The problem with legacy IT systems at the UK’s banks is increasingly becoming an industry-wide issue.
Financial services watchdog the Prudential Regulation Authority (PRA) has recognised the scale of the problem, with its CEO stating that banks would be better off rebuilding their IT from scratch than constantly trying to integrate ageing systems with new technologies.
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But the troubles at the Co-operative Bank demonstrate just how difficult that would be to pull off successfully.
A report published this week into the bank’s near-collapse highlighted IT as a major factor. The Co-op intended to replace its core IT with a new off-the-shelf banking system to bring its technology into the 21st century.
But executives hugely underestimated the complexity of such a project and eventually scrapped the programme, writing off nearly £150m as a result.
The Co-op is a relative minnow compares to giants like Barclays, Lloyds, and Royal Bank of Scotland (RBS). That shows the scale of the challenge of ripping and replacing IT systems that are increasingly stretched beyond limits – leading to the serious outages seen at RBS and Lloyds that temporarily prevented customers from accessing their money.
But perhaps there is a solution.
Banks have a history of collaborating when it comes to common interests. The UK banks originally set up BACS as a standard clearing house for financial transactions. Swift, the international platform for exchanging secure financial messaging, is a co-operative owned by its members.
Retail banks today don’t compete on the features of their core transactional systems – they differentiate through their websites, branch services and mobile apps. Surely the transaction engines, many of which are 20 or 30 years’ old, are commodities now.
So, what if the major retail banks came together and jointly developed a cloud-based transaction engine for all to use – which they could also sell out to challenger banks as the government tries to increase the number of banks on the high street.
Instead of spending billions of pounds each, they can spend less, build and test a secure central system, and focus their innovation and differentiation on more modern, digital technologies.
The regulator needs to take the initiative and investigate the potential for the cloud to transform UK banking and bring the industry’s IT into the digital age.