Many banks’ core systems are in real need of updating. Image: Shutterstock
The banking industry has reached a tipping point—one where it’s riskier to keep outdated core systems in the face of imminent disruption.
Traditionally, though, this hasn’t been the case. Only several years ago, the risk of updating core banking infrastructure was greater than staying with the legacy systems, says Peter Olynick, senior practice lead of retail banking with NTT Data (formerly Carlisle and Gallagher).
And no other vertical gets more attention for reinvention than payments, which starts at the deposit systems. Banks built these core deposit systems in the 60s and 70s. They’re written in old, inflexible programming languages such as Cobalt and PL/I and rely on batching transactions.
But this infrastructure is unlikely to suffice as a stable foundation in the age of digital finance. Consumers, influenced by millennials using third party providers that offer better digital experiences like Venmo, now expect real-time intuitive financial transactions.
According to a recent NTT Data report of US stakeholders, one in three consumers would consider changing their principle banking relationship for better online and mobile experiences. And moreover, one in four consumers would consider switching just because of a bank’s perceived tech-savvy.
In the past, people only switched financial institutions for better interest rates, said Olynick. But today banks are competing on technological prowess not only between each other but also against retailers like Target and Walmart, which 47% of people surveyed by NTT Data think would provide better banking than their traditional financial institutions.
According to the survey, two-thirds of banks have at least one major challenge, including cost of product development and complexity in integrating other systems, because of old core systems. Maintaining legacy systems accounts for 78% of a bank’s IT budget, and 70% of bankers feel their core processes cannot quickly adapt to change.
Eighty percent of the bankers surveyed agreed that their institution needs to complete an assessment over the next three years, but only 15% expected that to lead to a modernization effort. Banks know they need to make changes which is why they’re duct taping add-ons around the edges, Olynick says, but core modernization is timely and expensive.
Olynick’s solution: Banks should partner.
Banks can partner with other banks and vendors in the U.S., although that will only bring them two to three years ahead. Instead financial institutions might think about partnering with more innovative banks and vendors in Asia and Australia.
“To compete with fintech [startups], banks are going to have to share information and learn from each other,” says Andy Schmidt, an executive adviser at CEB.
But it’s not all about opposition. Banks can save time and money leaning on fintech startups for help, instead of building technology from scratch in-house. Partnering with distributed ledger technology providers is something many banks and financial services providers are already considering.
Banks can save time and money leaning on fintech startups, instead of building technology from scratch. Tweet This
For example, Ripple just partnered with CGI Group to integrate the startup’s technology into CGI’s payment portfolio. This turnkey solution allows banks to send payments in real-time, across the globe. It minimizes the need for complex integration – yet offers CGI’s banking clients new value for their systems and their clients.
Plus, 30 banks are piloting Ripple solutions with 10 in commercial deal phases.
While many maintain drastically restructuring a bank’s core to ride on distributed ledger technology is a long shot with bank’s rising compliance costs and squeezed margins, Schmidt doesn’t think it’s out of the question.
“If the core is just a fancy accounting system, that architecture could go away and distributed ledger could be that transparent holder of data,” Schmidt says, especially with the Federal Reserve’s work on real-time payments in mind.
And transparency within these ledgers could combat both compliance expenses and give banks a stable core system so they can focus on building revenue-generating products and services.
Bailey Reutzel is an independent freelance journalist focusing on finance, technology and politics. She blogs about US political culture and how people interact with money at Moneytripping.com.