A panel of financial experts gathered at the historic Law Society on Chancery Lane to debate legacy infrastructure and the constraints it places on digital innovation, while offering a myriad of consumer-centric and cost-effective solutions. However, with legacy systems bogging down banking infrastructure, can the banks manage this? Franchesca Hashemi writes
There is a relentless pace of change driving digital innovation in the banking sector. However, there isn’t going to be a big bang moment and the system won’t change overnight, according to Simon Cadbury, head of strategy and innovation at Intelligent Environments.
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Adding weight to the analysis, Cadbury said: "There are more challenger banks offering modern and competitive systems. If banks want to keep up, they have to adapt. If that goes well then big changes can be made to people’s lives."
While some panel members wanted to eradicate legacy infrastructures, others preferred to modify existing IT systems on a piece-by-piece basis.
The debate covered cultural modernisation from the consumer’s perspective and whether this will allow current banks to maintain market relevance. If this doesn’t happen, traditional financial institutions will be picked off by challenger banks and Cloud platforms in the next five to ten years.
A full house of members listened carefully to the straight-talking panellists, while group editor of Timetric’s consumer finance publications, Douglas Blakey, chaired the event.
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By GlobalDataA plethora of contemporary issues soon followed, including business to business collaboration, whether small banks versus big banks is a legitimate argument, product testing and the impact Apple, Google and PayPal will have on banking ecosystems.
Cadbury said: "There are three phenomena changing the face of British banking right now. The first is obvious, it is digital, but we also have an array of new competitors which are shaking up the banking system by creating principal forms of interaction that are digital only.
The current online climate, he added, is revolutionising not only British banking, but the way we interact with each other.
This cycle, the panel agreed, impacts public expectation and in turn the digital experience.
Cadbury continued: "The new financial entities come from small and simple backgrounds yet are top for innovation and continue to change the way consumers use services. They come in the form of banks like Fidor and Atom who are trying to become fully accessible in their own rights. So for example, Anthony Thompson, the co-founder of Atom Bank, believes he can deliver a 30% lower cost-of-income ratio in comparison to a traditional bank."
Presently, three of the big British banks cost income ratio stands at RBS with 68%, Barclays at 64% and Lloyds at 47.7%.
Yet across Europe, retail banks have digitised only 20% – 40% of their services while 90% invest less than 0.5% on digital innovation, according to McKinsey’s figures from 2014.
However, Cadbury argued: "The third and final point is that current infrastructures shouldn’t support digital debt. The legacy is creaking at the seams and seems Victorian in comparison to new competitors.
"We are also seeing evidence from organisations like CEB TowerGroup who are saying the cost of a branch telephone transaction is up to forty times the cost of a digital transaction, so we are really at a very early stage in this journey."
A low digital offering from bank to customer has serious potential to alienate millennials, tech-savvies and business people, who are increasingly self-directed when it comes to money management while looking to download apps and other interactive platforms that help prioritise expenses.
Richard Fraser, managing director at Global Financial Institutions and FIS, disagreed that legacy banking was crumbling and that while digitally transforming financial services is inevitable, he thought it difficult ‘to create real relevance unless there is a big enough franchise’.
Fraser argued: "We’ve seen improvements, a few of them have been mentioned already, but when you add it all together the result has not revolutionised true change in the way people make everyday transactions."
When pressed on whether legacy infrastructure was holding back digital innovation, in relation to the recent IT system failure at RBS, Fraser suggested that modern life is now so reliant on timely payments that as soon as one system outs, the cost to the consumer is drastic. This, he argued, detracted from successful ‘layers of integrative applications’ which have seen legacy and new systems work comprehensively.
Echoing this view, albeit from a different perspective, Benjamin Ensor, director of research at Forrester, added to the RBS system failure topic by suggesting the cost of replacing certain, big institutions legacy infrastructures ‘is greater than your royalties or profit’.
On closer examination, Ensor said: "Regulations are pushing down markets, plus banks are losing competition. So your margins are gradually squeezed. This leaves the bank’s ability to invest and make statutory system payments diminishable yet. In light of RBS, however, legacy infrastructure cannot be ignored for much longer."
Roy Vella, managing director and consultant for V2, offered a solution to the banking sector’s legacy-to-digital transition. His thinking effectively removed the middle person from any financial equation, while instead focusing attention on remote brand loyalty.
Vella said: "There is a modern and alternative system, which doesn’t have to be built in house or be stored on servers. The result is a platform that crosses between mobile, online and finance.
The digital entrepreneur and independent advisor went on to explain the benefits of running a modest banking IT system.
He added: "Interoperability and coherent relationships with different providers will create a superior and manageable route forward. This is exactly the reason why Amazon is so successful.
"It’s an old mentality that hypothesises on the inability to run legacy structures as they are, but we don’t need to think that way. In the modern world, everything is open and you only lock away items which need to stay secure – the question of whether a thirty year old legacy system should stay in place is ridiculous."
