Computer hardware failure, which last Sunday shut down some cash machines and blocked debit cards, was the latest technical glitch to hit the high street – evidence that the financial services industry must throw off the legacy of outdated technology and modernise, writes Pádraig Floyd
Financial services is an information-based industry, yet technology has never been a strong suit. Some experts estimate perhaps as many as 80 per cent of financial services organisations are sitting on core systems which are 25 to 30 years old where the current ratio of 80:20 in terms of maintenance and innovation needs to be reversed.
“Large swathes of financial services remain dependent on so-called legacy systems; outdated, patchwork platforms which rely on manual processes and ancient technology to function,” says John Mayr, marketing and partner development at SimCorp.
The dominant view in banking, insurance and asset management, has been that if it ain’t broke, then don’t fix it, because in the past these systems have been exceptionally cheap to run.
“Boxes have sat there for ten or fifteen years and people are afraid to go near them, so they are patching systems on top,” says James Haycock, managing director of Adaptive Labs.
This presents considerable risk. Adding new to old doesn’t make the system better and every year there are fewer technicians who understand the systems that underpin the core. As a result, businesses are spending increasing amounts of money maintaining obsolete, inefficient systems.
The financial space, and in particular retail banking, is moving faster than before, says Mr Haycock, and technology is levelling the playing field.
Obsolete technology is not the only driver of change. Regulation is increasing and fines for those who fail to meet the standard are becoming punitive. Yet despite this, financial services is dominated by “salami-slicing” and cost-savings, says Jean Lassignardie, head of sales and marketing for Capgemini Global Financial Services.
“Financial services cannot do cost-cutting only,” he says. “Businesses cannot continue to compromise the engine of growth for the future.”
Mr Lassignardie says outsourcing will increase with banks and insurers adopting third-party technology that allows them to integrate their creaking core systems with 21st-century flexible applications.
The financial space, and in particular retail banking, is moving faster than before and technology is levelling the playing field
This may not seem like a major step, but sharing technology is a radical departure in such a competitive industry, according to Steve Vinnicombe, a partner at Capco. This will happen in areas where competitive advantage is not as important.
“Though this does allow them to share in others’ utility,” says Mr Vinnicombe. “There is a risk and fear of what may happen in a disaster.”
The consensus is that core systems will continue to be maintained, while interactive systems are layered on top.
However it happens, technology used by banks has to catch up with the technologies employed by its customers, says Guy Bunker, senior vice president of products at Clearswift.
“Financial services and companies in general face a tsunami of personal information and company critical information flowing between mobile devices and smartphones, and this is going to get ten times worse in the next three to five years,” says Dr Bunker.
Individuals already expect a high level of integration of technology with their various accounts and this is set to increase.
This extends far beyond the digital native for whom “gamification” – literally to make the navigation of a process gamelike and therefore “cool” – was developed. It now includes those who have become more sophisticated at accessing data remotely and increasingly expect interaction to be both swift and efficient.
“However, the way they wish to access this data is at loggerheads with the security and methods of handling data at banks,” says Dr Bunker. But they’re going to have to get over it.
Banks have managed to silo each business channel in order to maximise the opportunity, yet have been slow to understand that technology isn’t a channel to exploit; rather it is something to integrate all channels.
Some of the more innovative retail banks have understood this, says Rahul Singh, president, financial services and business services at HCL Technologies, making customer interactions easy, relevant, transparent and cost effective.
“They do this by focusing on customer data and analytics, integrating the different channels a customer might use and also fundamentally re-engineering business processes by looking at how technology can not only improve the customer experience, but also reduce the cost of business,” he says.
And it’s not only in retail banking. This is happening in investment banking where real-time risk management is considered essential and in corporate banking where parties engaged in mergers and acquisitions activity demand access to information, not through the appointed bank, but their own trusted provider, whoever that may be.
The business world functions on data and it is the customers of financial services companies who will determine how that data is exchanged, not the providers. This means more collaboration, greater sharing and placing the customer before the limitations of their internal systems.
It’s a hard lesson for the industry to learn, but learn it they will, because the world has changed and if they don’t cotton on fast, they’ll go the way of the dinosaurs.