When the Banks children in Mary Poppins start a run on the bank, customers take fright because they are worried the institution is going to run out of cash.
In the digital age, the critical issue for banks is not really cash but server capacity. The run on Northern Rock in 2007, at the onset of the global financial crisis, started because the bank could not handle the online traffic on its website as customers tried to transfer money out.
Now, the critical nature of bank IT infrastructure has become a central preoccupation of regulators. IT is at the heart of running a high street bank, but the challenge for UK banking is that much of it rests on systems dating back decades which are unable to take the pressure of the growing demands being placed on them as a result of the digital revolution.
The problem lies at the heart of a bank’s IT infrastructure – its so-called “core banking system” – which credits and debits money to your current account, and calculates fees and interest. Most of the big banks still have core banking systems that date back to the 1970s or even 1960s.
Rather like an old house built on ancient foundations with new additions over the centuries, the banks have added on modern bits around the core over the years to provide new functions and services. But it becomes harder to patch up.
In many parts of a bank’s operations, technical problems with systems are not evident to customers. If the mortgage system goes down for a couple of days, few outsiders will notice. But customers expect transactions on their current accounts to be virtually instantaneous. In the digital age, 99 per cent reliability is not considered good enough by customers.
At the same time, as mobile and online activity rockets, the volume of real-time payments is increasing exponentially – it has roughly doubled since 2004.
On top of all this, customers have become accustomed to a constant diet of innovation in the form of new functionality and services, and banks are seeking to provide a deeper, richer service that requires them to analyse huge volumes of customer data.
It is no wonder that IT systems are creaking at the seams.
The big question facing the industry is whether to opt for an evolutionary approach or go for more radical change.
Replacing the core banking system in its entirety has been likened to changing the engines on a 747 while in flight. It is certainly a difficult and costly undertaking, but it is far from impossible.
Nationwide’s implementation of a new core banking transaction software platform, and the transformations brought about through Lloyds Banking Group’s integration of HBOS and Santander’s integration of its UK acquisitions, shows what can be done.
However, there have been costly failures too, and chief executives are understandably nervous about committing themselves to such ambitious IT programmes.
One alternative is evolutionary transformation by gradually migrating to a simpler, more resilient IT system. This phased approach is less risky than a “big bang” migration, but it depends on the bank’s ability to implement changes in a consistent and disciplined fashion over a number of years. That is not easy either.
A more attractive approach for many banks (and particularly for the new “challenger banks”) would be to outsource their core systems to a third party, which could then operate as a utility.
Switching to a proven provider like this would be relatively quick and cheap and this model is well-established in the United States, where mid-sized banks have the choice of a number of core banking utilities, but is not currently available in the UK to make an impact.
There is little doubt that IT pressures on banking are now escalating at a much faster rate than before.
The combination of elderly core systems, the coming of age of the digital generation and the growing pressure from regulators means that the UK banking industry needs to make fundamental changes to its IT infrastructure in the coming years.
It always pays to be wary about any major IT project, but it is time for banks to grasp the nettle.
• David Parker is the UK and Ireland banking managing director at Accenture
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