SB: Why are banks so slow to embrace IT change?
MG: IT change for banks has been slow and safe. They simply can’t afford to make mistakes. Banks’ systems, at the cutting edge in the 1960s and 1970s, have been upgraded, patched and reworked to their very limit, leaving their owners with IT architectures, kit and procedures that are complex, expensive, inefficient and vulnerable. In everything that banks do, they seek to minimise risk, and IT change has always involved risk.
SB: What is the biggest risk?
MG: The banks’ systems themselves now pose the biggest risk – to service, reputation, profitability and even survival. They need to be replaced to make banks fit for banking in the 21st century. In a recent Temenos poll, a startling 80 per cent of respondents agreed that “Ageing IT is the biggest threat to banks today”.
Almost all UK major high street banks have core banking systems dating back to the 1970s. This can mean that when a customer looks at her bank balance on her phone she is going through layer upon layer of IT to get to that number – a complexity that is leaving banks open to outages, inefficiencies and may even be making it harder to comply with regulation.
When I first started at Temenos in the 1990s our systems had to interface with an average of 20 other systems; now they have to interface on average with more than 60. And the situation is becoming more complex every day. So it’s easy to understand how the thought of unravelling and replacing these systems can fill a risk officer with dread.
SB: So what is the impact of this apparent inertia?
MG: Strategically, this is interfering with progress. Maintaining existing legacy systems, which most developed market banks still run, consumes three-quarters of IT budgets, crowding-out investment in IT enhancements.
Sometimes these legacy systems are managed by staff about to retire. After an IT audit, one Asian bank found that a significant portion of its IT estate was entirely maintained by people over 60. It had a choice – try to find a younger team who were willing to train in outdated technology or replace everything with a system fit for purpose. It went for the replacement.
There is also the issue of outages – both in terms of reputation and cost. A City analyst once told me that if a bank suffered a major outage it would take a year for its share price and investor confidence to recover. If it suffered a second, confidence would degrade to the point where the bank would need to be sold.
SB: What about the impact on profitability?
MG: Yes, this is a big issue. Banks’ aging IT environment is inappropriate to today’s banking challenges and this impacts their ability to be more profitable by offering the right products to the right customers.
To do this they need real time operations and they are still insufficiently customer oriented – their systems are still based around accounts and products, not people. Banks really struggle to see who is high risk, who is profitable. And they have no transparency within their operations. When this is the case it is very difficult to compete with challengers such as supermarkets or online retailers.
Add to this the fact that banks are also facing a hugely increased regulatory burden in the wake of the financial crisis. The post-2008 era requires banks to slice and dice information and data in a myriad of ways to help to analyse risk – and their systems can only do this with a lot of extremely costly input from staff.
SB: Are banks at a tipping point for change?
MG: Yes, definitely. Banks can see the issues and are aware of how they are affecting profitability. When all the traditional banks were in the same boat, there was no real pressure to change: everyone had occasional system outages that stopped customers seeing their bank balance from an ATM; the banks were profitable enough to cope with IT eating up 15% of their total costs; and they were able to adapt their systems to deliver some new services.
With forward-thinking banks already moving to new systems, growing demands from regulators and consumers, and intense competition from new entrants, there is a brewing fight for survival. Once a critical mass of banks has transformed its IT, the rest will have to follow to survive.