It is increasingly apparent that the longer-term viability and profitability of any financial institution depends on ending its reliance on legacy technology – IT systems that have been in place for decades and are no longer fit for the much changed business purpose.Extensive merger and acquisition activity in the industry has contributed to technological deficiencies, with some banks employing a complex patchwork architecture incorporating dozens of different legacy systems. These systems are amalgamated and layered on top of one other, ostensibly due to a lack of available budget for more wholesale upgrades and improvements, creating business risk and false economy. The investment needed to untangle the resulting technological spaghetti is likely to be more than it would have been to simply replace the entire legacy system when it reached the end of its useful life.The significant changes in the way that customers interact with banks are prompting a radical re-think about technology, how it is used and the financial institutions’ investment in it. Many of the banks’ systems were created years ago to serve businesses that have now changed fundamentally in the services they offer and the way they interact with their customers. Banks are recognising the need for change. For example, in late June Royal Bank of Scotland and NatWest announced a plan to spend more than £1 billion over three years to enhance their digital offer.Regulatory attention on the issue of legacy systems has also been increasing. For example, Andy Haldane, then director for financial stability at the Bank of England, drew attention to the issue in 2012 when he publicly stated that banks had not made sufficient investment in their systems and now needed to transform their IT. Subsequently Haldane said 70-80 percent of big banks’ IT spending was on maintaining legacy systems rather than investing in improvements. This is not just a problem for banks. Right across the financial services industry firms are battling with the problems presented by legacy systems, scoping out their replacements and finding the budget allocation needed to deliver them. For example, the settlement of securities in a timely and efficient manner is central to the functioning of financial markets yet this is an area that has suffered woefully from an underinvestment in technology. In general, what we are seeing across the industry is banks patching up feature-rich but technology-poor solutions, rather than replacing them with newer systems that carry out the same tasks on more modern platforms but with inferior functionality. The inability to separate the richness of a system that has been developed and enhanced over a period of years from the underlying legacy technology is a hallmark of the financial services industry.This approach does not meet the evolving needs of the banks’ business models as they look to increase share of wallet from their customers, respond to changing regulatory requirements and take advantage of new markets. The short-term mentality that took hold in the aftermath of the global financial crisis, coupled with pressure on profits and the demands of shareholders, is pushing technology far down the corporate agenda. The result has been failure to invest properly for the future. While the complexity, time and cost involved in replacing interdependent and ageing technology infrastructure are frequently given as reasons for the existence of legacy systems, it’s really time we start to see a change. The recent activity in the banking sector suggests that a new attitude is starting to take hold. For the financial industry’s sake, I hope that 2015 heralds a new era with IT enabling the business model changes that the industry so desperately needs to grow.
The two companies will provide the ECB with connectivity services to the payments (TARGET2 and TIPS) and securities ...Continue Reading →