How tech debt is stifling tech modernization

And as you may have noticed, your colleagues are relying on you to spearhead an era of unprecedented business growth and innovation in your bank. After all, you hold the keys to unlocking the vast potential of cutting-edge solutions and digital strategies.

Yet a perplexing reality persists — a significant number of tech leaders in financial institutions are struggling to harness the full power of their technological arsenal and translate it into tangible business value. In fact, McKinsey estimates that on average, banks convert just five to ten cents of every dollar of tech spend into additional business value.

So why, in this era of immense technological prowess, do so many bank technology leaders find themselves caught in a quagmire of unfulfilled promises and unrealized potential? What’s holding you back? Well, in a word, technical debt.

What is technical debt?

Technical debt is the tax you pay for integrating convenient, but less-than-ideal solutions into your operations. While these quick fixes may work out in the short term, you’re borrowing against the future and will have to pay back the effort — with interest. That’s because these fixes create a domino effect, compounding the complexity of your technology.

Essentially, it’s an accumulation of the off-balance-sheet costs of all the work the IT department needs to do in the future. And it’s complicating not only your day-to-day work, but also your ability to make an impact.

Technical debt compounds the work you have to do

Don’t believe us yet? We get it, it’s hard to understand the scope of the problem when it affects everything you do. But the numbers speak for themselves. Results from a McKinsey survey reveal that technical debt is:

1. Eating into your innovation budget: 10-20% of the technology budget dedicated to new products is diverted to resolving issues related to tech debt.

2. Increasing your total cost of ownership: Tech debt amounts to an estimated 20-40% of organizations’ entire technology estate before depreciation. For larger banks, this translates into hundreds of millions of dollars of unpaid debt. And things aren’t improving. In fact, 60% of the CIOs surveyed felt their organization’s tech debt had risen over the past three years, but less than 20% of their annual budget was allocated to paying it down.

3. Increasing your time to value: Actively managing your tech debt could free up to 50% more time for engineers to spend on work that supports business goals.

(Source: Tech debt: reclaiming tech equity, McKinsey, 2020)

And, unfortunately, tech debt isn’t the only challenge you face — it’s just the most pressing. But you’ll never begin to reduce your debt if you don’t improve on the principal issue: legacy systems.

Legacy systems are holding you hostage

Complex, monolithic legacy tech has long been the bedrock of financial institutions, providing stability and continuity over decades. However, these same systems often become a double-edged sword and eventually lead to a plethora of technical problems that limit progress and innovation.

Let’s take a look at the top three ways legacy systems are actively stifling your progress.

1. Manual software delivery and outdated development methodologies: Banks’ legacy systems often lack automated deployment pipelines, continuous integration and delivery (CI/CD) capabilities, DevSecOps practices, and robust testing frameworks. That limits their agility, and the delivery of software updates and new features becomes a manual, time-consuming, and error-prone process. This leads to:

• Slower time to market, thanks to longer lead times on shipping new features

• An increase in your cost to serve and total cost of ownership

• A reduction in your ability to respond quickly to market demands

2. Integration complexities and interoperability nightmares: Legacy systems are built on outdated architectures and technologies that lack modern integration capabilities. So when you combine these systems with new applications, third-party services, or emerging technologies, it quickly becomes a complex, time-consuming process. Without standardized interfaces and protocols, you’ll end up having to deal with bespoke solutions and custom integrations that eventually become so unique to your bank, they become almost impossible to migrate during any modernization attempts. This creates even more technical debt, due to the difficulty of managing and maintaining a whole web of interconnected systems. This results in:

• An inability to scale your architecture at pace with your bank’s growth ambitions

• A jump in both your total cost of ownership

• A decrease in the quality of your customer and employee experiences

3. Low straight-through processing (STP) rates: Straight-through processing refers to the ability to automate end-to-end transaction processing without the need for manual intervention. But the complex, monolithic structures of legacy systems often lack the seamless integration and automation capabilities required for high STP rates. As a result, banks experience a high level of manual intervention and human touchpoints throughout various stages of transaction processing. And it gets worse: low STP rates limit your bank’s ability to scale and handle increased transaction volumes efficiently. As you grow and your number of transactions rises, manual processing becomes a bottleneck. That means:

• Higher operational costs

• Lower overall efficiency

• A delay in transaction processing times and higher risk of error, which results in a poor customer experience

With all this considered, it’s easy to see why many CTOs feel like they’re running in place. It’s a tough situation — but luckily one with a solution.

What legacy will you leave behind?

As a technology leader in the banking industry, you likely find yourself at a crossroads — a pivotal moment where the legacy you leave behind will shape the future of your institution. The challenges posed by technical debt and complex legacy systems have been laid bare.

The question that demands your attention is a profound one: what legacy do you want to leave behind?

Will you be remembered as a custodian of outdated technology, burdened with costly technical debt and shackled by the limitations of the past? Or will you be heralded as a transformational leader who fearlessly challenges the status quo and resets the table stakes for your bank's future?

The answer lies in your willingness to embrace change, to forge a new path forward by harnessing technology as a powerful tool for creating business value. It requires a bold vision and a commitment to modernizing your tech architecture — the very foundation upon which your institution stands.

By modernizing your tech architecture, you unleash the potential to drive innovation, streamline operations, and deliver unparalleled customer experiences. It’s through this transformation that you can break free from the constraints of legacy systems and overcome the hurdles that have hindered your ability to create true business value.

Imagine a future where agility becomes your competitive advantage, where data flows seamlessly, empowering you to make data-driven decisions with confidence. In this landscape, customer experiences are elevated to new heights, bolstered by cutting-edge technology solutions that anticipate and exceed their needs. Naturally, your bank thrives as an industry leader, setting new benchmarks for success.

The path to this future lies in your hands.

But where do you begin? What are the questions you should ask? We know it can be overwhelming — which is why in the next chapter, we’ll help you get started by narrowing down your options for modernizing your bank’s architecture.