Large retail banks with outdated technology face extinction – unless they can replace IT legacies – as new players use the latest IT to disrupt the market.
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The credit crunch might still prove the beginning of the end for old-fashioned retail banks, as large cumbersome IT infrastructures make it impossible for them to compete with more nimble alternatives.
Take Royal Bank of Scotland (RBS). Once a predator with ambitions to be king, it grew fat during the good times. Now the bank is but a shadow of its former self, with a litany of recent IT problems.
RBS acquired NatWest in 2000 and ABN Amro as part of a consortium in 2007. It has since been bailed out by government, exited the investment business and has suffered very public IT disasters.
In 2012 problems with IT systems at RBS left customers unable to access their accounts for days.
The glitch in the CA7 batch process scheduler ended with 12 million customer accounts being frozen. Customers were denied access to funds for a week or more as RBS, NatWest and the Ulster Bank manually updated all account balances.
Then, in December 2013 – on the busiest shopping day of the year – IT problems stopped customers making online and card payments.
RBS has since admitted its IT systems need an overhaul after decades of under-investment.
One senior IT professional in the UK banking sector, who wished to remain anonymous, thinks the outlook for RBS looks bad. “I have the feeling customers want to get out, nobody wants to work there and management is chopping it up,” he says. “In a few years it will perhaps be a skeleton and the brand name will be sold off to somebody else and a much smaller operation will emerge, doing very basic banking.”
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But he says the problem extends way beyond RBS. Legacy IT systems are preventing the banking giants from adapting to meet the new demands of customers and regulators.
“From what I can see, banks are in survival mode and there is not much chance of new development, legacy replacement and innovation,” he says.
But the new players in the finance sector are doing this: “I think the new kids on the block will be doing that - the internet startups and heavyweight websites," he says.
"The age of the dinosaurs is over. I think banking will change from a few big firms to a multitude of smaller companies in the next few years. I think regulators and governments also want that to happen.”
Sam Woods, a director in the Bank of England's Prudential Regulation Authority, recently told an investigation into banking IT disasters that UK bank IT systems are far from robust.
“I feel we are a very long away from being able to sit here with confidence and say the UK banks' IT systems are robust,” Woods told the committee at a Northern Ireland Affairs Committee at Westminster.
Computer Weekly’s senior banking source agrees. “I think all banks have similar risks but RBS has suffered more than most. There is a fine between being just OK and just not OK," he says.
"The pressure on cost after 2008 has been significant and firms are also having to pay out large fines, compensation or cover trading losses, which does not help.
“There are numerous near misses every day and minor issues that don't reach the media. I think RBS has been unlucky but it could happen anywhere. These firms also have outages abroad that don't hit the UK press.”
The digitisation of customer services at banks is not only putting huge pressure on legacy systems but exposing every failure in near real-time. Even news of a small failure that lasts only minutes can be spread to millions via social media.
Chris Skinner, chairman at the Financial Services Club, says that, as ever more systems are digitised, core bank systems are “creaking at the seams and, in some cases, falling apart”.
“Most UK banks are stuck on legacy systems, built in the last century, that work. Their reluctance to change these core systems is for the very reasons that RBS experienced. As a result, most banks add middleware and front-end systems to their core systems, rather than replace the core.”
Failure to value technology
Part of the problem is that banks fail to understand the value of technology today, says Skinner.
He says banks have a mistaken view of technology. “Banks in the last century all held the view: ‘If ain’t broken, don’t touch it.’ So they had all these core processing systems for deposit accounts and payments that, once built, were never touched again. They were just maintained.”
This made sense in the past, because building core processing systems cost a lot of money, in terms of development and hardware. “Over the years, the systems were cemented in place by new developments around them, such as ATMs and callcentres. By the time the internet came around, the cement was so thick that internet banking was just added making the cement more like granite rock. That’s the problem: breaking apart the granite foundations of the banks’ technology base and replacing it, without any impact on performance or processing.”
If banks do not replace these foundations in the light of digitisation they leave themselves open to competitors. “They will look Victorian by comparison to new competition or banks that have systems fit for purpose,” says Skinner.
Daniel Mayo, analyst at Ovum, agrees that banks do not really understand what technology means to the business. “It varies by bank, but the business view of IT remains traditional in many banks, where IT is seen as a supplier/utility rather than partner/part of core business.”
An industry source says banks have forgotten that IT is the bank these days, not a commodity you can pass to another firm. “Many customers only interact with their bank via technology, so it is in fact core to the bank's offering and service,” he says.
Senior business management often think IT is a complex and expensive thing, which they would prefer to do without in an ideal world. “This totally misses the point in the market today,” he says.
