Digital transformation has become a key boardroom agenda in legacy banks and financial institutions and a focal point of industry conversations—for good reason. As discussed in our recent blog, the goal is to reinvent service delivery models with digital banking products, which have demonstrated immense potential in boosting customer acquisition, engagement, and retention while radically streamlining operations and reducing costs.
However, moving from legacy to digital is not a simple feat. Research shows that the majority of financial institutions undertaking digital transformation often fall behind their objectives, and only 30% manage to successfully transition. They are often held back by siloed and complex IT infrastructures, technical debt, resource constraints, low speed of transition, among other challenges.
But managed services provide a way to flip the odds. In this blog, we look at how adopting a managed services approach in digital transformation can enable financial institutions overcome these challenges, accelerate their transition, and unlock the full potential of modern banking.
As financial institutions evolve, they require more sophisticated solutions that balance flexibility, compliance, performance, and integration. And this is where customizable, adaptable platforms come into play, offering a blend of ready-to-market modules and the flexibility to meet unique business needs. With 30% of fintech startups struggling to differentiate their offerings, leveraging customizable platforms enables these institutions to create tailored solutions for distinct markets.
In this blog, we discuss why low-code or no-code platforms might not be the best choice for digital banking and fintech, and how customizable platforms provide a more strategic path forward.
Pain Points of Legacy Banks in Digital Transformation
One of the key impediments to success in traditional banks and financial institutions is the inability to separate business functions from IT operations. They are often too absorbed in managing complex IT infrastructures, which distracts them from their core operations—delivering value to customers.
During digital transformation, the lack of sufficient expertise often leads to critical missteps. Banks may fail to engage all relevant stakeholders in the development of their strategy and blueprint, resulting in incomplete or misaligned goals. They may also underestimate the extent of changes needed in existing business processes, which can hinder the success of the transformation. Additionally, they often do not fully implement the magnitude of changes required to truly realize the long-term benefits of digital transformation.
But that’s not all; other critical factors that derail digital transformation efforts in banks include:
Siloed and Complex IT Architecture
Decades of technology investments and system upgrades have left many legacy banks with fragmented and outdated IT infrastructures. These systems, often developed without a cohesive technology strategy and built on aging core platforms, have evolved in silos, making it difficult for them to communicate and work together effectively.
For banks undergoing digital transformation, these fragmented systems become a major roadblock. They make it difficult to implement new technologies or adopt innovative solutions because the existing infrastructure is not agile enough to integrate modern applications or tools. As a result, banks struggle to provide seamless customer experiences, create new digital products, or leverage data for strategic insights.
Furthermore, the complexity of managing these disconnected systems requires a significant amount of time, resources, and expertise. Banks are often forced to rely on costly, time-consuming workarounds or custom integrations, increasing operational overhead and diverting attention from customer-centric innovation.
Technical Debt
Technical debt refers to the cost incurred from choosing quick, short-term solutions over more sustainable, long-term options. In legacy banks, this often manifests in outdated systems and inefficient code that must be maintained and patched over time, rather than being replaced or modernized.
McKinsey describes technical debt as “dark matter” – something you know exists, can infer its impact, but can’t fully see or measure. This “dark matter” brings a range of drawbacks, including product delays, hidden risks, and spiraling costs, which collectively are a threat to the success of digital transformation.
In the McKinsey study, it was found that technical debt accounts for 20% to 40% of an organization’s entire technology estate – before depreciation, and its impact continues to grow over time. As technical debt accumulates, it creates a significant drag on performance, with 60% of CIOs surveyed reporting that technical debt levels had risen to noticeable levels over just a span of three years.
Resource Constraints
Limited resources – both financial and human – is yet another impediment to successful digital transformation in legacy banks. Statistics indicate that 70% of digital transformation initiatives exceed their original budgets, while 7% end up costing more than double the initial projections. This often results from inadequate planning and forecasting, where banks fail to fully account for the complexity and scope of the transformation. The lack of accurate resource estimation leads to cost overruns and delays, ultimately hindering the bank’s ability to execute its digital transformation strategy effectively.
