The past quarter has seen a spate of IT failures among UK retail banks, highlighting the dangers of the antiquated, legacy technology systems that dominate this sector.
In late January, Lloyds customers were outraged to find that their debit cards were declined and about 3,500 ATMs were not working for approximately three hours.
This followed “Cyber Monday” in early December, one of the busiest online shopping days before Christmas, when a systems crash left more than one million RBS customers unable to withdraw cash or pay for goods. Customers using NatWest and Ulster Bank operations were also affected.
Following the incident, many analysts and banking industry commentators noted that RBS’ IT systems were made up of a complex patchwork of systems following dozens of acquisitions. Ross McEwan, who became chief executive of the bank in October of last year, admitted that the bank had failed to invest properly in its IT.
The scope of the patchwork in place became clear in February, when RBS announced that it would be slashing the number of technology platforms it uses by 50%. The bank intends to move from 50 core banking, and 80 payment systems to around 10 of each. In its announcement RBS directly stated that it would be “maintaining a similar level of investment spending but directed at customer-facing process improvements, instead of maintaining inefficient legacy infrastructure.”
This hits the nail on the head – legacy systems are broadly inefficient and subsequently take up budget to maintain that could otherwise be used for investment in better technology. These problems have been building for many years. A case in point was when in 2012, Andy Haldane, director for financial stability at the Bank of England, told lawmakers that banks needed to transform their IT because they had not invested enough during the boom years. Haldane said 70-80 percent of big banks' IT spending was on maintaining legacy systems rather than investing in improvements. That may actually be an under-estimate.
Any organisation that is overly-reliant on technology that is not fit for purpose is playing a very dangerous game. But despite this, legacy systems continue to pervade the financial industry. The asset management sector is another prime example. A 2013 study published by research institute SimCorp StrategyLab found that at least one in four asset managers worldwide is running their core processes on outdated technology. As the top 2,000 firms collectively manage upwards of US$80 trillion in assets, potentially trillions of dollars are at the mercy of technology that is no longer keeping up with changing needs.
In addition to the potential economic and business costs of sticking with a legacy system, a number of other likely consequences can be identified. One is risk management failure. Proper understanding and mitigation of risk, compounded by the speed with which market conditions and requirements change, is extremely difficult to achieve using manual processes and outdated technology.
The use of spreadsheets in particular is prone to error and carries related risks. This should not be underestimated; spreadsheet errors were said to contribute to JP Morgan’s loss in 2012 of US$6.2billion in the “London Whale” trading incident.
Furthermore, over the past decade, investable asset classes have hugely expanded; emerging markets securities and derivatives, for example, have become mainstream. Many technology systems pre-date such shifts. And the pressure for faster reporting has increased, not just from clients, but from regulators too. Emir, Dodd-Frank and Mifid all carry significant reporting requirements for asset managers which are difficult to meet without modern technology.
Finally, investment firms are inundated with huge volumes of data, which in a legacy systems environment feeds into different processes and organisational silos. A legacy system environment is not equipped to analyse or manage this in a timely or useful way.
So why is the majority of the financial sector, putting to one side the RBSs of this world, seemingly so reluctant to replace systems carrying an in-built business risk – a “ticking time bomb” that could undermine their entire business? A number of issues may stand in the way – the complexity involved in decommissioning interwoven infrastructure or the expected cost to change are often cited, for example. Whether such objections bear scrutiny or rather reflect complacency or inertia isn’t clear.
Whatever the justification, relying on legacy systems rather than replacing them can be a false economy, hampering longer term business prospects as essential operational processes become outdated and costly workarounds are needed. Firms that employ outdated technology are not only storing up potential problems for their customers they are threatening the very future of their own businesses too.
Ultimately, replacing legacy systems will save companies money and improve how their customers are serviced despite the initial outlay. RBS’s recent investment decision should therefore reap benefits for all stakeholders other than, perhaps, those involved in legacy system maintenance.
Peter Hill joined SimCorp in February 2006 following a 26-year career in IT management and sales, the last eleven of which were in sales of high-end application solutions to the financial services industry. Prior to SimCorp, Peter was managing director of Fiserv Asia Pacific. He represented the company in relationships with major clients and key business partners in the finance industry, as well as regulatory authorities. Peter previously worked with IBM Australia for 18 years in sales and management positions and was appointed as general manager for finance and insurance industries for Australia and New Zealand.