The traditional payments industry is in a state of uncertainty. A wave of innovation has swept through the last decade creating dramatic changes in the way we make payments. This disruptive combination of emerging technologies and fresh faced non-traditional players entering the market driven by changes in consumer behaviour has tipped payments on its head. Traditional brick and mortar banks no longer have the upper hand and in an environment of shifting alliances and niche opportunities, financial institutions (FIs) need to invest in their underlying technology to ensure their place in the market for the foreseeable future.
Operational pressures aside, the underlying challenge facing FIs lies in serving today’s mobile, socially-oriented, security conscious and loyalty reluctant consumers that rule over a highly competitive market place. Without having the right technology platform in place, traditional FIs face a struggle to remain relevant in the face of all this disruption. FIs may consider a complete overhaul of their payments infrastructure extreme and for many it might not be the best solution as there are other options available. However, as high profile system crashes continue to make headlines, it is clear that something needs to be done to future-proof these established existing systems, and soon.
Let’s get one thing straight. There is nothing wrong with mainframes. Yes, they are more than 40 years old, and no, they were never designed to support the innovations of today. However, legacy systems have coped reasonably well so far and they are functionally capable of handling high transaction loads. The issues highlighted in the press about legacy systems ‘holding back banks’ and acting as ‘ticking time bombs’ aren’t altogether incorrect either. For larger institutions it is simply a factor of weighing current stability against risk and the additional risk of doing something new. The key factor tipping the balance towards system replacement isn’t functionality, scalability or even fault-tolerance; put simply, it is the correlation between system age and the cost of maintenance. It is this lack of continued investment that aggravates performance and ultimately causes glitches.
The system modernisation options available to FIs that continue to retain their original system architecture are plentiful: from customisation, adopting the wrap and renew approach and outsourcing parts or all of their business, to system replacement in its entirety. Whilst customisation offers a quick fix; years of patches and plugins can take their toll, making integration complex and risk creating both organisational and product silos. In fact, this is where a large portion of brick and mortar institutions in the developed world find themselves now. The addition of external applications to avoid replacing old software has effectively created spaghetti systems that increase complexity and risk.
The reason behind quite a distinctive lack of system replacement that drives FIs to continue along this path is cost. FIs need to make profits, and profits don’t come directly from basic infrastructure upgrades; at least not with any immediate effect. Exciting new front office applications quickly rolled out to impress the customer constitute the most ‘effective’ approach of increasing profit margins. However, delaying change brings about its own cost; IT experts with legacy skills are fast becoming a rare commodity and they don’t come cheap. Change is always considered a risk but at some point in an FI’s strategic roadmap it will stop being optional.
The wrap and renew approach has certainly been popular. This is where an application layer is wrapped around a legacy system and it is this modernised layer that staff and customers interact with. These wrappers are usually based on Service Oriented Architecture (SOA) even through the underlying infrastructure remains the same. On the upside, FIs are still able to enjoy some of the benefits on offer, such as increased system agility and configurability. On the downside, FIs are still limited to the functionality of the underlying platform. Whilst integration is easier, there is a new layer of complexity to contend with. Such is the popularity of these wrappers that many software vendors that claim to offer SOA systems are actually offering a SOA-based application layer rather than systems built on this software architecture model.
The methodology of complementing legacy systems by building customer-centric applications around them has certainly been a success and has enabled FIs to add value to their service offerings. This is still a stop-gap solution as in the long term the addition of these plugins will ultimately lead to the same complex and fractured operational environment they find themselves in now. However, as a shorter term solution, it is a very relevant option.
Due to the success of customisations and wrapping, however temporary, customers now expect banking services in real-time 24 hours a day. As customers only see the shell of the banking operations and don’t have to contend with what lies beneath, there is a very real discrepancy between how financial data appears to both parties and this opens up the possibility of system errors.
Outsourcing is another viable option, one that is very popular in the US. The choice between keeping all or some IT operations in-house or outsourcing them isn’t clear cut and there is no outright or correct ‘a’ or ‘b’ answer. The decision should depend on a combination of factors centred around the strategic position of the FI and their long term goals. Investment, time-to-market, available resources, legislation, competitors, etc., are all important considerations and must be included in the decision-making process. If there is a lack of staff available to run operations efficiently, then outsourcing could be the better option. In some cases, it could be more advantageous to outsource standard operations that don’t add value to the customer experience and keep differentiating services in-house, so as not to drain resources. There are many pros and cons for the outsourcing option and the success of this model is dependent on the requirements of the individual FI.
System replacement can be expensive. As with outsourcing, this can be done as a staged project or using a rip and replace approach. System modernisation doesn’t need to be immediate; it might be more practical to replace the front office first or implement a new system for mobile payments. The importance here should lie heavily on the platform introduced and its capability for future-proofing your business. Both modular and open development platforms are conducive to longevity depending on business need. Modular systems tend to be pre-built and offer software development kits (SDKs) for customisation, whilst truly open development platforms are in essence giant SDKs with limitless capabilities for development.
Whether FIs choose to customise, wrap, outsource or replace, the need for system modernisation is clear. As the modern dependency on banking systems grows, their fragility to sustain the performance expected by the end user becomes more apparent. Legacy systems do have value but they also have an expiry date and FIs should try to view system modernisation as an opportunity to enable their business rather than an expensive burden. Ultimately, the success of an FI lies with complete understanding and clarity of their businesses resources, strengths and weaknesses and clever investment into the right areas: essentially qualifying who they are and quantifying who they want to be and having the nous to make the right technological decisions to support this.
Bethan Cowper, Head of International Marketing at Compass Plus