Category: Fintech

Paradigm shift to replace the legacy technology stack of banks [and wealth and asset managers]

The McKinsey & Company article “Banks’ core technology conundrum reaches an inflection point” presents an insightful perspective on the core technology challenge that banks are currently facing, which is now reaching a critical point. While this issue has been discussed for a long time, two factors are making the situation more pressing than ever. Firstly, banks will soon face a talent shortage in their legacy technologies. At the same time, they will have to fight for talent in new technologies. Both talent shortages will put significant pressure on their ability to maintain and evolve their systems. Secondly, legacy technologies are consuming a growing share of banks’ budgets, leaving them with limited resources to pursue strategic initiatives that can drive innovation and transformation.

Another interesting element discussed in this article is how Thought Machine is thinking about solving part of the problem by running products as code and making them independent of the platform, which can be composed of tens if not hundreds of different systems for incumbent banks: “We have a system of smart contracts that run on the platform, but they’re separate from it” says Paul Taylor, founder and CEO of Thought Machine. Brian Ledbetter, a senior partner at McKinsey & Company, also brings up the concept of putting risk controls in code and not in processes for risk management. After infrastructure as code, which we have been discussing for quite some time, we are adding controls as code and products as code, significant paradigm shifts that are complicated for incumbent banks still dealing with mainframes and systems that are 20+ years old.

The challenge of legacy IT stacks and technical debt for incumbent banks has been discussed for decades. Incumbent banks must not look at this as a systems replacement, but as an enabler and a necessity for their future. To be successful, incumbent banks must educate their business on technology, have a technology talent strategy, and bring people to the center of their digital transformation.

Interesting video from the CEO of Thought Machine.

Being a pure robo-advisor is not that easy

While robo-advisors have been addressing a real problem, it is challenging to be a robo-advisor only from a business perspective. Even Betterment is struggling with its USD 33.8 bn assets under management and 730’000 customers (as of March 2022). Incumbents have captured a large part of the robo-advisor business and benefits. As reported by INSIDER, Betterment “is geared toward selling retirement plans to small and mid-size businesses, and to cater to financial advisors and their wealth-management firms.”