Posted: 17/10/2022 | Read time: 3 minutes
Growing competition in the banking industry
The emergence and rise of challenger banks and fintechs over the past 15 years have transformed the banking sector.
Some 40% of consumers now use a fintech platform for their day-to-day banking, according to research from McKinsey. And more than nine in 10 of those are satisfied with their experience.
Customers now expect traditional banks to offer similar technology to fintechs, but some traditional banks are not keeping pace with the speed of innovation. Many still rely on core technologies like COBOL – a programming language from 1959.
Despite rising competition, incumbent banks are still in an enviable position. Around four-fifths of European consumers who consider a traditional bank their primary provider say they trust them either completely or mostly, an EY survey found.
But to make the most of public trust and strengthen their position, traditional banks must modernise. Those still working with outdated legacy stacks cannot hope to compete in, according to Citi, “a world that is mobile first…and increasingly dominated by internet platform-based conglomerates.”
Back-office efficiency
Part of this transformation will include driving higher levels of efficiency in back-office financial control processes. After all, banking firms cannot succeed without effective reconciliation procedures in place.
It is imperative that banking firms understand the risks posed by outdated legacy systems. That is why we’ve outlined five key risks firms need to know – and how automating reconciliations can reduce costs, increase efficiency and empower staff.
The 5 key disadvantages of legacy systems in banking:
1. Manual intervention
Manual reconciliations increase both the risk of error and the likelihood of adjustments. The ease with which data can be deleted and edited harms data quality, validity, and integrity.
2. Regulatory breaches
The cost of non-compliance is substantial. Trying to meet the requirements of regulatory reporting with legacy systems is complex and costly.
3. Disparate systems
Also known as “spaghetti systems”, the infrastructure behind traditional banks is made up of multiple systems tangled together. As banks have had to implement mainframes to support a single purpose or application, some have accumulated more than 20 separate systems over time. Problems arise because systems are not designed to interact with one another.
4. Poor financial data control
Banks conducting reconciliations using outdated systems will lack the real-time data points required to inform decision-making and the financial data control required to satisfy regulators and auditors.
5. Operational inefficiencies
Extracting and sharing data across legacy architecture is time-consuming as it cannot consolidate multiple processes in one place. They therefore demand constant maintenance to keep pace with digital transformation.
The benefits of automated technologies
Firms can expect numerous benefits when they automate. This includes enhanced data quality, improved profitability and an increase in employee job satisfaction.
The three main benefits are:
1. Reduce costs
Challenger banks’ costs are 40% to 70% lower than traditional banks because they use modern technology. Using intelligent automation to reduce manual processes will allow incumbent banks to save money and remain competitive. An automation platform like AutoRek, for example, delivers at least a 75% cost reduction with an ROI in fewer than nine months.
2. Meet regulatory obligations
The importance of effective financial data management is becoming more important, especially as regulations in the banking industry become more stringent. Automation is critical if firms want to meet PSD2 mandates and GDPR rules.
Best-in-class solutions will ingest, validate and enrich data to ensure validity and transparency. Reconciliation systems should also be flexible enough to adapt to evolving regulatory requirements and future growth plans.
3. Empower staff to focus on value-added tasks
When working in a legacy world, skilled staff often spend their time on repetitive and tedious manual data work. Automation frees up staff to focus on more value-added tasks like investigating queries and breaks.
To find out more about what AutoRek can do for your firm, head over to our banking hub.