During the global banking crisis that triggered the Great Recession, I was working in the banking sector, and saw close up how the idea of “too big to fail” took hold, and how it ultimately proved to be a fallacy.
Fast-forward 15 years, and while lessons have certainly been learned, I still see an alarming complacency among large banking institutions. But this time around, the risk is not around subprime mortgages or similar financial instruments, but the massive flaws inherent in banks’ complex tech stacks.
I am not suggesting that these flaws are about to trigger a global financial crisis, but they are the cause of enormous inefficiency, customer dissatisfaction, and lost opportunities – by our estimate, hundreds of billions of dollars’ worth.
Banks and other large financial institutions like the major insurance companies use multiple technologies, including Customer Relationship Management (CRM) tools, Business Process Management (BPM) systems, and many more, covering areas such as Incentives and Omnichannel banking.
What typically happens in large enterprises of any kind, not just banks, is that decision makers within separate departments build or acquire software tools, and design systems and processes that are bespoke to their particular needs. Over time, more and more technologies are deployed, and more and more systems and processes implemented, until the company may have thousands, or even tens of thousands of separate technology strands, creating data silos that hinder communication and data sharing between departments.
I call this ‘incremental fragmentation’, and it is a common feature of large, complex enterprises. One bank with which I have worked in the past found itself with more than 70,000 separate, disjointed legacy systems. And it is in the gaps between that the lost opportunities lie.
A multi-billion dollar opportunity cost
Siloed technology not only obstructs communication but also creates a detrimental opportunity cost. Departments within an organization operate in isolation, each using their specialized software and data repositories. So when a customer interacts with multiple facets of the institution, the experience often feels disjointed and inefficient, creating friction and dissatisfaction.
There is also the missed opportunity to harness the power of cross-functional collaboration. Silos discourage departments from sharing data, insights, and innovative ideas. This means that valuable insights remain unidentified or untapped, leading to suboptimal decision-making and product development.
Software entropy: The hidden tax on innovation
Curiously, there is generally an awareness of this problem within most enterprises, but also an unwillingness to tackle it, for fear that doing so risks making things worse. This ‘software entropy’ is effectively a hidden tax on innovation, leading to higher maintenance costs, increased vulnerability to security breaches, and diminished ability to adapt to changing market conditions.
Startups: Threat or antidote?
The rise of the fintech startup over the past decade has given many in the financial services sector sleepless nights. These nimbler, more agile, tech-forward companies stole a march on their legacy counterparts, many of whom struggled with reputational as well as operational issues in the aftermath of the last global banking crisis and the Great Recession that followed. Companies like Square, Stripe, and Robinhood emerged, providing innovative products, services and experiences that challenged the status quo.
And unlike the legacy institutions, these startups are largely unencumbered by technical debt.
Startups were seen as a threat. Over time, though, we have seen many legacy banks, with their greater call on resources, invest more in technology, in an effort to beat the fintechs at their own game.
However, in many cases this has exacerbated the issue of incremental fragmentation, as more and more newer technologies have been layered on top of older ones.
Rather than seeing startups as a threat, should we instead view them as an antidote to the complexity inherent in so many large institutions?
With their lean and flexible teams, cutting-edge tech stacks and agile development practices, startups thrive on agility. They have the freedom to pivot, experiment, and iterate rapidly, in ways that are much more difficult for larger enterprises. Having been on both sides of the divide, I would argue that these characteristics make startups better equipped to tackle the challenges of siloed technology and software entropy in large financial institutions.
Overcoming vested interests
Let us acknowledge the elephant in the room: There is often resistance to partnering with or co-opting startups within the very teams that stand to gain from doing so: In my experience, financial institutions’ own IT departments often view the idea of working with external providers as a threat of some kind, or an admission of failure. Really, it is no such thing.
Incremental fragmentation is a natural consequence of large enterprises attempting to keep pace with a rapidly-evolving technological landscape, and ward off the threat of the fintechs and challenger banks; while software entropy is typical and completely understandable for risk-averse organizations.
But in all organizations, the tipping arrives sooner or later; the moment when not acting, when maintaining the status quo, is costlier than any risk that may come with overhauling systems and processes.
Seizing the opportunity, gaining advantage
With a greater premium now placed on adaptability and innovation in the financial services sector, the opportunity cost of maintaining siloed technology and succumbing to software entropy can be staggering; and I have witnessed firsthand how large enterprises are in most cases the least able to address these issues.
Startups, on the other hand, with their nimbleness and innovation-focused approach, offer a compelling solution to these challenges. They represent a cost-effective means of breaking down silos, reducing software entropy, and revitalizing large financial institutions.
The true opportunity lies in recognizing the hidden costs associated with the status quo.
Our analysis conservatively estimates the scale of the lost opportunity cost to be $272B. Securing even a small share of that has to be worthwhile.
Julián Colombo is the founder and CEO of N5, a software company dedicated to digital transformation in the financial sector. An economist with over 25 years of experience, he distinguished himself during his tenure at Banco Santander, where he held global corporate positions and executive roles in more than five countries.
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