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Banks with pre-internet age core systems have a heart that is no longer beating

I realised something about this new market of fintech the other day, where banks become financial systems integrators.  That realisation was that banks really should think about what they are doing, developing so much core capabilities internally.  Right now, coders are the new rock stars and banks develop pretty much everything themselves.  I can think of hardly any Tier 1 banks that have not developed their own core systems. 

Most banks are proud of this fact.  For example, one of my top stats is that HSBC has more developers than Microsoft.  Microsoft employed 1,000 developers to produce Windows 7, and a mid-size regional bank is employing more than double this number whilst a major global bank is employing over ten times this amount.  The last time I looked, HSBC had more than 13,000 developers for example.

Why? 

Because banks have 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 centres 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.

Wrong.

As I’ve screamed so many times: banks need to replace their core systems for the digital age.

They have to do this because their systems were built in the last century for the physical distribution of paper in a localised network.  Now they need to be digital and their systems are just not fit for purpose.

How they do this is to separate the content of their systems – the data – from their processors – the engines.  This is something I’ve mentioned a few times also.

So then 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 IT leaders in the major banks, including nine in the UK. What they discovered is that not one is committed to core systems replacement.  Not a single one.

In the USA, the situation is similar, with only BBVA cited as a bank that’s modernised 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, whilst banks sit happily with 1,000’s 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.

Roll on the digital age.

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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  • Interesting article! And it proofs once more that the German Fidor bank (but they came to the UK too) has it right with their API project. Any customer, running whatever commerce or service, can plug into their Fidor API. This way they can even indirectly use the Fidor bank license, what makes that they are becoming instantly a bank for their own customers. This is really ingenious and makes Fidor ready to be linked with thousands of developers with the right skills and digital knowledge. And with a lot more clients of course. They (Fidor) have also partnered with Ripple, even a more more disruptive innovator. Take some time to do some DD on Ripple – you won’t regret.
    There really is a lot happening right now (and I do not mean Bitcoin)!
    The big banks may not realize it, but they soon will get the same shake up as what the old Telcos did feel with the watershed of the internet becoming the major, sorry the only, communication channel that matters… The old Telcos had one big asset what saved most of them: they owned the grid of wires…
    But I really, really wonder what will save the banks in the next decade. Not the money – that’s for sure, because THAT is ours …