Technology debt in financial services

We discuss what technology debt is, why it is a growing problem for financial services, and suggestions for how to overcome the prevalent issue 

Technology debt is unavoidable. It is formed by a number of factors, including a failure to update infrastructure platforms and data bases, running legacy systems which are too old to be supported, investing in highly customised and inflexible software unable to be integrated across multiple business functions, and a non-standardised data model causing poor data quality and inconsistency. In essence it’s no different from other forms of debt; tech debt accumulates and can easily be mismanaged and overlooked. A recent survey with CIOs from financial services and technology firms revealed between 10-20% of new product technology budgets is redirected to resolving issues related to tech debt. 

However, the inevitability of accruing debt does not mean it should be neglected. This year has been a wake-up call for financial services. They have become more attuned to the problem as the pandemic has expedited digital transformation. Across the sector, financial institutions have needed to reconsider their infrastructure and processes in order to close offices and retail branches and enable nearly all employees to continue running operations remotely. 

In some cases, this mobilised a wider digital assessment of the organisation and the services provided to clients and customers. The 2020 World Retail Banking Report, for example, revealed customer behaviours shifted substantially this year with over half (57%) of consumers now preferring internet banking, up from 49% pre-COVID-19, and 55% preferring banking mobile apps, compared with 47% previously. Importantly, financial institutions have needed to deliver new products and services at pace to support their customers, yet the shifts in behaviours we have seen this year are expected to remain long after the end of the pandemic. 

Financial services need to consider business continuity, growth and transformation in both the short and long-term. While we have seen financial services fare well during this period of disruption after recent years of digitisation, there are emerging concerns of stability as the sector carried out years of change in just a few months. Although financial services have been able to pivot and adapt, we have to ask whether the change has been realised on a superficial level, causing deeper complications to their IT landscape and accumulating further tech debt. 

Here are a few suggestions of how to address the problem of tech debt: 

1. Know the complete technology landscape of the organisation 

Without awareness of an organisation’s IT infrastructure, tech debt cannot be addressed. The chief information or technology officer must have a comprehensive understanding of what systems are currently in place - in which departments are they being used and by how many people, how long they have been in operation, and what hardware and databases they require. 

Once there is a completed detailed map of the infrastructure, senior leaders can truly consider their current digital state, what problems need to be addressed in the short, medium and long term, as well as begin discussions around the optimal future state of the organisation. By identifying complications as well as aspirations, the organisation can make well-informed decisions on how to allocate resources and where to invest to ensure the next stage of digital transformation addresses accumulated tech debt as well as makes stable progress towards the digital future. 

2. Focus on operational resilience and risk 

Operational resilience (OR) is the topic of the moment in financial services with proposed changes coming from the UK regulators expected early next year. The global pandemic brought new meaning and importance to OR as this year was an unprecedented test of firms’ ability to adapt, adjust, and recover from challenges to operational continuity. 

A considerable factor in the impact tolerances of business services is technology and the reliance on third party vendors. Financial institutions need to be aware of not only what systems are required to carry out their services but also what those systems rely on and what protocol they have in place to overcome any risks associated in the technology provision. 

Financial services need to be vigilant with cloud technology, for example. Over recent years, the move to the cloud and a more blended approach to technology infrastructure throughout the sector has been widely successful. However, a consultation by the Financial Stability board published earlier this month identified the over-reliance on cloud technology as a potential risk, stating: “A major disruption, outage or failure at one of these third parties could create a single point of failure with potential adverse consequences for financial stability and/or the safety and soundness of multiple FIs.” 

You can read more on OR in an article I wrote back in August on future financial services regulatory change and transformation. 

3. Technology leadership 

Technology leadership goes beyond the management of the IT help desk. It requires someone to oversee the digital operations of every department in the organisation – maintaining the current systems but also looking ahead for what new technology the team may need to support and enhance operations. In order to balance the two sides of the role, a technology leader needs to work collaboratively with the heads of departments to truly understand the needs and direction of the business function and how it fits into the overall digital strategy of the organisation. 

4. Develop a clear strategy to tackle technology debt 

The aim is not to achieve zero tech debt, as that would require all resource to be dedicated to remediation rather than progress and building competitive advantage. Rather, there needs to be a plan to manage the size and value of the debt. This requires the IT team and business leaders to work together to initially determine the scope of the debt, decide upon a goal of to work towards of size, value and timeframe, and establish what resources to dedicate to the work. Within this initial strategising as well as throughout the programme of work, there must be absolute transparency in communications and regular reporting to the board, making this a business-critical agenda, not just an IT problem. 

The future of financial services is digital. The possibilities of new technologies such as AI and the increasing importance of data are driving the sector forward into new realms of existence. However, this cannot be realised without looking backwards. Firms must be addressing their technology debt, reorganising their previous incumbent IT infrastructures and putting in place new data management processes in order to push new digital strategies forward.