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Banking

The true cost of technical debt to Australia’s biggest banks

By Anthony McMahon, Vice President, APJ, GitLab

The financial services industry has been one of the key sectors to experience rapid change over the course of the pandemic, finding themselves being forced to digitise their business operations sooner than originally planned. As well as a need to respond to the emerging fintech start-up businesses that are up-ending their traditional Financial services offered to consumers and businesses.

This accelerated innovation pressure is uncovering an emerging risk – traditional banks in Australia and New Zealand have accumulated a huge amount of technical debt, that is simply not fit-for-purpose, in this rapidly changing environment. Opening up potential threats to business performance, regulatory compliance risks, shareholder concerns, and market competitiveness.

Mounting technical debt a CIO’s nightmare

Technical debt is an established concept in technology. IBM’s John Duigenan attributes technical debt to last-minute technology choices, explaining that although some decisions will benefit the organisation in the short-term, they may lead to the accumulation of long-term technical debt. Technical debt also grows over time as a result and creates a domino effect that companies have to deal with as quickly as possible.

Like any form of debt, technical debt becomes a significant liability for some of our largest organisations. Australian organisations that have been grappling with ageing IT systems in a digitised environment now have an increasing backlog of legacy issues that continue to generate high costs for the business. Technology leaders at these organisations are facing mounting technical debt because of failures in modernising quickly enough.

According to McKinsey, CIOs reported that 10 to 20 percent of the technology budget dedicated to new products is diverted to resolving issues related to tech debt. Two-thirds of companies are seeing their tech debt rise despite efforts to curb it.

The technology debt is a crucial indication of how well an organisation is positioned to adjust to new competition in the market. It provides a clear view of a bank’s technology capability and its liabilities in terms of its debt. For larger organisations, this translates into hundreds of millions of dollars of potential debt (or needed investment) exposure. However, most of this remains hidden to investors and stakeholders. Our current regulatory environment does not require our largest banks to publicly disclose risks related to the impact of technology legacy on the balance sheet.

Tech debt hampers innovation

Beyond the financial implications and potential loss of investor confidence, the consequences of operating legacy systems are manifold.

Technical debt limits the banks’ ability to compete with newer, more agile entrants. Innovation takes the backseat when teams are required to manage the many complexities and challenges of an outdated architecture, including increased security risk due to their complex software development and security toolchains.

Organisations with ongoing technical debt become more vulnerable to cybersecurity breaches or compliance investigations and remediation, where technology teams may find themselves in a relentless cycle of fixing emergencies to address these threats, instead of delivering new capabilities and customer experiences.

Both traditional and emerging providers need to capitalise on technology forces to reduce their technical debt and deliver value faster to customers. The longer a bank has ongoing technical debt, the less likely it will be able to react to competitive forces.

How to address tech debt with software innovation

While the constantly evolving environment means that some technical debt will always be present, CIOs of financial institutions need to implement a clear roadmap to address and minimise it, like any debt. An organisation that is focused on fixing legacy systems is accumulating expensive, damaging tech debt in their workflows.

One way to start dealing with technical debt is to conduct a rough audit and triage the organisation’s technical debt by “interest rate” – high interest rate cruft is addressed with the same priority as shipping new features, while medium-to-low interest rate cruft can be dealt with in a ratio that best suits the team’s situation, because dealing with the most urgent technical debt sooner rather than later will help save resources in the long-term.

UBS, the largest truly global wealth manager, turned to GitLab’s platform to power DevCloud, a single DevOps platform that allows for a cloud-based, service-oriented, software development lifecycle. In doing so, they were able to stay ahead of the tech debt curve and pave the way for a new era in banking innovation. By moving development to the cloud and applying the open source model, UBS was able to increase their development velocity, lower their infrastructure costs, and increase collaboration between engineers and non-engineering teams worldwide.

Similarly, Australian banking leaders can identify, value and manage their tech debt and unlock true agility to the development and deployment process. By taking the first step of updating and modernising their processes, through rationalising the number of tools and eliminating the toolchain tax, financial organisations stand to make great strides to increase the speed of their deployments and save hidden costs of doing business and remaining compliant.

Digitisation is here to stay and unless there is a concerted effort to get on top of legacy-driven technical debt, traditional banks will be challenged by profound implications in their business performance. A Modern DevSecOps platform that enforces collaboration, transparency, auditability and speed-to-value, will help alleviate technical debt risk,and unlock what is possible for traditional Financial service providers when it comes to designing, developing and deploying software.

Global Banking & Finance Review

 

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