

Banks’ ageing IT systems buckle under strain - nyamhap
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nyamhap
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Igor Feitoza, a Brazilian-born entrepreneur, left an angry message on his
bank’s Facebook page this week.

“I want to see if you guys will pay my overdue bills and my employees as I
can’t access my money which I . . . deposited last Friday to pay them,” he
wrote following a “ridiculous” three hours spent at the bank.

Mr Feitoza is not one of the many frustrated Royal Bank of Scotland customers
hit by the latest technology failure this week. He is a client of Commonwealth
Bank of Australia, the country’s biggest bank by market capitalisation, which
had its reputation as one of the most digitally advanced lenders tarnished by
an outage in its payment and online systems late last week.

As well as provoking outbursts on social media, the technology glitches at
RBS, which caused some 600,000 payments and direct debits to go missing, and
CBA underline how the world’s biggest banks are often failing to get to grips
with the growing demands being placed on their IT platforms.

Banks spent about $188bn on IT last year and that figure is expected to grow
at close to 5 per cent a year, taking it above $200bn by next year, according
to Celent, the research company.

Many banks, such as RBS, are plagued by computer systems that have been built
up over several decades through acquisitions and new product launches to form
a costly and complex patchwork of systems. “A lot of these programmes get
three-quarters done,” says a senior technology executive at one of the largest
US banks. “It’s one of these technical debt problems that builds up over the
course of time. If you have one thing happen it might cause the whole thing to
fall down.”

The cost of maintaining these often ageing and unwieldy systems eats up three-
quarters of banks’ IT spending, according to Celent. That leaves only a
quarter to spend on innovations to keep up with the rapidly emerging threat
from the many technology groups and start-ups trying to steal market share in
areas such as payments.

“For a sector that spends significantly more on technology than most other
sectors in the world, it is the least innovative, so there is a paradox here,”
says Bill Michael, head of financial services in Europe at KPMG.

As many banks struggle in the post-financial crisis environment to generate
returns above their cost of capital, these spiralling costs and inefficiencies
are becoming increasingly unacceptable to managers and shareholders. Bank-IT-
spend-chart

“The banks are all putting their hands up and saying: ‘Help, I no longer want
to do this alone any more — can someone else come and help, whether that be a
cloud services provider or a partnership with a start-up’,” says Mr Michael.

RBS, which last year paid a record fine to regulators for a bigger systems
outage in 2012, hoped to solve its problems by replacing its core processing
engine at a cost of £750m. But in a recent interview, its chief executive Ross
McEwan conceded there was still a big job to reduce the number of systems and
applications at RBS from more than 3,000.

Andrea Orcel, global head of UBS’s investment bank, says: “The challenge for
most banks is that they are not technologists ... As technology continues to
evolve at a fast pace, becoming ever more critical to their business, they are
having to navigate a space that is both highly complex, and does not play to
their core competencies.”

Asian banks spend more than Europeans or US rivals on IT; their spending is
growing faster; and more of their IT dollars are going on new projects than on
maintenance.

However, they are hardly glitch-free. In January, a problem in the system
linking accounts at Industrial and Commercial Bank of China, the country’s
largest lender, with securities brokerages, disrupted Rmb4.9bn in fund
transfers, affecting nearly 55,000 customers at 90 brokerages. Bank-IT-spend-
chart

As regulators make ever growing demands on banks to provide them with vast
amounts of data for everything from stress tests to anti-money laundering
checks, banks are racing to keep their systems up to speed.

Deutsche Bank insiders blamed its failure in this year’s US stress test on
years of under-investment in IT that made it unable to meet US regulators’
demands.

Concern is growing about cyber security after a string of high profile hacking
attacks, such as last year’s theft of data on 76m customers from computer
systems at JPMorgan Chase.

Executives say this focus on cyber security is a catalyst for change, pushing
banks to simplify and upgrade their IT systems. “Making something secure
requires it to be consistent and clean and up to date and well managed,” says
the US tech executive.

James O’Neill, senior analyst at Celent, predicts that within a decade most
big banks will have switched from using costly mainframe computers for
overnight processing of customer data to using much more flexible cloud-based
services.

If nothing else, the shortage of developers trained in the Cobol programming
language that drives most bank mainframes will force them to make the switch.
Australia’s CBA has moved to a cloud-based system, while Deutsche recently
outsourced many of its applications to a cloud provider. Bank-IT-spend-chart

“The story about legacy systems impeding innovation is a bit oversold,” says
Mr O’Neill. “I’m not saying they will go on for ever, but they have done a
pretty decent job of supplying new products and services.”

Like many sectors, however, banks are realising the need to harness the power
of “big data” to offer better digital services to their customers.

Mr Michael at KPMG says his banking clients know the stakes are high. “They
have seen what technology has done to music and home shopping and so far they
have been relatively slow to adapt — but the longer they wait the harder it
will get.”

