I had a fascinating chat about banks and their legacy systems the other day and concluded that legacy issues are the banks’ own fault.
There are two issues: one relates to banks believing they are stuck with overheads they want to eradicate, but customers won’t let them go; the other is banks being stuck with legacies due to previous management’s lack of bravado.
The first relates to things such as cheques. Banks want to get rid of cheques and, in the UK, announced that they would phase these payment services out in the near future. The media and public reaction was not positive. “Oh no,” said the customer, “look at small businesses and old people. They need these payment services.”
A simple dilemma
This dilemma is a simple one: as you bring in new capabilities, you need to delete the old ones. If you introduce mobile internet banking and do not want customers to use call centres or branches, then charge them for the pleasure of doing so. A fee per transaction in branch or call centre would soon stop customers using those channels.
But banks then scream: “We can’t do that, we would be ripped to shreds by the press and regulators.” Sure, sure, sure. So turn it around and give customers a discount if they use the channels you want them to, rather than punishing them for using the ones you do not want them to.
“But that is what led to free banking,” screams the banker fraternity and we don’t want a repeat of that disaster. In that case, banks should time limit the offer or, even better, make it a behaviour incentive approach.
How about: “For the first year of mobile banking, if you never visit the branch or phone our call centre, we will give you £100 cash back” or something similar. It is amazing how customers change when you reward the right behaviours. Then, over time, you are naturally punishing the wrong ones.
Just look at the transit industry for a lead here. When authorities introduced contactless payment cards for public transport, journeys paid for by card were charged at half the price of a traditional ticket. Gradually, the pricing of those contactless journeys became the same as the old ticket-based journey, while the ticket-based journey became double the cost of the contactless journey. Simple mathematics and it works.
The London Oyster card, for example, was launched in 2003 and now more than 7 million Oyster cards are regularly used in London. Each week, 57 million journeys are made with Oyster cards.
In 2011, more than 3 billion journeys were made with Oyster cards, representing 80% of all bus and underground train journeys. That is simply because a bus or underground journey costs about half the price of a traditional ticket (£4.50 [$7.25] cash versus £2.10 using the Oyster). Meanwhile, operator Transport for London makes about £53m a year in unused monies left on the cards. Banks could learn a thing or two from this sort of incentivised price and reward model.
Goodbye to the old
Then we get to the other issue: the legacy. Banks complain about the cost of keeping up with the new when so much cost goes into maintaining the old. Doesn’t this reflect the bank’s historic management being too spineless to tackle the issue?
No one wants to eradicate the old if it means risk, but not taking the risk is creating a bigger issue downstream. Similar to an unexploded bomb in the bank, ticking away until one day it explodes, a critical systems failure happens because no one bothered to overhaul the system.
The legacy is no longer a good excuse for a bank. Banks should not be hamstrung by heritage, but need to be fit for the future and they can only achieve future fitness by continually refreshing and renewing.
So, for a bank with any systems constraints, it really should be looking to rip those systems out and replace them, rather than living with the time bomb and applying a little more lipstick to make it look better.
Chris Skinner is an independent financial commentator and chairman of London-based The Financial Services Club.
