I spent a long time talking with banks in Turkey yesterday, and realised that my message is off mark with some markets. This arose when one of the banks told me they had just been to America to visit with banks there, and see how they were becoming digital. Apparently most of the American banks talked about ripping out and replacing their core systems and legacy – something I’ve been advocating for a while now. The Turkish bank could not understand this. Why would you rip out and replace a core system?
My answer is that if it’s not real-time, then you must. You cannot run digital operations in batch. If I make a phone call, I don’t expect someone to answer it three days later. I expect the answer and the conversation now, or at least to go to their voice mail (unless you work for JPMorgan of course).
So why am I making payments that take days to process?
I regularly make payments to the USA and they take days. Equally, vice versa. Even worse is that Americans like checks, or cheques. They often send me a cheque, even though I ask them to wire the payment. For gawds sake, a cheque takes six weeks to process and then gets hit with heavy processing fees and terrible exchange rates. Not only that, but I have to physically go into a branch to pay it in (UK banks haven’t caught on to the photo cheque app yet). And this is the 21st century?
So I regularly bang on about replacing core systems, because the UK and US banks I deal with have systems built in the 1960s and 1970s. They’re batch, overnight update systems designed for branch operations. They’ve seen lots of additions – call centre, internet, mobile – and lots of layers of new legacy applied to their old legacy. That’s something that has to be sorted out, which is why these banks have to rip out and replace core systems.
This is not the case in Turkey or Poland, India, China and many of the other markets I reference for innovation. These markets implemented their core systems in the 1990s. They were implemented when the internet was already here. UK and American banks implemented when the internet was about as real as Mark Zuckerberg and Larry Page, e.g. they were designed and implemented before these guys were born.
That is a huge difference and is the reason why the newer economies are evolving internet-enabled back office systems to support digital, rather than replacing back office systems to operate in an internet-enabled world. This does not mean that their systems are fit for the digital age. They still have a branch-based mentality, rather than a digital culture that sees this as core. They still have systems that need renewal to be fit for low-cost, real-time. But at least the challenge is not the same as the older banks with older systems, who have to rip out and replace to allow real-time, low cost processing.
This last point it the criticality. A digital core delivers real-time processing for low cost. Real-time, low cost is completely at opposites with traditional bank structures that are long time, high cost.
T+2; 7-10 working days to process; £32 if required for payment to be made within 24 hours; and all these other messages and mantras of our industry are so last century that, when I recently visited a fossilised remains of a dinosaur, someone said I should stay there. What they meant is that when I work with banks I might as well be a fossilised dinosaur. I disagreed as even the dinosaur could process its payment faster than the bank (it did involve biting your head off however).
Some banks are dinosaurs, as Bill Gates was once famously quoted, and yet 20 years after that quote, we still live in a world of high cost, slow payments. That’s just wrong, and until my cross-border monetary movements are real-time and virtually free, I know there’s a huge opportunity for someone to change the banking system. Maybe that someone could even be a processor or bank from a country unencumbered by legacy, like Turkey. I certainly hope so as, from here, the markets look far more dynamic than the slow moving, hampered by heritage, Americans and Europeans who are stuck with legacy.