By Mark Leydon.
Retail banks are really quite simple things… They keep safe peoples money (perhaps paying them a little fee) and lend that money (even magically creating some!) to other people - always for a fee.
More often than not, powering all of this activity is a 1960’s era computer technology called a Mainframe.
These Mainframes were designed before the era of the personal computer, when computing power was expensive, centralised and not widely available. They used magnetic tape for storage, and in the early days, used paper punch cards to enter data. These punch cards were ‘batched’ and fed into the Mainframe for processing.
Forty years later, we still have the legacy of this ‘batch’ - data is collated from around the bank, and from other banks, into files that are fed into the Mainframe, or ‘Core’, every night. The Core processes this information throughout the night and the next morning the true financial position of the bank is revealed!
Of course, in our highly connected, real-time instantly available world, we cannot continue to run banks this way. Bank customers now hail cabs, get real time updates on cab position, instantly tell all their friends they are safe, pay for coffee with watches, and expect these services to be always on 24/7/365… They expect banks to offer similar service levels. Bank customers compare their current bank experience to other, much better, non-banking experiences.
Banks have the ability to generate plenty of profit. They have more money to invest in technology than most any other sector. So, how come they can’t appear to compete technically with the run-on-a-shoestring internet startup?
It is not correct to say Banks don’t adopt innovative technology. They have adopted Credit Cards, ATMs, internet and mobile banking, and recently Apple Pay, to name but a few. However these solutions are primarily brought to them by external companies, and follow customer demand rather than lead it. The Banks are then responsible for integrating these external services into their Core.
This approach maintains the status quo. Core never gets changed. Yet another server, providing the latest service, is installed to feed another file into the batch. Banks are left to play catchup with technology.
Why is this a problem? Complexity increases, while quality of communication decreases. If Core maintains the ‘real’ position of the bank, and only presents this the next morning, how for example do you transfer money instantly from one account to another? The only solution is to get one service to communicate directly with another, outside of Core. This leads to multiple financial positions for the Bank which need to be resolved during the batch process overnight.
As the complexity of services around Core increases, the possibility of error also increases. We have seen Bank wide technology failures with increasing regularity over recent years. Banks, contrary to their internal view, do not have overly complex, fault tolerant systems.
Four independently developed computer systems, running four separate software systems, all voting to produce a consensus as to what to do next, allow the Airbus to fly by wire. No-one would fly if the pilot apologised to passengers because of a problem with a software update! The new Boeing 787 will produce 0.5TB of data for every flight. William Hill process 464 bets per second, 5M price changes, and 160TB of data per day. Facebook process 4.5 billion ‘likes’ and 968 million logons a day. Every 60 seconds on Facebook, 510 comments are posted, 293,000 statuses are updated, and 136,000 photos are uploaded. And all of this is available 24/7/365. It is companies such as these that Banks need to compare themselves against.
Banks have historically viewed their technology and IT services purely as an expense of doing business. In the recent past, many have outsourced these services to many of the ‘big four’ consultancy companies. This has proved to be a big mistake. Yes, overheads have been reduced - but at what cost? Agility has been lost, with a corresponding increase in bureaucracy. But more than anything else, strategic technological capability has now moved into external companies hands. Why would it be in the interest of any of the ‘big four’ to challenge the existing way of doing business?
Banks are regulated. Legally. With fines and prison if it goes wrong. Internet companies, in general, don’t have to worry about a similar framework. This regulation, coupled with bureaucracy, increases the organisational fear of failure. Banks, in general, don’t try something to see how it will work out. They prefer months of testing with consumer groups, ask the regulator, look to see what the competition is doing, and perhaps ask some of the ‘big four’ for advice.
Money will soon no longer exist in any physical form. Governments are increasingly pushing people towards electronic forms of payment. Convenience will make customers adopt payments through their phone or watch. All of this electronic money will be collected, processed and distributed by technology. Banks will become technology driven companies. It is already possible to transfer ‘value’ from one location to any other on Earth in less than 5 seconds - without requiring a Bank.
So, is there hope for the industry? There are many startups attempting to build a new Bank, and they are following the development methods used by the leading Internet companies. They have the advantage of no legacy technologies to support, but they do not have the customers. And people are notoriously slow to move their bank accounts. So, yes, there is hope. But Banks will have to learn a new way of delivering services to their customer… and fast.
Bank executives will have to become more technologically aware. Organisational capability will have to be radically improved to allow modern Banks to deliver services that customers now take for granted elsewhere. They will have to attract people with non-financial experience into their organisations. Simply hiring more IT staff is not the solution. Banks need to hire highly skilled technologists, architect a new competitive Core banking system with a DevOps approach to service delivery, embrace failure as a means of natural selection and provide APIs to attract other companies to collaborate in delivering the solutions their customers expect.
