Across the globe, banks are being held back by core banking systems that are decades old. With the rapid rise of digital banking, further stress has been added to already overburdened platforms. Modernising these platforms for the digital age is a huge challenge for IT to plan and execute as well as being expensive, and risky if migrations do not go to plan. At the same time, standing still is not an option.
Outdated banking technology is making it difficult for banks to move forward, but with money and talent at their disposal, why is this a problem that hasn’t yet been solved?
Issues with legacy banking infrastructure
Core banking systems, designed to support a bank’s basic functions on the back-end, were built as far back as the 1970s – and yet many banks continue to operate using these platforms. These ‘traditional’ systems, for the most part, worked well for banks up until the new millennium, when customer expectations and demands began to increase – all around them, the internet and mobile devices started to play a bigger and bigger part in their daily lives.
Not keeping up with the times has already cost financial institutions billions of dollars. Mike Gardner, CEO of Agreement Express provides several examples.
“In 2012, Bruno Iksil, a trader known as the “London Whale,” lost $6.2-billion for JP Morgan. While the underlying reasons why are complicated, one of the contributing causes was that the bank’s value at risk was being manually calculated through spreadsheets. Unfortunately, outdated IT systems resulted in an inappropriate tool, in this case, Excel, being used for a mission-critical process.
“It’s a familiar story, such as The Royal Bank of Scotland’s system crash in 2012, locking customers out of their accounts and costing millions in fines, or MF Global’s collapse as a result of its dependence on outdated IT systems.”
The problem is, despite not being fit for purpose, replacing these legacy systems is extraordinarily expensive and complex.
In a report examining the options for rebuilding legacy infrastructure, EY states that core replacement transformations have consumed over $350 million and taken more than five years on average to roll out.
In addition, there are huge potential operational risks with replacing core banking systems, in fact, McKinsey research revealed that less than 30% of first-generation banking platform replacements have succeeded. One bank who took on the challenge and lost was TSB, who encountered a number of issues when building its own core banking system. Making these mistakes was costly, eventually resulting in a total loss of £176 million, not to mention the reputational damage caused to the bank.
So if building bespoke digital banking platforms isn’t the solution, what is?
The rise of banking-as-a-service (BaaS)
According to a report by Accenture, 39% of banking executives cited their complex legacy IT environment as the greatest barrier to driving digital transformation, with the cost of modernising core banking systems being the most significant obstacle to adopting new technologies.
However, all is not lost. Open banking initiatives and the development of APIs, have enabled third parties to develop new products and services, including back-end solutions, that sit on top of core banking systems to provide BaaS.
This approach allows banks to focus on optimising the front-end customer experience, while not having to replace the ‘pipes’ that deliver core banking services. This significantly reduces the risk of disruption to operations, reduces the cost of completely digitising existing infrastructure, and allows banks to deliver a better service and customer experience in a far shorter timeframe than designing, building, and implementing a platform from scratch.
Banks are increasingly embracing an ecosystem-based approach centred around forging partnerships with third parties. Banking Circle is one such utility that provides banking solutions for financial institutions, including mid-tier banks, eliminating the need to build their own infrastructure and correspondent banking partner network.