5 Steps to Financial Services App Modernization

November 25, 2020 Kip Cole

In recent years, traditional financial services companies have increasingly come under attack from fast-moving financial technology firms—or “fintechs”—which use software to erode the market share of their competition. But while many fintechs’ digital-first origins do play right into the preferences of today’s younger, tech-savvy consumer, the truth is that traditional financial services companies have typically been among the first to adopt new technologies, from credit cards to internet banking—even blockchain.

Incumbent financial services organizations will want to modernize their customer experience to keep up with fast-moving fintechs. But if they want new applications to deliver tangible business outcomes, they must ensure those applications integrate with core systems. 

5 key steps

The issue for many financial services companies is less around their adoption of technology and more about the speed with which they can create new services to improve things, be it customer experience, back-end operations, or anything in between. That’s because financial services is a highly regulated industry, which is an inherent impediment to speed. It’s also because these organizations have accumulated terabytes of data over the decades, which is housed in core systems and applications that are legacy. These core systems were designed to be robust and handle huge volumes of transactions, but they were never intended to move fast or evolve easily.

Surrounding core systems with microservices and APIs to access things like account balances provides the scale and ease of access developers need when building new digital applications for end users, such as for payments or financial planning. Taking this approach to modernizing legacy cores and applications can help traditional financial services organizations make improvements to the user experience, innovate their service offerings, and leverage their huge data moats without having to make drastic changes to the core systems themselves. To that end, traditional financial services organizations looking to level the technology playing field must do five key things:

  1. Assess where you can afford to take risk

  2. Understand the regulatory environment

  3. Focus on security and stability

  4. Get the people side right

  5. Plan for success

Traditional financial services organizations that take these five steps will be able to modernize their applications and compete with even the fastest-moving fintechs.

Assess where you can afford to take risk

The modern approach to software is that of a single, continuous, and iterative process. Product teams must have the freedom to innovate, which also means the freedom to fail.

For that reason, we recommend teams work to identify the areas in which they can afford to take some level of risk. (We are not, of course, talking about the sort of risk that lands you on the front page of the Financial Times.) Typically, this means looking away from core banking systems and toward peripheral systems, such as mobile banking apps. For example, a product team at a bank can examine end user engagement systems to identify areas in which they can afford to introduce modernization practices.

This should not just be about using new technologies, but about modernizing the way the team works to match the iterative nature of modern software development and ensure the user experience is being continuously improved and refined.

Fostering a culture of continuous learning is crucial—technology changes so quickly that if your team doesn’t learn how to learn, they may end up specializing in a technology that becomes redundant in a few years.

Ultimately, the goal of app modernization is to build experiences that will translate into revenue—like a new mobile app, for example—rather than having to constantly build out new infrastructure.

Understand the regulatory environment

Not only is financial services rife with regulation, it’s arguably the most closely watched industry in the world. Australia, for example, recently wrapped up a more than year-long review into misconduct within the sector.  

In addition to the extant regulations around industry-specific issues like lending, insurance, and financial crime, organizations must also factor in the various consumer data protection laws that have been introduced around the globe, like the EU’s GDPR and Australia’s mandatory data breach notification laws.

When looking to modernize applications, it’s important to consider every option available for protecting consumer data. Any personally identifiable information (PII) collected—whether from online forms or sensors in vehicles—should be anonymized unless identification is absolutely necessary. In those instances, end-to-end encryption is strongly recommended.

That is why it’s important to ensure the underlying infrastructure is transparent and can facilitate operations from anywhere. Modern solutions like service meshes enable you to capture PII in your system directly, then leverage hyperscale platforms to anonymize data processing on-premises. A hybrid cloud approach can be hugely beneficial to this process. 

Focus on security and stability

When looking to modernize applications, it’s important to consider security from the start, not later on, as an afterthought. That's because when you have security or stability issues you stand to lose customers or risk getting fined by a regulator—both of which will impact the business’s bottom line.

With so many different technologies available, financial services organizations should make sure that whatever they are moving to is secure by default and has a proven track record. For this reason, we recommend using open source technology wherever possible. Open source products typically have huge communities looking very closely at the code, which helps iron out bugs and security issues, in turn ensuring you have a more secure product.

Since stability and security are ultimately the result of longevity, it’s important to choose technologies that have a proven track record. Over the last two decades, most systems in financial organizations have been written in Java, which is robust but not easily changeable. Instead, teams looking to modernize applications can use a framework like Spring. It has a huge community around it that closely monitors and patches vulnerabilities, so those products would be secure by default. 

Get the people side right

Key to delivering any solutions are people, processes, and technology. In most instances, technology is the easiest one to get right.

Financial services organizations have historically operated with a project-oriented mindset, which over the years has let employees grow accustomed to a start-stop approach. But such an approach is not conducive to success in app modernization, where teams need to view products not as a series of projects but as one product to which they are making continuous improvements. And as I noted, teams need to have some budget for failure, which means executive buy-in is critical for success.

The structure and capability of your product team is also important. Tech executives should recognize that it is nearly impossible to compile a full-stack team complete with experts in everything from UX to networks to data centers. But it is important to have a strong product owner with a deep understanding of customer needs, someone who can articulate requirements and expectations clearly and give definitive answers to your engineers’ questions.

Financial services organizations can split their DevOps teams by area of responsibility. Application DevOps teams can focus on modernizing online or mobile banking products, while platform DevOps teams can dedicate their energies toward improving the banking platform, which is also a product. But organizations should not separate DevOps teams from testing. At VMware Tanzu, we believe it is important to have testing, quality assurance, and production support within the core product engineering team.

Plan for success

We also believe that to become truly successful in the cloud era, all businesses must become software businesses. That means fast-moving companies will eventually overtake large businesses.

Of course, large companies like banks and insurers can also become fast-moving companies, but they need a road map to get there. That’s why we created the Build to Adapt Benchmark, a quantitative framework of indicators that gauge how well an organization builds software that delivers business value.

We believe effective software development supports the following business outcomes: speed, stability, scalability, security, and savings. We then look at measurable indicators that fit into one of these outcomes.

For example, one thing we track to measure speed is “customer feedback frequency,” or how often feedback is collected from the end users of our customers’ software products. For savings, we look at things like “developer time allocation,” which is the ratio of developer time spent writing new code that drives value to the time spent maintaining old code. These are specific and measurable indicators that can be continuously improved by product teams.

Financial services organizations should consider the most important indicators that will drive value for their business.

Moving forward

Financial services organizations have a wealth of data at their disposal that can help them create amazing experiences for their customers and competitive advantage against upstart fintechs. But to use it in a constructive and sustainable way, they must take a modern approach to software development that supports a culture of continuous learning and innovation.

VMware Tanzu partners with banks and other financial institutions to accelerate software delivery and modernize applications while reducing operating costs and risk. We work side by side with your teams to help them put smart applications into action, delivering always-on insights, in context, for dynamic, game-changing business and customer outcomes.

For a deeper dive, check out this Forrester study, which surveyed 100 financial services CIOs and SVPs and found that modernizing apps improves customer experiences and boosts revenue.

About the Author

Kip Cole is VP, Asia Pacific & Japan, VMware Tanzu.

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