Pitting old technology against new creates a valuable opportunity. The grey area between both issues can be filled with five key areas, according to Cadbury, that will help ‘incumbent and struggling banks’ seize the day.
He continued: "The first is mobile, and the fact there is a much better understood user interface and experience. That should be at the heart of what they do. Then look at a social media, challenge again the community aspect and send your message across in a cost effective and instantaneous way, while harvesting the data garnered from both platforms.
"Helping customers understand their money and the organisation’s proposition will instil a level of control and confidence. And not to forget niche markets, fill the gaps in society because nothing these days is blindingly obvious. Trends come along that shock and surprise you: the world changes."
The zenith of Cadbury’s five point plan was collaboration and culture. This, he went on to state, will enable architects of legacy banks to reinvent their core system, while potentially opening the gates to a bigger target market.
Jake Chambers, head of innovation and insight at Nationwide, conceded that new IT systems were advantageous. However, he added that it is far more complex than stated to successfully operate and manage new digital infrastructures within start-up financial organisations.
Chambers said: "Some banks today have invested in modernising their legacy infrastructure, Nationwide restructured; others are replicating their systems with new variants already.
Furthermore, Chambers reasoned: "The point is you have to keep investing in your organisation: IT, the way you make decisions, the way your employees work, being able to respond to the changing world around you. This, alongside agility, is the essence of financial modernity.
"It is an ongoing practice, and there is more to it than throwing your hands in the air and declaring a new IT system will set your organisation up for life."
The panellist’s conflicting visions were soon balanced by a shared pragmatism: to create a virtual and physical community that focused on financial service’s interaction with consumers and potential employees.
Nowadays, 71% of people would rather visit the dentist than listen to their bank manager, while 68% think the way in which we access money in five years’ time will be completely different to now, according to Fidor Bank’s latest statistics.
Investing in the culture of a financial organisation lay at the heart of the legacy debate. Hi-tech software aside, consumers have to want the technology created for banks by Fintech companies, and what better way to innovate than asking people directly what products will help them manage their life?
Ensor led the notion that success is met when customer centricity is based on collaborations as well as culture, making the quality over quantity argument as pertinent as ever.
He claimed: "It is about the attitude of a financial organisation and its willingness to invest in products and development, all of which are valuable to customers. The alternative is to continue as before, trying to make a profit off existing systems and fiddling with the rates.
"Technology is an enabler. It is putting the transparency back into banking for the benefits of its customer: from automated emails, sending money online, to the mount of people who now manage their accounts digitally."
The big bank and small bank question proved popular in this debate, as Ensor continued to say that digital innovation is irrelevant to ‘the size of company, but rather take into account its willingness to change’.
"It’s just not the case that big banks are doomed and small ones will be okay. It’s all about the culture in the organisation and whether they can be agile. So the premise of the digital debate should not take into account size but rather the organisation’s aptitude for innovation.
"Regulations are pushing down markets, plus banks are losing competition. So your margins are gradually squeezed. This leaves the bank’s ability to invest and make statutory system payments diminishable yet. In light of RBS, however, legacy infrastructure cannot be ignored for much longer."
The panel agreed on a need for technology infrastructures to partner with companies and use the abilities of other Fintech firms. Furthermore, Fraser suggested a shared service approach could ease and potentially safeguard established banks transition away from legacy infrastructures.
Coming in with a different take on the subject, Jake Chambers stated: "No bank is perfect. That’s why we innovate. It is about trying to better the business.
Nationwide’s head of strategy drew on one particular example that strained his bank’s dip into digital: "The mobile operators at Nationwide realised that trying to run everything early on was a losing battle, and that collaborating with established network providers like Apple and Google would prove beneficial in the long run.
"It was a painful journey. We had to give up some ground and see what other people and businesses could do for us."
The panel agreed on a business technology agenda, with reference to small and unknown software companies developing into gigantic international brands, including PayPal, EBay, Amazon, Apple and Google.
Chair of the debate, Douglas Blakey, rounded up the discussion with a final proposition: if the financial sector took into account digital innovation on an Apple-scale, what would become of legacy infrastructures?
While Jake Chambers viewed aspects of the sentiment as ‘paradoxical’, he also cited ‘brand loyalty, in the form of John Lewis’ to emphasise a financial services appeal. On the other hand, Roy Vella listed Russian Standard as having a fantastic reputation amongst clients.
Vella expanded on this by stating two vital dynamics fundamental to successful digital innovation: "Customers at the centre, then test and learn. Taking up a scientific method and approach to your commercial business, involve the customer in the process of decision making. Without this, you won’t attain innovation and drive."
However, as Simon Cadbury pointed out: "Involving all aspects of your organisation, from finance to corporate, will create a highly innovative atmosphere.
"Get people together and invest in the future. Only then will it become apparent that you can’t test products by sitting in a room and talking about them. It is vital to get out there and see what happens."
