Hannah Prevett takes a look at the thorny issue of core banking systems

The recent credit crunch brought some of the UK’s biggest banks to their knees. Though the economy is now back in growth mode, the financial services sector continues to face unique challenges. Where the High Street giants were the unequivocal market leaders, an increasing number of challenger banks and FinTech companies are springing up and quickly gaining momentum. Meanwhile, the big banks are encumbered by ageing core banking systems and struggle to keep up as a result, threatening their very survival.

There’s no doubt that these systems are wildly out of date, says Anne Boden, CEO of Starling Bank, which hopes to launch next year. Boden has also held senior positions at major financial services institutions including Standard Chartered, Zurich and Allied Irish Bank, thus she is well aware of the size of the issue. “The majority of the systems they’re using for core processing of customer accounts is the bespoke software built in the 1970s and 80s – and sometimes even earlier than that.”

While a handful of banks have successfully updated these crucial systems, it’s been costly and time-consuming. “Two banks have replaced their core banking systems; Nationwide and Commonwealth Bank of Australia. Both of those organisations embarked upon six or seven year projects to replace the systems and it’s very expensive – it’s taken billions of pounds or dollars and it’s taken many, many years.”

It’s a very brave CTO or CIO who takes on a project of this magnitude, she adds. “These projects are basically a CIOs’ graveyard. You take on a new job and people tell you, ‘our systems are broken and we need new ones.’ But do you have the energy to spend five or six years of your career to do this and then the courage to press the button to migrate? It’s a very difficult decision.”

The biggest technical challenge is keeping the lights on and continuing to provide an excellent service to customers whilst tinkering under the bonnet. “I’ve heard a lot of banking IT teams equate core systems replacement to trying to replace the engine in a moving car,” says Rahul Singh, president of business services and financial services at HCL Technologies. “They argue they’d have to come to a halt for years if they wanted to do a complete rip-and-replace, which banks simply can’t afford to do in today’s 24/7 economy.”

What’s more, it’s also very difficult to secure ageing infrastructure against growing security threats. “To do that you have to upgrade them to the latest version of all of the operating systems and the core systems were never intended to work under these new operating systems,” says Boden. Needing to spend more time and resource fixing bugs and security glitches mean the same systems cannot be updated or replaced. “You get to the situation where you have resource contention in that even though you have the money and the people, you can’t put them to work because the same product or software is being worked on for security issues or routine maintenance.”

To compound matters further, the financial services industry is gradually losing the skills of people who are used to grappling with chunky mainframe technology. “The generation of workers that has maintained the mainframe until now is dwindling as they reach retirement age and the younger developers coming in to replace them don’t have the same, necessary skill sets needed to take over from them,” warns Steven Murray, solution director at Compuware.

New kids on the block

The upshot is that bulky old banks are struggling to keep up with newer market entrants that don’t have the same challenges around legacy systems. Challenger banks such as Atom, Fidor and Starling have an immediate advantage, says Ted Rees, partner at Crossbridge. “This could be seen as a significant advantage in a time where technology is advancing at a pace that traditional banks are struggling to keep up with. It could be argued that if you started a new bank today, you would have your pick, budget dependant, of the latest technologies…This opportunity may prove to be a tipping point for smaller, newer or less complex organisations, as traditional banks may not be able to provide functionality that future consumers will expect – even if they have the desire and funds to do so.”

Singh agrees that the new cohort of upstarts have the upper hand when it comes to agility. “The new FinTech startups possess a significant advantage over many of their more established rivals in that they are not weighed down by the same hugely complex hulking legacy core IT systems. This enables them to achieve far greater cost-efficiencies as well as making them more agile in responding to innovations and market opportunities. As a result, they can create more competitive service offerings in areas such as payments or loans,” he says.

The digitisation of customer services, within financial services as well as other industries such as retail, doesn’t just heap pressure on core banking systems, but it also means that news of any outage spreads like wildfire via social media. “It has to work on day one – it can’t go out for 10 minutes or 20 minutes – when you do a migration, it has to work immediately and be resilient. The testing you have to do prior to conversion is enormous,” says Boden. “We all know the consequences of systems outages – we all know what happens when these big banking systems fail and the implications for customers.”

The implications of such an outage reaches beyond the ire of customers on Twitter. Last November, Royal Bank of Scotland (RBS) was fined £56 million by regulators after problems with a software upgrade in 2012 left millions of customers unable to access accounts, withdraw their money overseas and make timely mortgage payments.

As the newer banks aren’t steeped in history, they don’t face the same risks when software and systems are upgraded and data is migrated. “Banks have thousands of systems – they have those they’ve acquired through each acquisition, they have systems for each segment and each product – and then these are all joined up with spaghetti,” says Boden. “I’ve spent 30 years in the industry, I’m a banker and a computer scientist, and all this has driven me to the conclusion that the only way to get something that’s really great for customer, that’s really responsive and really up-to-date, is to start from scratch.”

So that’s just what she’s doing with Starling, which is hoping to obtain its licence from the FCA this year, ahead of a launch in 2015. One of the technologies she’ll be able to take advantage of from the get-go is private cloud. “The thing about cloud is that it’s scalable, so you can procure servers as and when capacity is demanded so that’s really good for banks like ourselves that are going to grow very, very fast. It will scale with us,” explains Boden.

What does she think the banks’ response will be to the growing threat posed by banks like Starling? Will they make core banking system upgrades a priority? “Even if the banks decided they had to stop everything else and focus on getting this problem sorted, they couldn’t change their core banking systems in less than five years. That’s why I’m doing this job rather than being in a big bank,” she says.

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