Legacy core banking systems are well past their shelf life and adding on new layers of functionality at the front end just won’t make the grade, writes Chris Skinner.

There is a phrase used by many people that criticises banks for sticking “lipstick on a pig”. What they mean by this is that you can make front-end systems look pretty, but if the back-end systems are a mess then they will still be found wanting. A pretty pig is still a pig. However, sorting out those back-end systems is incredibly difficult and risky, so why do it?

There was a headline that caught my eye about this when two Australian banks were trying to merge. The headline screamed ‘Australia's two most technologically challenged banks could merge’, and the article discussed the tech headaches of Suncorp and Bank of Queensland (BOQ). Both banks have been trying to change their core systems over the past few years – and have failed.

Their common issue is with core systems that cannot keep up with the digital world. They’re not real-time; they’re not easy to change; they’re unable to keep up with the needs of open banking and open application programming interface plug-and-play code; and they’re unable to integrate with third parties. In other words, these banks are behind the curve and now trying to overhaul a legacy structure built over the past half-century that is not fit for this century.

Cosmetic changes

This is true of many banks I deal with, and most have managed to get by for the past decade by trying to spruce up the customer interface. A mobile app stuck on the old branch passbook system of the 1970s mainframe has been just about enough to keep up. But now these old systems are becoming blatantly obvious as not fit for purpose to customers.

Examples include chunky, laborious screens that customers must deal with to make a payment, especially an international payment; a lack of alerts due to back-end systems being unable to communicate changes to the front-end mobile apps; and basic transaction information rather than full personal financial management with information enrichment.

These examples are laid bare when you compare traditional bank digital services with challenger bank digital services. All of the functionality provided in account management and payments is made simple and enriched with data from the challengers; the lack of information and analytics in the traditional bank account is fine for those who have not seen the alternative.

The issue is that when your friends and their children are all showing you what the alternative is, it is difficult to ignore; and this is what the Australian banks have discovered. System changes that should have been made years ago are now being delivered – too little, too late.

BOQ’s interim CEO and chief operating officer, Anthony Rose, lamented a slump in the bank’s cash earnings during an investor call, stating: “Our digital customer offering, lending processes and the inability to attract new owner managers, with the overlay of regulatory uncertainty, have hampered customer acquisition and returns.”

Meanwhile, Suncorp has spent millions trying to replace ageing systems in 'Project Ignite'. The aim was to replace core systems and to be up and running in 2016. The change has still not taken place and, in February 2019, Suncorp CEO Michael Cameron complained that the costs of running two parallel systems was costing Suncorp A$11m ($7.64m) a year and was the “last thing we wanted”.

Digital first

Bearing in mind these issues, why do banks feel compelled to replace the core? Because customers are voting with their feet and the banks are losing market share, seeing earnings dive and losing investor confidence.

The specific issue is that the banks have avoided engaging in what they saw as technology fads over the years, something that pleased conservative investors. Now, the banks are left stranded as everything goes digital first around it, especially the customer.

Australia, like many countries, is seeing a rise of many new banks who appeal to these customers. For example, 86400, UBank, Up, Volt Bank and Xinja are all new digital-first banks. Add to these the big banks’ ability to invest in innovation, and Suncorp and BOQ’s lack of ability to keep up has become glaringly obvious.

For me, it is the nail in the coffin for the banks that have avoided core systems change. I personally made it a mission that banks must change these systems a decade ago, and recently said that banks that did not make such changes had maybe three to five years left before they would lose customers and become acquisition targets. Maybe I was too optimistic and the time is now… or even last year perhaps.

In conclusion, if you’ve avoided the core systems change bullet, it is time to take it. In fact, it is well past time. Get on and do it.

Chris Skinner is an independent financial commentator and chairman of the London-based Financial Services Club.

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