Underinvestment by Indian Banks in IT has led to outdated core systems that struggle with scalability, flexibility, and resilience, according to Boston Consulting Group (BCG).

Indian banks invest significantly less in IT compared to their global counterparts, allocating only about 5% of their revenue, versus 7-9% in global banks, per BCG India’s latest report “Navigating the Journey to Cloud-based Core Transformations,”.

The report noted that while India’s BFSI sector has seen rapid digitalization, innovations in fintech, driven by Artificial Intelligence, cloud computing, and digitalization, have far outpaced traditional banking, which continues to rely on legacy core systems.

BCG assessed that nearly 75% of digital payments and loans, and 25% of new digital accounts are likely to originate from third-party platforms by FY26.

Keeping up with emerging digital trends, skyrocketing customer expectations, and meeting regulatory requirements makes it imperative for financial institutes to modernize their core systems by transitioning to cloud-based solutions, it added.

The global consulting firm observed that many Indian banks still rely on legacy systems from the 1990s, which are costly to maintain and lack the agility needed to launch new products quickly. These systems often face issues with scalability, performance, and the ability to integrate with modern applications.

BCG said the heavily regulated financial sector in India poses additional challenges. It observed that Banks must adhere to strict compliance requirements related to data privacy, security, and accessibility, which are harder to manage with traditional systems.

“As customer expectations continue to evolve, fuelled by digital innovations in other sectors, banks must adopt new technologies to offer seamless, personalized services. The rise of fully online, digitally native lenders and neobanks is setting new standards for speed and customer service, pressuring traditional banks to keep pace.,” the report said.

Published on August 2, 2024