Banks are not contemplating core system replacement

European banks are maintaining rather than replacing core banking IT, in spite of recent, high profile failures in such systems

Despite increasing competition and high-profile IT failures, the replacement of core banking systems is not on the agenda for European banks, with investments instead being made to maintain current systems and make incremental changes to meet business needs, according to research.

In its Attitudes to Core Banking Transformation in Europe report, IBM questioned IT leaders at 27 European banks, including nine in the UK. It revealed that IT leaders at banks are not committing to core system replacement.

“Banking technology leaders in Western Europe neither embrace fundamental transformation of core banking systems as a strategy nor see the need for it. 

"They are clear about where they want to get to and the broad direction of their journey, but find that the only practical way to get there is through incremental steps,” said IBM. “No one is contemplating the complete replacement of core banking systems.”

The report said that banks are investing in small IT projects that can provide a quick return on investment rather than making a huge investment in replacing legacy core systems for long-term benefits.

“Most bank leaders are engaged in investments for which payback is expected in the same year for highly targeted modernisation initiatives, driven mostly by front office digitisation and regulatory requirements, but also by cost reduction and operational improvement. Budgets are mostly tight, but adequate for incremental improvement.”

The report concluded that although the approach of banks is arguably the right thing to do in the current economic climate, it could see them lose business to online companies offering banking services.

A recent report from analyst firm Forrester, internet giants will not try to replace banks but will disrupt the sector through other services that take consumers away from traditional banks.

While traditional banking services, such as accounts, loans and mortgages, are unlikely to be offered by the likes of Google or Facebook, some peripheral capabilities are suited to their expertise. Forester said the high costs and strict regulation of setting up a traditional bank – alongside advertising revenue coming from banks – will push internet firms into roles that support the relationship between banks and their customers. These include transactional payment services, financial advice, money management and product comparisons.

A total of 64% of banks interviewed said that maintaining core banking systems takes up an unusually high proportion of IT budgets and large chunk of what is left to introduce IT to change the business, according to 63% of respondents.

Things might not change any time soon if IBM’s findings are an accurate reflection of industry attitudes. When asked if underinvestment in core systems has reduced the flexibility needed for digital innovation 38% disagreed and 35 agreed.

But when presented with the hypothesis that ignoring core banking transformation is not an option if they want to remain competitive, 54% agreed, while 38% disagreed. Traditional banks are over-expanding to keep up with digital developments. With legacy IT infrastructures weighing them down, many are making mistakes when it comes to mobile and online banking.

Recent system crashes have highlighted weaknesses in banking IT. 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 said. “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.”

While banks are making substantial efforts and investments to address demand for digital services such as online and mobile apps, with middleware and cloud based services, only Nationwide Building Society has completed a legacy system overhaul.

In 2008, Nationwide embarked on a £1bn project to transform its technology after years of under-investment, typical in the financial services sector. The project involved upgrading its datacentre, outsourcing IT for the first time and implementing Microsoft technology in the front office and SAP at the back.

The IBM study also revealed that the cloud is not seen as the answer because bank leaders are “not yet actively thinking about cloud for core banking transformation.”

Read more on Enterprise resource planning (ERP) software