The other day, I realised something about this new market of fintech, in which banks are becoming financial systems integrators. This realisation was that banks really should think about what they are doing, as they race ahead developing so much of their core capabilities internally. Right now, coders are the new rock stars, and banks develop pretty much everything themselves – I can think of hardly any Tier 1 banks that have not developed their own core systems.
Most banks are proud of this fact. For example, one of my top statistics is that UK-based bank HSBC has more developers than software multinational Microsoft. Microsoft employed 1000 developers to produce its operating system, Windows 7. The average mid-size regional bank is employing more than double this number while the average major global bank is employing more than 10 times this amount. Last time I looked, HSBC had more than 13,000 developers.
Why is this? Because banks developed their own core systems back in the 1960s. They then added lots of middleware and front-office applications onto these systems. They then found that these front, middle and back-office systems needed to be adapted to support call centres, then the internet and, most recently, mobile. Now, they are looking at wearables, the internet of things and everything connected, and they are thinking, 'wow, we need more developers to add these new-fangled gadgets onto our creaky legacy network'.
Wrong. As I have pointed out so many times: banks need to replace their core systems for the digital age.
Dragging their feet
They have to do this because their systems were built in the previous century, for the physical distribution of paper in a localised network. Now, they need to be digital, and their systems are just not fit for purpose. What they need to do is separate the content of their systems (the data) from their processors (the engines). This is something that I have mentioned before, too.
So, I did a Google search, to find out how many banks have actually replaced their core system with a shiny new modern one. What I discovered was a lot of consultancy and vendor white papers, which talk about core systems replacement and how it can be done. But the reality is that no bank is actually doing it.
In mid-2014, technology multinational IBM published a research paper entitled 'Attitudes to core banking transformation in Europe'. The report is based on interviews with 27 European IT leaders in major banks, including nine in the UK. What it found was that there was no bank committed to core systems replacement. Not a single one.
In the US, the situation is similar, with Spanish bank BBVA the only one in the country to have modernised its core. According to most analysts, this is the first bank to venture into such a major transformation in the past 15 years. And even this has not always gone smoothly (see Simple’s technical issues for a case in point).
So we have PayPal struggling to keep up with new online payments player Stripe, with systems that are already out of date, even if they are only 15 years old, while banks sit happily with thousands of developers maintaining systems that pre-date PayPal, and even the internet in most cases. And that is the reason for all of those developers. Not for competitive purposes, not for innovation purposes, not even for cost purposes. No. All those developers are sitting there because the creaky old core systems need to be maintained whatever the cost.
Approaching tipping point
In the IBM report, two-thirds of IT leaders said that maintaining core banking systems takes up an unusually high proportion of IT budgets. So the obvious answer is to get rid of them.
Banks are not fit for the digital age if they are running on systems that pre-date the internet. Banks that have systems that pre-date the internet do not have a digital core. Banks that have a pre-internet core have a heart that is no longer beating. Banks with pre-internet age systems are only keeping that heart beating by using life support machines, called middleware. And this leaves them facing an uphill battle.
This is the opportunity for the new fintech crowd.
The fintech age will replace the banking age with a new core. A digital one. That is why so much money is going into fintech. It will be interesting to see what happens over the next few years, as these innovators hit the road and, specifically, when we hit the tipping point where these over-staffed bank IT shops are forced to re-engineer and re-architect.
Roll on the digital age.
Chris Skinner is an independent financial commentator and chairman of the London-based Financial Services Club.
