost, but at significantly lower risk. Unlike the other approaches, a progressive modernization is suitable for almost every bank. Does that make it the perfect approach for every bank? Of course not. Like we said, each transformation is a unique journey. But the pros vastly outweigh the cons, making it your best bet, pound for pound.

But maybe you’re not yet familiar with this approach. Here’s our take on it.

Progressive modernization is your chance to re-architect your customer journeys and create instant value. By leveraging incremental change and iterative improvements, you’ll be able to modernize your most important customer journeys and underlying processes, all while mitigating risks and maximizing both customer and business value.

Of course, this is only possible after you’ve adopted a platform model, but with the right tech partner, this is much less daunting than you’d expect. By reimagining your operating model, you’ll be poised to capitalize on your underlying capabilities, which will be made reusable and interoperable. Imagine a digital factory, composed of smaller, more skilled teams, all working together on a standardized architecture and automated infrastructure.

And that’s the way you super-charge innovation.

We know it, and you know it — modernization is hard. It’s so hard, in fact, that many banks spend years kicking the idea around before market circumstances force them to act. And one of the biggest problems is getting started.

In the next blog, we’ll further explore the progressive modernization approach so you can better understand the unique value of this method and start planning your bank’s modernization journey.

For more information, check out our Banking Reinvented podcast, where Backbase Founder/CEO Jouk Pleiter dissects similar topics alongside Tim Rutten, EVP/Chief of Staff, and other digital leaders. Stay tuned as they chat about everything from progressive modernization to decomposing your bank’s complexity.