The cost advantage of neobanks! 📱

While European banks are looking to reduce their IT expenses, especially on their legacy Core Banking System, they can now take advantage of next-generation solutions and gradually reduce costs every year. If you compare traditional banks to neobanks, the latter digital players generally leverage a cloud-based next-generation Core Banking System that yields a 60 to 70% reduction in costs, depending on the player’s size. How do banks strike a balance between strengthening their organization and adapting to new digital business models? 

For more than a decade, we have witnessed a steady stream of competitive, economic, and regulatory developments that have entirely changed the face of the banking industry. Several factors drive changes to the competitive environment: 

  • Neobanks: there are now more than 300 neobanks across the globe. These neobanks have reinvented the customer experience by offering simple, fast, and mobile-first banking services.  
  • BigTech: they’ve entered the race. Apple Card and even Google Plex work with traditional banks to integrate financial services into the customer experience. 
  • Evolving customer expectations: customers seek new and innovative financial services coupled with smooth and fast communication. 
  • Regulations: they complicate IT changes at traditional financial institutions, but they also present opportunities. However, regulatory policy is becoming increasingly difficult.   
  • New technology: it creates opportunities to design new products and adapt the bank’s tech stacks.

Other factors to take into account include the significant drop in interest rates and economic growth that has become sluggish. 

These factors were all exacerbated by the pandemic. More than a year after the beginning of the crisis, European customers have come to terms with the constraints of the pandemic and are now expressing an interest in digital banking; they want to access their bank accounts and manage their personal finances remotely, securely, quickly and conveniently. This trend has been observed in 12 European markets, with 62% of customers wanting to switch from a physical bank to a digital bank, an increase of 13 points compared to the last few years. While fintech companies have begun to introduce customers to a great user experience, the pandemic has also forced banks to accelerate their investment in technology in order to develop new products faster while leveraging Open Banking to innovate.

While traditional banks have large technology budgets, the pace and ability to achieve change in short cycles remains a real challenge. One of the main reasons for this challenge is the legacy Core Banking System. It’s an inflexible IT infrastructure, costly to maintain, difficult to customize, and it presents complex challenges to integrating new technologies and third-party solutions. Moreover, it negatively affects the customer experience while reducing operational efficiency. Using a next-generation Core Banking (or Core Banking platform ) has real economic and operational advantages that not only allow traditional banks to strengthen their organization but also allow them to enter the era of neobanking

The advantages of using a next-generation Core Banking System 💡

Traditional banks are feeling performance pressures due to the inordinate expense of running a bank. Of their budgets, 67% of IT expenses can be attributed to maintaining IT systems. And 16 to 30% of overall IT spending is devoted to maintaining and upgrading the legacy Core Banking System. Therefore, traditional banks are being pulled in two different directions: external factors that reduce banks’ profitability when internal IT infrastructure is experiencing increased costs. As a result, they need to think about avoiding further erosion of their value streams and modifying their business model to create new value, generate additional revenue, and drive performance. 

Banks that have decided to migrate to a next-generation cloud-native, Core Banking System to create neobanks or BaaS, have reduced their Core Banking IT costs by 60-70%. This is due to several factors, which are: 

  • Elimination of long system update cycles 
  • Less expensive and reduced time to market for new product launches 
  • Simplification of the app landscape with new modern architecture 
  • Faster return on investment, usually less than 12 months.

The next-generation Core Banking System accelerates the pace of innovation by developing products faster, enabling the deployment of digital products, and integrating new technologies—or third parties—all of which have real business advantages. These new cloud-based technology platforms provide a competitive advantage in execution, design and positively foster a superior customer experience. 

5 principles to orchestrate a transition to a next-generation Core Banking System 🖐

Traditional banks are increasingly concerned about the limitations of their legacy Core Banking System and their relatively slow rate of change. As a result, more than 65% of the world’s banks are looking to explore the potential of a next-generation CBS. There are 5 key principles to orchestrating a transition to a next-generation Core Banking System: 

Run a dual Core Banking System.

There are 3 different ways to orchestrate a transformation of your Core Banking System. 

  • Full Replacement/Replatforming: This method requires a significant migration of existing products and customers. This is the riskiest and most expensive approach. 
  • Progressive Modernization: This method involves running a dual Core Banking System in which the customer journey, business skills, and customer data are slowly migrated to the new core. It also allows the launch of new digital products in addition to the existing ones currently being offered. As a result, there is less risk, and it requires minimal investment. 
  • Greenfield: this approach allows you to create a new brand with a new value proposition and a superior customer experience using a new technology stack—a next-generation CBS—by running a dual Core Banking System. This approach is the fastest way to bring an MVP to market (6 to 9 months) and offers a superior capacity for testing and innovation. This is the most recognized method for launching neobanks, BaaS or fintech companies.

Configure rather than customize. 

The most proven next-generation Core Banking Systems run on a back-end that relies on microservices and a low-code platform to deliver application components. Using this approach, the replatforming effort is focused on redeployment, configuration, and training. This minimizes the risk of custom code failure as well as the problem of monopolizing staff time (and associated costs) to test new capabilities. 

Continuous Delivery.

Continuous Delivery enables production software to be updated at any time or at short, regular intervals. These frequent updates, made possible by new organic architecture, facilitate the creation and development of new features and the integration of new partners. As a result, banks will be able to accelerate the pace of innovation and promote differentiation. This effect is more pronounced when using a highly configurable and flexible next-generation Core Banking System. 

The Private Cloud.

The banking industry has been slow to adopt the cloud. Banks’ primary concerns are data security and regulatory risks, despite the proven benefits of accelerated time to market, agility, and cost reduction. Banks and neobanks feel more secure in the private cloud because of the access to a dedicated environment. The organization can maintain control and define the security protocols it desires. As a result, the private cloud is more attractive to banks. 

Alignment between IT and Business Units.

While 34% of banks’ technology spending is decentralized and controlled by business units, alignment between IT and business teams is needed to improve infrastructure agility and operational efficiency. This structure allows banks to optimize operations, increase profit and improve ROI. This synergy is very successful in companies such as Amazon and Apple, where technology is integrated and aligned within the operational structure (strong use of agile methods). The customer journey, products, and also processes, such as KYC and account maintenance, will be architected and delivered from start to finish. 

Conclusion 

In summary, the window of opportunity to replace legacy Core Banking Systems is closing, and the benefits of doing so are obvious and significant. This will allow banks to reduce operating costs while driving revenue growth by quickly reaching underserved customer segments and launching new products.

  • innovation

  • neobanks

  • corebanking

  • cloud

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