Banks must shed their bad debts to win the modernization battle and achieve the OneOffice vision

No matter how much banks spend on digital transformation, executives are often disappointed with the results. The disappointment stems from focusing on temporary fixes, favoring quick wins over long-term benefits. The urgency to build quickly has overshadowed the need to build correctly.

Banks see deeper modernization and OneOffice—aligning front, middle, and back offices for unified processes and data flows to enhance customer, employee, and partner experiences—as a cornerstone of their strategic goals. However, accumulating various forms of debt is a silent obstacle to these efforts. Exhibit 1 highlights five critical types of debt—technology, process, data, culture, and skills—that impede deeper modernization and achieving the OneOffice goal. There is no simple way to quantify these debts, which can sometimes obscure the deep-seated issues at play in banks. However, this report attempts to delve into the root cause of the debts and expounds on strategic recommendations for resolving them effectively.

Exhibit 1: Insidious build-up of debts that stave off modernization and the pursuit of OneOffice

Source: HFS Research, 2024

Debt one: Pay down tech debt at the asset level

Legacy technology’s rigidity and the fiefdom, such as the structure of retail, credit card, mortgage, and other business lines, create significant obstacles to modernization. Fragmented systems such as identity management (KYC), payment rails, and variances in business logic complicate operations further, while poor architectural decisions and bloated IT assets inflate costs and stifle innovation. Banks burdened with technical debt often find it impractical to shed legacy systems entirely. Instead, they must strategically balance budgets by sustaining legacy systems while modernizing. This begins with evaluating tech debt at the asset level, as it is unevenly distributed and varies in severity. Banks should assess each asset’s contribution to value, identify the types of tech debt related to software maintenance, code decay, lack of documentation, tight coupling, and legacy systems, among others, and implement targeted remediation strategies such as DevOps, containerization, hybrid cloud, microservices, and event streaming. This approach enables meaningful transformation on a case-by-case basis without disrupting core operations.

Debt two: Break away from suffocating process bureaucracy and reimagine processes through digital

Decades of compliance mandates and restructuring efforts have mired banking operations in complexity. Siloed cost-containment efforts and piecemeal governance have further compounded inefficiencies. Banks must rethink operations from the ground up to achieve true process reinvention. This starts with mapping customer journeys, business lines, and products, identifying critical processes for transformation, and adopting purpose-built technologies such as cognitive technologies, content management systems (CMS), and business process management (BPM) platforms. Prioritizing these technologies’ impact, value, and feasibility and layering them onto traditional operations IT systems is essential for maximum effectiveness. Additionally, the success of reimagined processes hinges on effective change management, ensuring they are fully adopted and utilized by those working within them.

Debt three: Blow up the archaic leadership mindset and balance risk-aversion with the need for innovation

Culture debt runs deeper than technology debt. For banks, the problem isn’t just technology—it’s how they’re structured around it. Banks spend millions avoiding mistakes and fostering a culture that penalizes failure, which stifles innovation. Changing entrenched policies and aligning incentives with transformation is tough, especially when a lack of digital literacy among leadership amplifies resistance. As banking faces constant disruption, balancing risk aversion and innovation is essential. Banks should use incubators to get an overview of what is happening in the market, invest in and collaborate with startups, or create greenfield banks that operate independently, learning from the new kids on the block to tackle challenges with entrepreneurial thinking. This allows the outside innovative culture to bleed into and blend with the main bank, fostering broader cultural transformation. Furthermore, leadership must ensure that digital strategy and execution speak the same lexicon, bridging the gap between vision and implementation.

Debt four: Tame data debt through an enterprise-wide data initiative

Despite the market-wide push for data-driven banking, many banks remain stuck in holding patterns with data ownership siloed within individual functions and departments. Most systems operate in isolation, limiting data use to the teams that sourced it and hindering the sharing of insights, signals, and information across divisions. To break free, banks must adopt an enterprise-wide data strategy, as shown in Exhibit 2, prioritizing integration, quality, and accessibility. Implementing data lakes with distributed file systems allows structured and unstructured data from multiple sources to be captured, stored, and updated instantly for real-time access. They must adopt cloud-based architecture to organize and reassemble data on the fly, advanced analytics tools to conclude data points, and machine learning to apply controls and monitor risks in real time.

Exhibit 2: The HFS OneOffice data cycle remains as relevant today for BFS and all enterprises as it was three years ago

Source: HFS Research, 2024

Debt five: Overcome skill paradox with strategy, planning, and developing talent for the future

Modernization isn’t only about new technologies; it’s about cultivating a workforce prepared to embrace the changes that come with it. While culture will guide the bank, the skills will enable the action. The skills paradox in banking is twofold: experienced employees are retiring, taking their institutional knowledge with them, while banks face challenges in attracting new talent with the expertise to implement emerging technologies and digital services. To address this, banks must rethink talent strategies for the age of GenAI, moving from rigid hierarchies to dynamic, skill-based models to support the nature of work in the future, as Exhibit 3 indicates.

Exhibit 3: Amid disruption, banks must build a future-ready workforce, blending business and tech skills for the AI era

Sample: 550 enterprise leaders
Source: HFS Research, 2024

The Bottom Line: Standing still is no longer an option. Traditional banks must embark on a bold journey of deeper modernization with the OneOffice vision in mind—but first, they must pay down their debts.

The banks’ proposition to provide an efficient store of value, financing economies, and their promissory relationship to safeguard deposits or lending sources will not change—‘how’ they do it will change. Going forward, the rules of the game will be based on agility, faster time to market, advanced technologies, data-driven strategies, and diverse talent within scalable, digitized models. To achieve this, banks must address their debts with clear goals and accountability, paving the way for deeper modernization and the OneOffice transition.