05/07/2024
As seen on Global Banking and Finance Review, originally published in April 2024.
In the ever-evolving landscape of banking, the drive toward digital transformation is not just a desire but a necessity. With extreme competition and rising customer expectations, banks must continuously innovate to stay ahead. According to Digital Banking Report, the number one goal for financial institutions is improving the customer experience. While this is a major priority, institutions often find themselves “stuck in quicksand” when trying to implement new digital tools and modernize call centers to improve the customer experience because they have technical debt that they failed to address first. Just like trying to move forward while trapped in quicksand, banks will find their efforts to implement new technologies come to a halt due to the underlying problems that arise from not addressing technical debt. This can lead to increased system complexity and operational disruptions, undermining the outcomes the new technology was designed to achieve.
What exactly is technical debt? It’s the compromises made across an organization’s technology strategy to meet immediate needs, often at the expense of long-term sustainability. Think of it like financial debt in corporate finance. Just as different financial debts come with varying levels of urgency, not all technical debts are created equal. So, the first step for financial institutions is identifying and prioritizing their technical debt.
Picture technical debt as a spectrum. At one end there’s first lien debts requiring immediate attention. First lien technology debts encompass critical areas like cybersecurity, disaster recovery and data integrity issues that impact customers or revenue. Neglecting this first lien technical dept poses severe risks. Without robust cybersecurity measures and reliable disaster recovery protocols, banks are vulnerable to cyber threats and operational disruptions, jeopardizing customer trust, the bank’s reputation and negative financial outcomes. Similarly, ensuring data quality and integrity is essential for informed decision-making and long-term sustainability.
Next on the spectrum is mezzanine technical debts, which includes issues like aging infrastructure and inadequate data management. While these may not need immediate attention like first lien debts, they cannot be completely disregarded. Neglecting infrastructure modernization and data optimization will stunt the institution’s growth and agility, making it almost impossible for banks to implement new innovative technologies without encountering “quicksand.”
However, just like in corporate finance, not all technical debts necessarily warrant action. You can think of this type of technical debt as common equity debt similar to public shares in corporate finance. Technical debt that falls under this category can be managed through strategic planning and resource allocation. Once it’s addressed, an institution might experience more efficient processes, but this type of technical debt does not critically impact an organization’s operational effectiveness.
Before deploying a new tool, it’s imperative to understand an organization’s technical debt landscape and develop a debt management strategy ahead of implementing an innovation. Without this evaluation, institutions risk that “quicksand” feeling because of unforeseen challenges and resource limitations.
Consider the analogy of constructing a house. Before you do anything, it’s important to ensure the ground you’re building upon is solid. Similarly, before implementing modern customer experience tools, banks must ensure their foundation is solid through operational efficiency and customer experience technologies. The “house’s foundation” is made up of the operational technologies that address cybersecurity, data management and API management. When there are flaws in the technology, it’s akin to trying to remodel a house on cracked foundation – there’s inevitably going to be a problem maintaining the property over a long period of time. Likewise, core customer experience technologies must be in place before involving the latest and greatest customer experience tools. When core customer experience technologies such as CRM systems, customer support tools, payment platforms, and mobile applications fail to generate value on their own and do not contribute to an omni-channel customer experience, it will be increasingly difficult for financial institutions to implement new technologies like Large Action Models (LAMs), Generative AI, and predictive analytics tools. When institutions then take the step to identify and address these technical debts, the new technologies are not only implemented more efficiently, but the returns on investments are much more significant.
By adopting an understanding of technical debt and its importance, banks can develop a pragmatic approach, prioritizing critical areas while strategically addressing long-term challenges. Although opting for the flashy new customer experience tool might appear to be the best course of action, it is too often a short-term benefit that can’t be sustained until the “foundation” of underlying technology and processes are brought “up to code.”
