Chaos, panic, Branches full of complaints, and, the ensuing reputational damage from Social Media. That’s what happens when banking services fail, when there’s a failure to manage the basic requirements of customers and the simplest of transactions.
We understand the risks of legacy infrastructure, and have assessed it for probability and impact of failure. Attention is focused elsewhere – on profits, regulatory compliance, shareholders, past-business compensation and so forth. Events, though, have a crude way for sharpening perspective, for reshaping plans and diverting focus to matters previously deprioritised. We have all seen the stories; Banks such as RBS and HSBC have felt them for real, and their customers certainly have, too. Whether we like it or not, technology is a key part of banking services today. We grow ever more reliant on technology each passing minute – especially in a world of high consumer demand for real-time access.
Leading online retailers such as Amazon, eBay etc. are providing customers with simple and painless user experiences, Straight-Through Processing and One-Click Purchasing shows the art of the possible. Banking is still haunted by complexity, lengthy processing of applications and batch processing of transactions; legacy systems in banking as we know it today were designed many decades ago. Essentially, the legacy mainframes and their architecture are old-style solutions built around branch transactional requirements. Moving into the 21st century, such systems are simply no longer fit for purpose, the majority of banking systems simply don’t have the capabilities of providing Straight-Through Processing or of digitising the application processes for customers.
This can be underlined by the payments failures at RBS back in June. Crippled by their legacy IT systems, over 600,000 payments and direct debits just went missing. HSBC also suffered a payments meltdown when c. 275,000 payments failed to reach accounts on the August bank holiday weekend. It is of huge significance when we see technical failures on this scale, particularly when it affects two of the major sponsor banks in the UK, responsible for managing payments not only on behalf of themselves, but also their agency banking partners – meaning other banking brands have an associated reputational risk. Arguably, those experienced by RBS and HSBC, and more generally, these types of problems can be traced back to the multitude of acquisitions and mergers by banks and building societies, alongside many product launches and other activities; therefore, IT systems became huge, costly and complex and are simply unwieldy.
Banks spent around $188bn (c. £124bn) on IT investment in 2014: that figure is set to grow by five percent a year1. Indeed, Ross McEwan – the RBS CEO – has belatedly recognised the challenge of IT in his business and increased his IT spend by £750m. The risks are fairly severe in nature, and potentially more severe than another banking crisis – failure to invest heavily in core banking platforms can have a catastrophic effect; think where the bulk of the UK customers have their current accounts held?
The major banks (Barclays, HSBC, Lloyds, RBS and Santander) account for around 77% of the personal current account (PCA) market3. All of these banks operate legacy IT systems – each to varying degrees. Four of these are the main UK sponsor banks acting for a host of other players. Should systems of sponsor banks fail, that could create an unprecedented crisis for the financial services firms, customers and businesses – the net would be cast wide in terms of impact, this is why the regulator has IT Infrastructure so high up on their agenda.
Of course it is a huge risk to begin replacing old, often defunct systems, untangling the plugs and wires and so on. However, the risk of simply continuing to ‘bolt-on’ new software and patching existing software is not sustainable. Technology is continuing to shape and reshape our lives all around us and in ways we’ve not yet foreseen. The ‘internet of things’ is becoming a reality. Cyber security challenges continue to know no bounds, and existing infrastructure is not designed with these in mind.
As the first high-street bank to launch in over 100 years, Metro Bank has been fortunate to be unrestricted in their IT estate. Craig Donaldson, Metro’s CEO, has built a software-as-a-solution (SaaS) as their core-bank platform, choosing Temenos to deliver that on a ‘pay as you grow’ model – and it’s only five years old2. This allows Metro to offer straight-through processing, and fulfilling 80% of all account opening transactions at the point of sale – in-store – including being able to walk out of account opening with the debit card in hand. Metro is also able to offer their customers a joined up solution between online, mobile, telephony, and branches. By employing their IT infrastructure in this way, Metro believes they can be more effective in supporting their customers in their banking activities. Donaldson states “service & convenience is all about giving customers choice, and what customers want is the ability to choose what channels they want to interact with their bank and not the other way round”2.
Another bank is the soon-to-launch Atom Bank. Based in Durham, it is proposing to be a digital-only banking proposition. Created from the ground up, Atom are also developing their systems from scratch having signed agreements with FIS for their back-office and Intelligent Environments (IE) for their front-office solutions. This provides Atom with the flexibility to be truly innovative in their approach to wishing to redesign banking. FIS and IE are at the forefront of banking technology design, and with Atom as a client, they will be able to be more radical in the exploitation of their technology – rather than being restricted by the forever ‘bolting on’ of systems.
