Government should push banking platform upgrades in wake of Treasury report say IT firms
Banking systems are antiquated and need to be overhauled
Reaction to the publication of the Report of the Parliamentary Commission on Banking Standards earlier this week focussed largely on the restrictions that senior management in banks, but it also made recommendations about the systems banks use, and the need to upgrade them.
This part of the nine-volume report provoked mixed reaction – commentators generally said it was good that the issue of systems overhaul was addressed, but they would like to see a greater drive to improving the underlying technology platforms, particularly in the creation of utility services that can be accessed by so-called ‘challenger’ banks.
“The news that the Banking Commission is recommending that IT systems be overhauled is welcome and long overdue. One of the biggest challenges for banks has been the fact that they’re constrained by legacy systems, which in some cases have been in existence for many years,” Dorian Wiskow, client managing director, financial services, Fujitsu UK & Ireland. “These ageing IT systems are less flexible and more expensive to run than today’s state-of-the-art equipment. Technology is crucial to a bank’s ability to construct its business. It enables the handling and processing of huge volumes of customer and process data and insight. Financial service institutions must create environments which not only enable them to respond to change as it occurs, but also allow them to respond to situations they’ve not yet anticipated. Moving forward with innovative technology and trusted partnerships will enable them to do exactly this.”
Intellect, the trade association for the UK technology industry, welcomed the conclusions set out by the Commission on but warned that its recommendations “do not fully address the fundamental frailties and counter-productive complexities of the technology infrastructure that underpins the financial system”.
In contrast to many other industry reviews and investigations since the financial crisis, the Commission has commendably acknowledged the role of ‘patchy and outdated’ technology infrastructure in creating problems such as banks that are ‘too complex to manage’ and scuppering competition-enhancing branch divestures. However it has not addressed this fundamental problem as part of its recommendations.
“The public has only recently gained an insight into the all-encompassing nature of the technology that underpins their banks, and indeed the entire financial system, through a demonstration of what happens when this stops working. A light has been shone on the 90% of the technology iceberg that is underwater, and that the Commission has recognised technology is not only a challenge for the industry to surmount, but also part of the solution in doing so, is commendable,” said Ben Wilson, associate director for financial services programmes at Intellect. “But they have, nonetheless, missed an opportunity to really bury down into some of the problems they identify, and connect the dots. Many of these issues around conduct, competition and supervision have a common denominator – the technology infrastructures that facilitate all the operations of ‘the bank’. You reduce the complexity of this, and you ultimately make life a lot easier for the banks and the regulators, and you improve the ability of the banks to serve the customers and the wider economy.”
Intellect believes that by seeking to address a number of technology-based challenges on a point-by-point basis – “including the perceived weaknesses of the Financial Conduct Authority’s IT systems which it has inherited from the FSA, and consideration of a common utility platform for core banking services” – the Commission is missing an opportunity to catalyse a solution to these challenges at a root point. These, and other issues highlighted in the paper are the product of a technology estate across individual banks that is simply too complex, has been built layer upon layer over the years and does now not allow the banks to adequately know their own operations, their customers or implement change on a timely and cost effective basis.
Intellect believes that there is “a strong case for the Government to take on board this issue of technology infrastructure alongside the recommendations within the Commission’s report”, In particular, it recommends:
- Consideration of a greater number of technology-literate individuals in decision-making positions on boards.
- Encouraging banks to more comprehensively map their existing systems and processes – which should have been done as part of ongoing recovery and resolution requirements. If this is undertaken, change can be implemented more quickly and with reduced cost; weaknesses and risks can be better identified before they impact customers; and decisions on issues such as branch divestures can be made with greater certainty.
- Clarification from regulatory authorities on what they want banks to be able to do in the future and allow banks to work towards this, without wasting money on duplicative regulatory implementation.
- Facilitating a greater degree of collaboration across banks, to identify how common problems of technology infrastructure – outlined comprehensively in the Commission’s paper – can be addressed more systematically and effectively.
