How endemic is IT underinvestment in UK retail banking?

The Royal Bank of Scotland has failed to invest properly in its IT system, but it is not alone

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The Royal Bank of Scotland (RBS) has failed to invest properly in its IT systems over the years, leading to a number of high-profile IT failures that have caused customers the ultimate discomfort of being unable to access their own money. But how endemic is this underinvestment in UK retail banking?

The latest problems with IT systems at RBS, which also affected NatWest and Ulster Bank customers – the specifics of which are not yet known – stopped customers making online and in-store card payments on Monday 2 December, the busiest shopping day of the year.

RBS CEO Ross McEwan said the failure of systems was unacceptable and blamed years of underinvestment in IT for the issues.

"For decades, RBS failed to invest properly in its systems. We need to put our customers' needs at the centre of all we do. It will take time, but we are investing heavily in building IT systems our customers can rely on," he said.

But as banks charge into the digital world, how can they avoid problems with legacy systems that are out of date and unable to support the changes in consumer habits?

RBS customers affected by multiple IT failures

RBS has hit the headlines several times in recent years as a result of IT failures. In July 2012, the bank's customers were unable to access their accounts for days, as a result of software issues.

It will take time, but we are investing heavily in building IT systems our customers can rely on

Ross McEwan, RBS

The glitch in the CA7 batch process scheduler ended with 12 million customer accounts being frozen. Customers were unable to access funds for a week or more as RBS, NatWest and the Ulster Bank manually updated all the account balances. 

RBS said the problems cost £175m. The Financial Services Authority (FSA) demanded details of how major banks planned to prevent a repeat.

In March 2013, the bank experienced further disruptions as ATM, online and telephone banking services were hit by IT problems, resulting in customers having difficulties in making cash withdrawals, debit card payments, and using online and telephone banking.

Banking technology not fit for digital world

UK banks have legacy systems that have been in place for decades. Meanwhile, extensive merger and acquisition activity has meant some banks have dozens of different legacy systems. 

One source told Computer Weekly that one of the UK’s main banks has 40. Add to that the middleware used to connect legacy systems to new applications and you have environments that are highly complex and difficult and expensive to maintain. There are systems in banks that a limited number of people have the expertise required to maintain.

As Jean-Louis Bravard, director at Burnt-Oak Partners and former CIO at JP Morgan, put it: "Bank IT in the UK is not OK.”

He said it is unlikely that RBS is alone among banks “in relying 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”. 

He said banks are not ready for this digital world and the FSA and the banks' boards are in denial.

RBS is certainly not alone. Barclays and Nationwide are other recent examples.

Pressure on banks to deliver 100% availability

With the recently introduced rules that simplify and speed up the process of changing bank accounts, from 30 days to seven days, banks need to keep their digital services up 100% of the time, or risk customers leaving. 

Online and mobile banking downtime is quickly apparent, and with the spread of news on social media it does not take long for the world to know when digital banking channels are down.

RBS and NatWest customers have vented their anger on social media platforms such as Twitter, with many threatening to leave the banks following the latest problems.

Neil Kinson, vice-president EMEA at business and IT automation supplier Redwood Software, said the days where business IT issues went largely unnoticed by the outside world are gone. 

“Business processes are more connected now than ever before, meaning a back-end failure can have a knock-on effect on frontline services. It's like a domino effect; a persisting failure in the billing department can lead to greater pressure on the provider’s website and call centres, as customers look to question the mistake," he said.

With RBS pulling out of investment banking it is dependent on its retail customers, but problems such as those that occurred this week, combined with the promise of pain-free bank switching, could see them move to other banks.

Ovum analyst Rik Turner said RBS appears to be the bank worst hit by system failures, but agrees it is not the only one. “As the other cases show, RBS is not alone, but seems to have bigger problems than the others. The seven-day switching rule is a reason to get systems in order.”

Legacy IT systems impeding growth

Research carried out by Ovum last year revealed that three-quarters of banks in Europe are using outdated core systems which are hindering their ability to grow. And 79% of the banks questioned said the complexity of IT and a shortage of the right in-house skills are making it difficult to replace legacy core banking systems.

With the digitisation of banking, and consumers and regulators becoming more demanding, banks are beginning to accept the need for modern IT

The longer banks leave it, the more difficult and costly it becomes to replace legacy technology. In 2008, when German banks Commerzbank and Dresdner Bank merged in a £8bn deal, legacy proprietary systems made it more complex. One example was Dresdner's fund accounting system, Paladign, which it used to balance the books at the close of business. It was old and had been modified so often that few IT people could work with it. Dresdner's trading platform, called Imagine – which covers parts of the bank's investment business – was another.

Replacing legacy systems at banks is often described as being akin to changing the engine on a Jumbo Jet while in flight. Additionally, there has been a view that if systems work, why change them? But with the digitisation of banking, and consumers and regulators becoming more demanding, banks are beginning to accept the inevitable.

IT transformation underway

After years of underinvestment, where systems had not been kept up to date, Nationwide Building Society committed to spend £1bn on replacing core back-end systems that had been built in-house decades ago with off-the-shelf banking software from SAP. At the same time, it chose to move its customer-facing delivery channels onto Microsoft software.

Meanwhile, Barclays has been building a cloud platform to deliver services under the leadership of the recently departed chief operations and technology officer Shaygan Kheradpir, who has transformed the bank’s digital strategy.

Kinson at Redwood Software, said banks need to build more automation into their systems to ensure core functions run reliably. 

"If large brands like RBS wish to protect their customers from the effects of IT failure, greater effort must be made to ensure business-critical processes work efficiently 100% of the time, both at the front end and the back end, to deliver accurate and reliable results," he said.

"By automating key processes such as billing, stock control and credit checks, organisations dramatically streamline operations, reducing the chance of errors and freeing up valuable resources to focus efforts on other business-critical tasks, such as innovation," added Kinson.

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