Nationwide Building Society was another to recognise the scale of risk to their business and customers, and embarked on a five-year programme to renew their core-banking platform. In choosing SAP, they too developed a tailored digital platform capable of integrating front, mid and back offices. Something that may also cause banks concern, is that the delivery of the new platform cost almost £1bn4. In view of the size of Nationwide, versus some of its competitors, this sum could easily be dwarfed. Yet, the solution has allowed Nationwide to exploit its digital proposition helping to bring in Smart ATMs, multiple mobile banking facilities and the connection of the branch and call centre with the exciting Nationwide Now capability.
We are no longer held back by analogue systems, what were once big mainframe green screen solutions that became behemoths, are simply reaching end of life. The take up of digital banking methods and its pace, mean that financial services firms must ensure that they’re set up to both maintain the safety and security of customers’ data and enable customers to meet their banking ambitions – being able to transact at a time, place and with a device of their choosing.
Without an infrastructure capable of meeting the demands of digital – both now and in future – it could mean firms go out of business. Those unwilling, incapable or just too slow to adapt, risk losing the trust of their customers, especially if they are unable to offer effective solutions to their life needs. We only need to cast our eyes to those online retailers with huge success – Amazon, eBay etc. – as well as those making successful transitions such as John Lewis Partnership (JLP). Regular success has been seen for JLP in their stores over the years, but they are having just as much success now with online sales, which has opened up wider markets for them – truly one of the successful UK retailers, and with a powerful online and store presence which is fully joined up. On the banking side, Metro Bank and Nationwide are both providing digital and traditional banking to their customers in a joined up way.
There are many challenges faced in both planning and executing changes – even minor – to banking platforms. If you’re considering addressing your legacy system issues, we recommend you:
A more stable, up to date platform will reduce your risk in the long term, but in the short and medium term you have to be comfortable taking the inevitable risks which come with a major system implementation. Don’t underestimate the complexity and risk involved in unwinding the patchwork of old systems, often patched, mended and bolted together after acquisitions and mergers – document, assess and mitigate your risks as far as possible.
Board buy-in to what is likely to be a multi-year programme of work is essential, as well as incurring the cost of a major development alongside your normal operations. Ensure senior management involvement from the beginning.
Make the innovation work by incorporating new trends in data and regulation into your planning – once that is seen to be central to the way you do business, costs reduce and it becomes easier for your people and process to “do the right thing” by your customers.
Strategic partnerships have to work for both parties involved; getting the right partner who can align with your strategy, deliver an operation which can adapt and be future proof, with straight through processing isn’t straightforward. Nor is getting regulatory approval. Ensure you can call on independent expertise to ensure your firm gets the right result when outsourcing.
Customers want a simple user experience, real time access, one click delivery and zero downtime, the Regulator increasingly expects very detailed “big data” tracking – so plan ahead to incorporate adaptability and compliance into your requirements to avoid re-work later on.
The systems you replaced may need to be kept running for a number of years after the new system is introduced. Ensure the migration active customers off your old system is central to your planning, negotiate with suppliers for cost reductions during run off and budget for the long tail costs of shutting down and archiving your legacy data.
There are two clear options for consideration – firstly, continue to maintain your current infrastructure and bolt-on additional technology, or second, take the opportunity to completely renew your banking platform. Technology is changing faster than ever, and our recommendation is to renew the core banking platform now, allowing you to take advantage of agile solutions, enhanced security and the ability to truly shape your customer’s experience to be fit for the digital world in which they reside.
At BearingPoint, our experienced team of Management and Technology Consultants have a digital pedigree, a unique appreciation of the customer journey, and deep experience managing large change programmes across the financial services spectrum. Our industry experience means we know the pitfalls and can work alongside you and your suppliers to manage your risks, ensure you deliver on time, on budget and help you ensure the customer is at the heart of your business and its digital proposition.
Author: Simon Rose1 – Provided by research firm Celent 2 – Interview by Chris Skinner on his ‘the finanser’ blog, published 18th February 2015 3 – CMA press release on 18th July 2014 as part of the investigation into banking competition 4 – Financial Times article on 5th April 2015