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Bank technologies are obsolete the day you buy them

I have had the contention for a while that Technology needs to be
seen as disposable.  The day you buy it, it is out-of-date.  No sooner do you invest in new technology, than you find your investment is

It has always been this way ever since the PC revolution took over.  Should I buy an Intel 80386 processor when the 80486 is on the way, and then the Pentium chip and the Celeron, the Xeon and the Atom …

is the point of the IT industry: to change, to adapt, to innovate and
to continually get us to upgrade.  In so doing, technology has moved
from being a long-term investment to a short-term hike.

consumers, we know that this point is obvious.  We get a new mobile
telephone every eighteen months.  No sooner have we bought a new iPod
than the iTouch or iPhone appears.  You just bought an HD-DVD player
when the world settles on Blu-Ray.  You invest in a Sony Bravia TV and
a new one comes out a week later.

Do banks get this?

really.  Many banks still work on net present value depreciation
models.  They still want cost-benefit analysis and 18-month return on
investment business cases.  They need to settle and agree by committee
the decision to purchase, and the committee meets once every quarter,
so wait for your investment requirement to appear on the business radar
before you can even think of a sign off. 

The trouble is, bearing in mind the speed of technology change, these are the processes and structures of yesteryear. 

banks made massive investments in technology that required huge
consideration because of (a) the cost, (b) the risk of getting it
wrong, (c) the time it would take to implement, and (d) the time you
intended to use it for. 

Two to three decades ago, you would be buying into a lifetime’s investment. 

core system would be expected to last … well, a lifetime.  That’s why
so many are still around today.  That’s why so many banks are worried
about changing core systems.
That’s why so much is layered upon legacy, rather than displacing such
legacy, although a lot of the legacy exists due to cost avoidance: if
it ain’t broke, don’t change it.   

In 2008 however, we need to look at things differently.  Nowadays, techology is disposable.  It is obsolete the day you buy it.

Take the CIO I mentioned yesterday,
who sees his issue as applications and capacity.  This CIO had run out
of physical space for servers in London.  Then a front office head of
dealing came up to him and said, “Look, we need to implement a new
derivative to compete with XYZ and we need it fast”. 

derivative was so complex and global, that the CIO basically brought a
lease on a new office, deployed a grid server farm, developed a new
application to run the derivative at low latency globally, and had the
whole thing up and running within 18 months.  By the time it was
deployed, there was more computing power in the new data centre than
the old one. 

That’s disposability in mission critical core applications in action. 

We need to look at things differently. 

need to think that our delivery channels might change every year and
our services may be completely overhauled in months.  Therefore, our systems and
structures cannot constrain us.  They have to be agile and flexible.

And bankers are concerned that their systems are not agile and flexible. 

why Open Account trading for corporates is of concern.  After all, this
moves the commercial bank out of the corporate supply chain to become
just a commoditised settlement engine at the bank-end of the process. 
No bank wants to be just a commoditised back-end, which is why they are
all trying to create real-time services to add value to their corporate

That’s why social lending is of concern.  How rapidly
could services such as Zopa, Prosper, Smava and ppdai displace
traditional bank lenders?  Who knows?  What we do know is that they are
offering a real alternative to banking in the 21st century. 

why retail banker’s are deploying new retail services, such as mobile
and contactless.  Bankers want to innovate and to show their technology
capability can keep up with consumer and societal changes. 

But here’s another issue.  The sooner you change something, the sooner you need to change it again. 

way of example, the UK banks determined to implement Chip & PIN in
2000, five years after France and the Netherlands had proven the model
worked.  The fact that such a change would mean a national
implementation, it had to be agreed by committee through APACS, which
took about three years to decide on how to implement this. 

The banks determined to implement the service using Static Data Authentication (SDA), which means that the PIN can be authorised by terminals that are offline.   The alternative would have been Dynamic Data Authentication
(DDA), where a unique number is generated for each transaction.  This
is used in France, but was considered too expensive for the UK banks.

So the service rolled out in 2005 and was made mandatory on February 14th 2006. 

In other words, it took six years to implement a service based upon a decision by committee. 

Then the cracks started to appear. 

First, not all card issuers had sent out EMV-chip cards. 

Second, not all customers had PIN’s or used them. 

those two were overcome easily enough.  It just meant all UK cards had
to be reissued and all customers had to change behaviours. 

Then industry pundits came out and said the system was being hacked because static authentication is too easy to defraud.  In other words, we should have implemented Dynamic Data Authentication, as it is more secure. 

Then we find that Chip & PIN only works for retail payments where the cardholder is present, so we send out Xiring terminals for online payments. 

Then we want to rollout contactless payments, so merchants now have to have two terminals at the checkout. 

Then we want to move to mobile payments and so on and so forth. 

The speed at which banks
make a consensus decision is too slow, whilst the speed at which
individual banks are trying to rollout innovations is, for some, too
fast.  The two processes are potentially even in conflict.

On the one hand, the customer expects the bank to innovate to suit
their life, to make buying and selling stuff easy, to provide
information services that are of value to them.  On the other, the bank
needs to rollout technologies that secure the bank’s systems, that
force customers to behave in a secure manner … even if the customer
doesn’t want to.

The result is that technology
is therefore not only disposable, but it is potentially undermining the
relationships between the banks and their customers.   

So here’s the quandary of today’s modern bank.

is disposable.  It needs replacing rapidly and easily.  But technology
also fundamentally changes your customer’s and corporate client’s
operations, processes and behaviours.  In other words, it can make or
break your customer relationship.   

So how can you get technology right, first time, every time?

There’s the rub. 

banks that can deploy and implement technology at low cost and faster,
more efficiently and effectively than their competitors, in a flexible,
agile and rapid methodology, will be the banks that win in the future
of this technically turbo-charged industry.

About Chris M Skinner

Chris M Skinner
Chris Skinner is best known as an independent commentator on the financial markets through his blog, the Finanser.com, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal’s Financial News. To learn more click here...

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