Banks interested in digital transformation may be met with a surprising, pernicious and expensive problem: technology debt. Tech debt is like driving an aging car. The more workarounds you add and maintenance it needs, the more it costs you — until you’re wondering why you didn’t just buy a new car.
Financial institutions have complicated, layered information technology, or IT, environments that span anything from a mainframe core, an infrastructure layer, numerous applications and software that facilitate activities like payments, loans and digital banking and the data that flows throughout all these areas. It’s easy for them to accumulate costs known as “technology debt” because of the complicated execution and security layers they must implement to follow specific regulatory and compliance protocols, says Nicole Lanza Turner, managing director for financial services cloud, data and artificial intelligence at the consulting firm Accenture.
“In banking, when we have to make choices about how to get things done, we often know what we want to do. But how to do it can be more complicated because of our regulatory environment [and] the sensitivity of our customer data,” she says.
She defines tech debt as any investment a firm makes to maintain a process or technology to make it workable that isn’t part of the firm’s strategic objective or vision. The idea of “technology debt” started in software engineering and referred to software codes that functioned as placeholders or workarounds during development. It now has a much wider application in a firm’s IT organization.
For example, she points out how a bank may not be able to take advantage of the efficiencies of cloud environments that can automatically and quickly manage their storage capacity for certain applications or use cases because the institution would need to document these changes for regulators. In other situations, financial institutions may build their own applications and tools to ensure they’re compliant, rather than buying a ready-made application.
“Tech debt inhibits your ability to get products to market quickly, to adapt to changes quickly,” she says.
Accenture has found a correlation between business agility and positive revenue, and tech debt can be a drag on business agility. It can be difficult for companies, including banks and credit unions, to calculate their tech debt. Lanza Turner says most institutions carry more tech debt than they estimate, given the legacy technology throughout an institution. Calculating the size of the debt — and the cost of servicing it – can be difficult for institutions and should include costs like labor required and the length of any process, along with the price tag of the technology itself.
Tech debt is on the radar of bank regulators, something that Lanza Turner has already begun to see. In its spring 2023 semiannual risk perspective, the Office of the Comptroller of the Currency included the topic in a broader discussion on technology infrastructure. The OCC wrote that “[d]ecisions to postpone system updates or delay technology architecture upgrades can create risks to an organization and unnecessarily increase its ‘tech debt.’”
Lanza Turner believes bankers and IT professionals are increasingly aware of the cost of tech debt, but other pressing issues make it hard to solve the problem outside of technology upgrades and cloud migrations. Still, she recommends banks perform regular portfolio exercises that scrutinize their existing technology stack against alternatives in the market and think about how to minimize accumulating tech debt in the future, but not to make eliminating tech debt the only goal.
“If they can fix [tech debt] in the context of doing something else, fantastic. But it’s not necessarily something to go after,” she says.
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