I realized something about this new market of fintech the other day, where banks become financial systems integrators. The realization was that banks really should think about what they are doing by developing so much of their core capabilities internally. Right now, coders are the new rock stars and banks develop pretty much everything themselves. I can’t think of hardly any large banks in the UK that have not developed their own core systems.
Why is that? Because banks developed their own core systems back in the 1960s. They then added onto these systems lots of middleware and front office applications. They then found these front, middle and back office internally-developed systems needed to be adapted to support call centers and then the Internet and most recently mobile. Now, they’re looking at wearables and the Internet of things and everything connected and thinking, wow, we need more developers to add these new-fangled gadgets to our creaky legacy network.
They have to do this because their systems were built in the last century for the physical distribution of paper in a localized network. Now, they need to be digital and their systems are just not fit for that purpose. So, what they do is separate the content of their systems – the data – from their processors – the engines.
Recently, I did a Google search, to find out how many banks have actually replaced their core system with a shiny new modern one. How many banks have created a pucker digital core?
What I discovered is lots of consultancy and vendor white papers that talk about core systems replacement and how it can be done. But the reality is that no bank is doing it.
During the summer, IBM published a research paper on Attitudes to Core Banking Transformation in Europe. The report is based upon interviews with 27 European Information Technology (IT) leaders in the major banks, including nine in the UK. What IBM discovered is that not one is committed to core systems replacement. Not a single one.
In the U.S., the situation is similar, with only BBVA cited as a bank that’s modernized its core. According to most analysts, this is the first bank to venture into such a major transformation in the last fifteen years and, even then, it doesn’t always run smoothly (see Simple’s technical issues for a case in point).
So, we have PayPal struggling to keep up with Stripe with systems that are only fifteen years old, while banks sit happily with thousands of developers maintaining systems that pre-date PayPal and the Internet in most cases. That’s the reason for all those developers. Not for competitive purposes, not for innovation purposes, not even for cost purposes. No. All those developers are sitting there because the creaky old core systems need to be maintained whatever the cost.
In the IBM report, two-thirds of the IT leaders said that maintaining core banking systems takes up an unusually high proportion of IT budgets. YES, SO GET RID OF THEM.
Banks are not fit for the digital age if they have systems at their heart that pre-date the Internet.
Banks that have systems that pre-date the Internet do not have a digital core. Banks that have a pre-Internet core have a heart that is no longer beating. Banks with pre-internet age systems are only keeping that heart beating by using life support machines, called middleware, to make it work in unison when it does not. Banks that try to make their pre-Internet core systems work in unison are just sticking lipstick on a pig.
This is the opportunity for the new fintech crowd. The fintech age will replace the banking age with a new core. A digital one. That is why so much money is going into fintech.
It will be interesting to see what happens over the next few years, as these innovators hit the road and specifically, when we hit the tipping point where these over-staffed bank IT shops are forced to re-engineer and re-architect.
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