Cost cutting in Banking IT – But how?
Introduction
As a consultant and software vendor for Central European banks, particularly those with total assets ranging from €5 to €100 billion, we’ve observed increasing pressure on boards to reduce IT operational costs. Every year, we negotiate pricing adjustments to account for inflation, sometimes engaging in lengthy 3-6 month discussions for a modest €10k increase in annual maintenance fees. While we understand the bonus criteria for senior management (B-1 level), the impact of inflation on wages cannot be ignored.
Many banks also enlist international advisory firms to optimize processes and lower costs, which is a good practice. However, it’s important to remember that in an IT company, 90% of the expenses are related to wages. If you want a high-performing, innovative company, you need the best programmers and analysts.
Recently, after a conversation with a COO of a large bank, I promised to share my nearly 30 years of experience in banking IT and suggest how to effectively optimize costs. Let me share with you my thoughts as well:
Common cost-cutting ideas
1. Change the Core Banking System
Switching a core banking system (CBS) is a massive undertaking, often taking 5-7 years for complex banks. By the time the new system goes live, it may already be outdated. CBS migrations also overwhelm bank employees with IT tasks, pulling them away from core business activities.
In some cases, a CBS change is necessary, particularly if the technology is so outdated that it threatens operations. For example, when no further server upgrades are available, or the programming language is so old that finding qualified personnel is nearly impossible, it’s time to modernize.
However, when replacing a CBS, banks often transition from one monolithic system to another—this is a mistake. The best approach is a slimmed-down CBS with only 3-6 essential modules (customer accounts, loans, deposits). Before making the change, banks should first slim down their current CBS by outsourcing non-core functionalities (payments, reconciliations, loan origination) to independent modules from specialized vendors.
In general, I believe the new CBS will not help the bank either in cost cutting or in digitalization.
2. Address low hanging fruit
Start by replacing costly software components wherever possible. For instance, many high-quality database servers, and containerisation platforms are available almost for free, which can be an ideal option unless your operations require processing millions of records daily (e.g., in lending).
There’s no reason not to utilize them where appropriate.
3. Embrace AI Solutions
Incorporating AI into your banking operations is more relevant now than ever. AI can help reduce costs across many areas. As an IT company, we focus on AI applications that can immediately lower costs:
- Automated Testing with AI: Streamlining your testing processes.
- Program Skeleton Creation with AI: Faster and more efficient code generation.
For more detailed and Business related advantages and information, check out our previous blog posts on AI-driven cost-cutting strategies.
4. Leverage Low-Code Platform
In today’s rapidly evolving financial landscape, digital transformation is essential. Traditional software development is time-consuming and costly, making low-code platforms a game-changer. Implementing low-code solutions enables banks to be more agile, innovative, and cost-efficient.
Why Low-Code is Key to Agility
- Accelerated Time-to-Market: Low-code platforms provide visual development environments with pre-built templates and drag-and-drop components, allowing banks to quickly launch new services in response to market demand.
- Flexibility and Scalability: Low-code allows easy updates, from integrating new payment methods to regulatory changes, without extensive coding.
- Cost Efficiency: By reducing the need for large development teams and long project timelines, low-code cuts costs, freeing up resources for strategic initiatives like enhancing cybersecurity or AI-driven insights.
- Empowering Citizen Developers: Non-technical staff can contribute to development, eliminating bottlenecks and enabling more rapid innovation.
- Legacy System Integration: Low-code platforms seamlessly integrate with legacy systems, reducing the need for costly infrastructure overhauls.
Example: Digital Banking Transformation
Consider a mid-sized bank launching a new digital lending platform. Using traditional methods, the project would take over a year with a large team. By adopting a low-code platform, the bank was able to launch in under six months with a smaller team, drastically cutting costs and gaining a competitive edge.
Conclusion
As the banking industry continues to evolve, speed, agility, and innovation are crucial. Low-code platforms offer banks a powerful tool to cut costs while enhancing their ability to adapt and innovate. Now is the time to embrace low-code and AI to stay ahead in an increasingly digital banking world.
Ready to Accelerate Your Digital Transformation?
Discover how low-code platforms can drive agility and innovation in your bank. Contact us today for more details or request a demo!