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Which banks are leading digital (and who are the laggards)?

I’ve written a lot about legacy and the challenge of old systems, so it’s interesting to read a few press reports on said subjects. Yolanda Bobeldijk writes in the Financial News that 92 of the world’s top 100 banks still rely on IBM mainframes.

Now that’s not an issue if those systems are well maintained and refreshed regularly. The issue is that most are not. I recently visited Ant Financial for example, who run Alipay, and they tell me they refresh their systems architectures every three or four years. How often does your bank refresh their systems? Some haven’t refreshed their back-end systems since the last century.

Banks typically spend 80% of their IT budgets on legacy technology maintenance and a tier one bank could easily spend up to $300m a year on existing software which constantly needs expensive updates in order to meet regulatory requirements.

Why so much? Because most of those systems are written in programming languages that no one knows anymore. Anna Irrera writes on Reuters that 43 percent of US banks’ core systems are written in COBOL.

$3 trillion in daily commerce flows through COBOL systems. The language underpins deposit accounts, check-clearing services, card networks, ATMs, mortgage servicing, loan ledgers and other services.

Hmmm. It’s not all bleak, sad and bad though. In another report, Autonomous Research said the banks with the most potential to do better than analysts’ profit expectations because of digitisation were: JPMorgan Chase and SunTrust in the US, Spain’s CaixaBank, Lloyds Banking Group in the UK and KBC in Belgium.

Autonomous ranked the banks based on two criteria: their current level of digitisation and their transformation outlook. It assessed 18 attributes from customer ratings of mobile banking apps to IT expertise on the board of directors. Banks viewed as being behind on digitalisation included HSBC, BNP, Credit Suisse, Intesa Sanpaolo and Standard Chartered; the three biggest Japanese banks: MUFG, Mizuho and Sumitomo Mitsui Financial Group; and the four big Canadian banks: TD Bank, Royal Bank of Canada, Bank of Montreal and Bank of Nova Scotia.

Australian banks could only manage to hit the middle of the rankings, and aren’t viewed as leaders, which many disagree with. In fact, unsurprisingly, many banks would argue that they’re not laggards, whilst I would argue that some of the banks viewed as leaders, such as Lloyds, are a mess in their back office.

Interesting how research can create such discussions.

Meantime, I did agree with Autonomous that banks would be reducing their physical distribution structures. Their research suggests that digitising operations would help cut €30 billion of the combined €233 billion of branch network costs.

Autonomous forecast that banks would cut their combined branch numbers by 40 per cent over the next five years. “Nobody can seriously believe that Europe needs 195,000 bank branches,” it said. “There are over 32,000 bank branches in Germany compared to 7,370 supermarkets and 15 Apple stores. That 32,000 figure is going to shrink massively.”

The report estimated the banks could improve their ratio of costs to income by 6 percentage points by 2021 as a result.

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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  • Igor Kosta

    What does it exactly mean “refresh their systems architectures”? I am not a fan of mainframes but at least those big banks own their cores and can change them (if they wanted to and weren’t afraid of the potential failure 🙂 ), right. Most of the new digital banks in UK, on the other hand, are all running on the backend provided by Wirecard – they cannot change it or even influence the development of this system. So, at the end of the day, bigger banks are even in a more favourable position – at least theoretically 🙂

    • Chris_Skinner

      They rearchitect every three-four years, as in rethink and review current and future tech against what they’ve got and replace redundant or obviously obsoleting tech

    • Arif

      The advantage FinTechs have not just “Technology” – its the highly motivated smart people, driven by passion. The difference is that as a FinTech/Startup I may not own the hardware and choose to deploy that on Amazon’s cloud infrastructure/services – however, the architecture/design of application is such that I can easily swap out the infrastructure. Tradinonal banks are not only struck with legacy technology but also (and more importantly) very poor design of systems – and that makes it very hard for them to move out of Legacy Platforms.

      • Igor Kosta

        I never said that “the only advantage FinTechs have is technology” 🙂
        Neither was I talking about the hardware. Many challenger banks are running their service on someone else’s core – it’s not necessarily good or bad but it’s a dependency that will need some effort to be replaced.
        IMO bigger banks just don’t feel the urgency yet – they still have too much money. Startups on the other hand have to move fast in order to not go out of business.
        Exaggerating about legacy – something new today is a legacy tomorrow. It’s a very hard battle to not fuck up your architecture. FinTechs are young – their architecture is more modern, sure. Will it be as modern in 20-30 years (if they still will be around) – I don’t know.
        To avoid any misunderstandings – I’m not bashing FinTechs or protect bigger banks – I’m just trying to state the facts.

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