Today’s Core Banking Systems:
Why they can’t do the job any longer
Today’s core banking systems are a major and sometimes even the major problem in moving from a business built for reliability and stability, with IT as a rigid set of disparate processing elements, to one where agility, flexibility and speed are the currency of competition.
A 2014 survey of executives reports that the majority of banks’ systems are more than ten years old with many dating back thirty years; only 10% have changed platforms in the last three years. The cost of maintaining existing CBS amounts to 70-80% of most banks’ IT budgets. This is higher than the average for other industries, where the reported figure is generally 60%. It is well over double that for online firms like Google, PayPal and Amazon, for whom maintenance is 30%. Much of the maintenance comes from the inflexibility, redundancy, differences in data definitions, lack of documentation of old code, “patching”.
That not only doesn’t add value but also diverts resources from investment in innovation. It locks companies into escalating costs and business inflexibility. It multiplies product and service time to market by factor of 3-10. It locks banks into their technology base, which means locking them in to processes, strategies and markets. It gets worse, the older and more complex the CSB becomes. The survey article comments that “Institutions are becoming more tied to their vendors’ platforms…[as] banking solutions become more sophisticated, it will likely become even harder for banks to make a change.”
At least this is all some improvement over 2010, when another survey of European banks found that 69% of the systems were 11-30 years old and 11% predated the 1980s.
The core banking systems in widest use today were built for back office discipline. They are outmoded in just about every way: the hardware was discontinued several decades ago. A figure that shows how much banks in general are at the trailing edge of technology is that in 2014 an estimated 95% of the world’s ATMs use the Windows XP operating system. This was discontinued by Microsoft in 2005 and has since been replaced by Windows Vista, 7 and 8. It ended its support of XP in mid-2014. The operating costs of XP are around five times those of Windows 7. So banks are relying on a key software base that is years behind what their customers have on their home PCs.
The primary CBS programming language, COBOL, is decades behind standard practice. It is the equivalent of Ancient Greek. In a field where currency of technical expertise is a dominant factor in building an IT talent base, the average age of the COBOL language programmers who look after these legacy systems is close to 50, with over a quarter of them entering their 60s. COBOL is no longer taught in colleges or used in any Web-based application.
Like an old truck, more and money has to go into maintenance to keep things on the road. There are many software packages that allow them to be extended without having to redesign the core, though these almost always increase the complexity of the IT operations, especially maintenance. At a certain stage – which is increasingly now not sometime in the future – the systems start to collapse.
The UK is a warning alert here. It is a concentrated market with six financial institutions accounting for 94% of all transactions. Every ones of them has had systems crashes over the past three years: NatWest 2012 and 2013, “millions” unable to make withdrawals, transfer money, or use debit cards for three days; Lloyds TSB, 2014, ATMs down nationwide for half a day; RBS 2012 and 2013, cards blocked and accounts locked for days; 2012 Ulster Bank, locked out for weeks; Barclays, 2013, internet and phone banking out of service, all debit cards unusable; Natwest, Halifax, and Bank of Scotland, mobile banking crashes not infrequent. Statistically, every bank customer in the UK has been affected by a major crash or crashes in the past two years.
Banks’ existing systems can still do the job – the old job. They keep the back office up and running, though as the UK examples suggest, tacking on a new Internet or mobile banking feature to an already inefficient core can crash the ATMs and basic processing that used to work well. But at best they keep the bank running in place; they are not the basis on which to build the customer experience, speed up time to market, customize service, or target extended financial markets and services.
The new job demands a very different and wider range of capabilities, both technical and organizational. The key demands are speed, adaptability, integration, flexibility, cost efficiency, access and customer-centricity. This list captures the business agenda and the very same set of words defines the IT requirements.
The major shift in effective use of IT to compete through the customer experience is towards an architecture that provides these capabilities. They cannot be met by any core banking system that is ten years old or more. Delay turns “cannot” into “it’s totally impossible.” Of course, technology never in and of itself creates successful business innovation. The classic cautionary tale here is GM spending $54 billion on IT acquisitions as its market share continued to drop. At the end of this, it could have bought the entire Japanese car industry for a mere $35 billion.
But, no bank of today can position to be a customer favorite tomorrow without a first-rate IT architecture. The CEOs in UK banks plus their critics plus regulators plus customers plus competitors point to decades of underinvestment in IT as the main factor in declining service and increasing risk. IT has to be high on the Board agenda while there is still a little time left to move.