However, all of this boils down to insufficient tech talent and gaps in expertise. Legacy banks often struggle to recruit and retain skilled professionals who are well-versed in modern technologies. The scarcity of in-house tech talent makes it challenging for banks to execute transformation plans, impeding their progress toward modernization.
Slow Pace of Digital Transformation
Legacy banks face significant challenges in keeping up with the pace of innovation demonstrated by their digital-native counterparts. Research reveals that fintechs and neobanks typically roll out new products and features every two to four weeks, while legacy banks take four to six months to achieve similar milestones. Moreover, a McKinsey study highlights that traditional banks are 40% less productive than their digital-native peers. Addressing these gaps requires a modernized innovation strategy, and leveraging managed services can provide the scalability, agility, and expertise needed to accelerate transformation and close the speed and productivity gap.
Operational Risks During Transition
Transforming legacy systems to digital platforms introduces significant operational risks that can jeopardize the success of the initiative. These risks often manifest in several critical areas:
- Data Migration Challenges: Transitioning from outdated systems to modern infrastructure can lead to data inconsistencies, loss, or corruption if not managed meticulously.
- System Downtime: Upgrading or replacing core systems often requires temporary service disruptions, potentially affecting customer trust and satisfaction.
- Compliance Breaches: Navigating stringent regulatory requirements during transformation increases the likelihood of errors, which can result in penalties or reputational damage.
- Change Management Issues: The introduction of new processes and technologies requires comprehensive training and adoption strategies to avoid disruptions in operations and workforce productivity.
Overcoming the Pain Points Through Managed Services
Managed services present strategic solutions to address the many pain points that hinder progress in traditional banks. The 2020 BCG study, which found that only 30% of financial institutions succeed in digital transformation, also outlines fundamental steps that, when leveraged, can help financial institutions increase their success rate from 30% to 80%. One of these factors is “Deploying High-Caliber Talent,” which requires management to identify and free up key resources to drive digital transformation. This can be precisely achieved by delegating technology operations to seasoned managed services providers, allowing the bank to focus on its core business.
Below are some of the strategic ways through which managed services enable legacy banks and financial institutions on their digital transformation journey to overcome these challenges.
Providing Technical Expertise for Digital Transformation
Managed Services Providers (MSPs) bring the skills and experience gained from working with similar institutions to help turn digital transformation failures into success. Their deep technical expertise enables banks to bridge the knowledge gap, develop clear implementation plans, and create well-thought-out, effective roadmaps.
Ideally, managed services providers are financial technology companies that have overseen numerous projects and have a proven track record of managing complex transformations. Their understanding of industry best practices and lessons learned from past projects equips them with the insights necessary to help banks avoid common pitfalls and accelerate their transformation journeys.
Besides, their support is customized to meet the unique challenges and objectives of each institution – they provide personalized support that aligns with the bank’s strategic goals. This approach not only mitigates risks but also enhances the overall efficiency and success of the transformation process.
Sustainable Innovation to Address Technical Debt
MSPs work hand in hand with financial institutions to help identify and prioritize areas where technical debt is most detrimental, then develop tailored strategies to replace inefficient components with modern, scalable technologies. Since much of this technical debt originates from core banking systems, financial institutions may choose to work with MSPs to fully replace their core systems, gradually modernize, or adopt a progressive modernization approach.
This sets the stage for sustainable product development and innovation. Building on an agile, flexible, and scalable core banking system like that of our Digibanc platform allows financial institutions to efficiently evolve and respond to changing customer demands and market conditions. They are no longer held back by technical debt, as these modernized architectures enable seamless upgrades, integrations, and the swift deployment of new features, eliminating the need for quick fixes.
Flexible Resource Access Model
Instead of having to invest heavily in permanent in-house resources, banks can scale up or down depending on the specific needs of their transformation journey. Managed services offer a flexible resource access model, which allows banks to adapt quickly to shifting demands and project requirements. This approach ensures that banks can obtain the right expertise and technology when needed, without incurring the high costs associated with long-term staffing.
Another related approach is Staff Augmentation, where financial institutions hire external talent temporarily to fill specific skill gaps or support digital projects. At Codebase Technologies, we combine Managed Services and Staff Augmentation, providing specialized onsite and offsite teams to support your entire digital transformation journey—from planning to execution and ongoing innovation. You also have the flexibility to insource the team at any stage of the innovation process, allowing for a seamless transition without the burden of building and managing an internal team.