This opens the way for startups to get into banking products via technology and erode market share for the big banks. Firms such as Wonga, Pounds to Pocket, Currency Cloud may be in niche products today, but they have the ability to break into mainstream products as they grow.
The IT outages at RBS have stirred the regulators, but will this lead to real change. He says RBS’s problems have woken banks to the problems they face.
"When RBS had problems last year, the regulators contacted other banks," he says. "We had to provide statements and evidence to show how we would not suffer a similar fate."
Jean-Louis Bravard, director at Burnt-Oak Partners and former CIO at JP Morgan, said UK banking IT faces major challenges. "Bank IT in the UK is not OK,” he says.
“Banks rely on obsolete legacy IT surrounded by an ever-increasing plethora of newer systems to give consumers the impression that the banking systems are fit for purpose in our internet and smartphone world.”
Approaches to legacy refresh
Skinner at the Financial Services Club says banks are engaged in legacy refresh but are highly cautious.
“Most are working on it and have been for years. The issue however is that they shoot for the lowest common denominator," says Skinner.
"Take the HBOS integration with Lloyds. To ensure the lowest risk path, Lloyds migrated HBOS to their core system, rather than take the risk of replacing a core system. The result was that they have a very reliable, lo-tech processing unit built in the last century servicing both banks. Nationwide took a different approach and replaced their core, using Accenture and SAP. The result was a big risk project that consolidated multiple, fragmented, last-century solutions. They achieved the result, but it involved a lot more time, effort and cost than they ever anticipated.”
Daniel Mayo, analyst at Ovum, says banks have their work cut out replacing legacy systems. “They need to modify systems to support both compliance demands and new services (particularly mobile), however, knowledge of old systems is declining due to retirement of workforce with system experience.”
Could the regulators do more to spur banks into action without making matters more complicated? The banking IT source says the regulators are trying to do this, but often make hard work of it. “They are onsite, very invasive, they have lots of questions and data being requested all the time. They are doing what they can, but they are not necessarily hitting the right spots. They are in fact putting an extra strain on IT management time which should be spent on fixing problems.”
Will competition drive IT improvements? Reputation could drive improvements as customers gradually move away, if a bank becomes known for poor IT and reliability. “I dropped RBS/NatWest Bankline, for example, as it was expensive and offline a few days most weeks. It looked like 1970s technology when it actually ran and was horrible to use,” said one consumer.
Consumers today use web-based services, which are trusted and have good IT, every day. If services such as PayPal, eBay, Amazon, Facebook and Twitter moved into banking, they would attract customers. Their systems already contain details about people and businesses and handle transactions and money.
So could 2014 be the time when legacy systems go?
“Not a chance,” concludes the anonymous senior IT professional Computer Weekly spoke to. “Too expensive, too difficult, other priorities, no budget, and the legacy systems actually work (subject to human error of course). Yes, there will be a few cases, but I don't expect a trend from what I know of budget priorities. Main focus is around risk, compliance, security, regionalisation, regulation and some new business requirements.”
Role of outsourcing in bank IT failures through the eyes of a banking professional
"I actually think the so-called legacy systems are the good quality, proven systems," says an anonymous senior IT professional. "They've been around a long time and survived the test of time. It's the new, quick, cheap software that worries me more. However, as legacy systems support is prime for outsourcing and offshoring, the skills and knowledge disappear and a firm is left unable to work on its legacy systems or jump in and fix them if they go wrong. It becomes totally reliant on external providers, who may have higher priorities or maybe even suffering tension of contractual, service level or payment issues. I don't feel this is so much of a technical issue – developers can solve those – it's more of a management, cultural, structural and outsource issue.
"I don't think too much pressure on systems is the problem. Most of the issues I've seen have been due to human error, equipment failure or in recent years errors made by outsourced firms who are more distant than they were historically. More work has gone abroad as a result of cost pressure and that has led to a drop in standards across the industry. Outsourcing and offshoring development didn't hurt production, but now that more production support is both offshore and outsourced, the scope for live problems is much higher than a few years ago. All too often problems arise from human error, by a junior person at a third party somewhere half way round the world, who did not understand or follow a process properly.
"In my opinion it is because far more has been offshored and outsourced and internal expertise and care has been eroded. In the effort to commoditise IT and reduce the cost, these large firms have forgotten that quality, expertise and enthusiasm is needed close to hand. The systems are also very complex, tangled up and it is beyond the capability of any individual to make a major impact. There is so much bureaucracy, governance, process, control applied internally in all firms that getting anything done can be a challenge. Even getting budget and approval to do regulatory projects can be difficult."