Computer systems that deal in pounds, shillings and pence are at the core of IT infrastructures at some of the UK's biggest banks. Banking services depend on them 24-hours a day, but the legacy systems of many banks are expensive to maintain and inflexible.
The complexity of replacing hundreds of applications developed, acquired and integrated over a long time using proprietary methods makes the task "analogous to an archaeological dig," says Gartner analyst Don Free.
Furthermore banks have not been in a hurry to change things because they do not have to, according to Justin Speake, CEO at research company Bloor. "Banks have not had to invest aggressively in IT because they have been making lots of money," he says.
Ian Benn, managing director of payment services at Fidelity Information Services (FIS), which provides core banking systems to banks, says it is hard for the IT department to sell legacy system replacement.
"This is because it costs hundreds of millions of pounds, takes four or five years to implement, is a risk because it might not work, and when it is finished it just does the same thing as the previous system."
The current slowdown in business has put banks under pressure to cut costs. It is at times like this that banks will look at cutting fixed costs such as people, property and IT, he says.
Free at Gartner says more banks will be refreshing their systems over the next three years. "The velocity of core banking replacement is accelerating. There will be activity as banks turn from [research and development] to fully fledged implementations in most regions."
Typically banks are using middleware to enable them to re-use legacy systems for new products and services.
Barclays, for example, has a two-year IT project to link legacy systems to frontline applications using Java-based web services. This enables legacy systems to be connected to new applications.
This method of re-using functionality is a common alternative to SOA, which for the larger banks is a major challenge, according to Speake at Bloor. "Everybody is looking to use SOAs but they are actually using web services and are more effectively connecting a bunch of widgets," he said.
Large banks are not yet ready to replace all legacy applications with SOA. This is, however, more manageable for smaller financial services firms such as the Nationwide Building Society which has begun a five year project to adopt service oriented architecture (SOA). The firm is using SAP software to move away from building its own systems to help it introduce new products quicker it could if it had to build applications on its legacy infrastructure.
The ultimate goal of any financial services firm is to have a single view of customers across its product range with databases and product processing systems sharing information automatically. This would simplify the creation of new product systems and make it easier to access customer information.
Abbey has moved to a single view after it integrated to the global banking platform of its parent Santander, known as Partenon. This replaced all legacy systems and gave what is traditionally a national bank similar capability to a global bank.
As a result of the high costs and risks associated with the replacement of legacy systems many industries are moving towards hosting services, and banks outside the UK are no exception.
Benn at FIS said the UK banks are not yet interested in the hosted model but this could change as reducing the fixed costs of doing business becomes a more important consideration. But UK banks are yet to take make such a sea change.
"In the US, banks have been happy to use third parties to run core banking systems. In Germany 10 of our customers use the hosted model for core systems, and in the Nordics 165 use it," says Benn. "But in the UK none of our customers use it."
Banks have kept their legacy systems for so long because there has not been a business case for changing them, but the current economic climate could give IT a strong enough voice to get IT upgrades approved. In the past IT has been a weak cost centre negotiation with departments, which are powerful profit centres. But times are changing in financial services and IT will be increasingly harnessed to improve competitiveness and efficiency.