Fast-Tracking Innovation
With their expertise, technological capabilities, and experience, managed services providers enable financial institutions to significantly reduce product innovation timelines and achieve record speed in going to market. This results in faster development cycles, quicker deployment of new features, and more agile responses to market shifts. A prime example is Codebase Technologies’ managed services support for Bahrain Commercial Facilities Company (BCFC). In this initiative, we supported BCFC in implementing a co-branded youth card under the commercial brand IMTIAZ on their digital lending app, Sahel. Leveraging managed services, this solution was seamlessly integrated into the application in under two weeks, thanks to the team’s expertise and familiarity with BCFC’s infrastructure.
Reducing the Risk of Failure During and After Digital Transformation
As we’ve just seen, managed services empower financial institutions with advanced expertise, helping to mitigate potential loopholes that could derail the digital transformation journey. In addition to this, they provide ongoing post-transformation support, ensuring that newly implemented systems are consistently monitored and maintained to prevent disruptions. This proactive approach enables banks to stay ahead of any emerging challenges, whether related to system performance, security, or compliance. With the right support in place, institutions can maintain stability, optimize performance, and ensure long-term success.
Steps to Succeed with Managed Services During Digital Transformation
Achieving true success in digital transformation with managed services requires financial institutions to be diligent in their approach. From experience, financial institutions can benefit from executing a structured six-step blueprint that ensures a seamless transition while maximizing the value of managed services. Below is an outline of these essential steps to guide legacy banks on their journey toward modernization.
1. Define Strategic Objectives
Clearly outline the goals of the digital transformation and how managed services align with them. Whether it’s modernizing legacy systems, improving customer experience, or enhancing operational efficiency, understanding priorities ensures alignment between the institution and the managed services provider.
2. Assess Current Infrastructure and Gaps
Conduct a comprehensive audit of existing systems, technologies, and processes. This assessment identifies areas of technical debt, skill shortages, and operational bottlenecks that managed services can address effectively.
3. Select the Right Managed Services Partner
Choose a provider with deep expertise in financial services, proven track records, and a scalable tech foundation. Look for flexibility, compliance with industry regulations, and the ability to offer customized solutions that cater to your institution’s unique needs.
4. Develop a Phased Implementation Plan
Avoid abrupt changes by adopting a phased approach to integrating managed services. Start with non-critical operations or pilot projects to evaluate the provider’s performance and gradually expand to core systems.
5. Collaborate for Change Management
Work closely with the provider to implement training programs, streamline workflows, and ensure employee adoption of new systems. Effective communication and collaboration minimize disruptions and build internal support for the transformation.
6. Monitor Performance and Continuously Optimize
Establish KPIs to track the performance of managed services and their impact on transformation goals. Regular reviews with the provider help refine processes, improve outcomes, and adapt to evolving business needs.
Final Thoughts
Much as digital transformation is one of the most discussed and prioritized subjects in the financial sector today, it’s evident that the bottlenecks are equally overwhelming – especially for legacy banks. However, managed services have emerged at the perfect moment to help ease the burden that traditional banks have faced for the longest time.
Financial institutions looking to succeed in this process need to implement the six-step framework while mirroring their digital transformation objectives. The most fundamental step in the framework is selecting the right MSP, as those are the enablers who will either pivot you to success or limit your progress.
As mentioned earlier, what makes Codebase Technologies stand out as an MSP is our unique blend of managed services and staff augmentation. Through this approach, we have been able to support legacy financial institutions in transitioning to digital and sustaining their business growth and technological evolution. Learn more here.
Tagged:
- africa, apac, digibanc, digital banking, digital transformation, fintech, mena
Share this page
Raheel Iqbal, Managing Partner
Experienced Board Member with a demonstrated history of working in the financial services industry. Skilled in Business Planning, Management, Employee Training, Financial Accounting, and Product Development. Strong business development professional with a Bachelor of Science (BSc) focused in Management (Accounting & Finance) from University of Manchester - Manchester Business School.
