Banks are Still Using Decade Old Core Banking Systems – Why are They so Behind the Digital Age?

Banks are Still Using Decade Old Core Banking Systems – Why are They so Behind the Digital Age?

by January 30, 2017

The question that has plagued the financial services industry for a number of years – is why are banks not keeping pace with technological change? Why do they continue working with archaic and monolithic systems that are prone to failure and are expensive to maintain?

The core banking systems owned by the UK banks are typically at least 10 years old and there have been inevitable public failures that have resulted in substantial fines being levied by the FCA. In 2014 the FCA fined RBS, NatWest and Ulster Ltd £42 million for IT failures.

Tracy McDermott of the FCA said, “Modern banking depends on effective, reliable and resilient core banking systems”.

In this particular case, the issue was not reported at the time as a direct result of under investment in IT systems, but it clearly indicated the seriousness with which the FCA would approach IT failures. However, RBS has since admitted that its systems need an overhaul after many years of under investment.

Given everything we have just said, why would the banks not decommission legacy systems and implement modern and robust systems?

The global economic crisis of 2007/2008

This one does not need an explanation more than – things got very tough and budgets got cut. There was no appetite or money to invest in new core banking systems.

Failure to recognise technology as a differentiator

Within traditional banking, core banking systems were seen as a necessity, but not necessarily as a differentiator. Therefore, an attitude of making do with what they had was typically employed.

Focus on merging technology

The Banking industry is no stranger to mergers/takeaways and so on. Let us take the example of Lloyds and HBOS who came together as Lloyds Banking Group. In this scenario, a decision has to be made in terms of whether both core banking systems will remain, can they be connected, can everything be migrated onto one of the systems, or should it all be thrown away and a brand new implementation be planned.

What has typically happened is that the Banks have gone for a complex hybrid of the two legacy platforms, where elements of infrastructure are decommissioned over time. The truth is, replacing all the systems when they were managing a far wider business merger seemed too hard!

So what about now? The good news is that things are changing and the larger and more traditional banks are beginning to invest in major core banking upgrades/transformations. One of the key motivators for this change has come from the competition being presented by the likes of Metro Bank, and Oaknorth who are seeking competitive advantage through technology.

Oaknorth is the first UK bank to have its core banking system in the cloud. These are just two of many new Banking entrants who are getting FCA approval and are having success through their technology – both from an internal, and a customer value perspective.



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