Banks systems creak under weight of digital transactions

Pressure is mounting on the archaic technology systems that underpin some of the largest banks as they roll out online and mobile services to compete in the digital age.

High street lenders are spending more on "digitising" services, from renovating branches with new cash machines and iPads, to launching mobile applications and digital payments.

The rush comes as a number of financial technology companies unveil rival online payment services and digital current accounts in an attempt to capture customers from the biggest banks.

But behind the banks' new mobile apps and faster digital payment services is, in many cases, decades-old technology. The growth of channels offering instant banking access is creating a surge in transactions that threatens to overload the core IT systems serving them.

"We believe it is more pressing than ever that banks address the challenges with their back office systems," says David Parker, UK head of retail banking at Accenture. "In general these systems are old, complex and they were created long before digitisation existed."

Many of the banks' core systems were originally built for slower branch-based banking and overnight batch-processing of payments.

Experts say some banks even run off pre-decimal systems. "In one case the core system converts customer account data in and out of pre-decimal pounds, shilling and pence," one former banker said.

Lord Blackwell, chairman of Lloyds Banking Group, which plans to invest £1.6bn in digital services and increased automation in the next three years, claims the digital transformation will result in "more fundamental change occurring in the banking industry over the next decade than we have seen in the last 200 years".

The trend is not limited to the UK; other countries are arguably further ahead. Turkey is one of the most digitally progressive countries, according to experts. Garanti Bank, Turkey's second largest, has developed iGaranti, a mobile service that splits the bank into individual apps, from a digital wallet to loans.

<

The tabular content relating to this article is not available to view. Apologies in advance for the inconvenience caused.

But these old systems are prone to failure. RBS experienced a severe systems upgrade failure in 2012 which left many thousands of customers without access to their accounts. The bank is now spending about £1.3bn per year improving its technology platform and core IT processes.

A number of other banks are making significant changes, and some have successfully overhauled entire systems, albeit at a high cost.

Santander UK, for example, integrated Abbey after its takeover of the bank in 2004 on to its Parthenon core banking system.

Juan Olaizola, the bank's chief operating officer, says the key to success in digital is "balancing the investment between front and back ends".

"Though the emphasis tends to be on the apps and the customer-related experience, it is only the back-end services that provide frictionless customer experiences, as we see in success stories such as Amazon or Uber.

"Banks are still far from providing this type of customer-centric services," he says.

He notes that the "massive growth" in smartphones means the bank has to respond at a "speed that we don't control . . . a speed previously unknown to banks".

Nationwide, the building society, has spent £1bn overhauling its technology in the past five years, resulting in a new core banking platform.

It recently struck a deal with Apptio, a US technology provider, to cut the cost of its IT services, in a move expected to save $10m-$13m in the first year of implementation. The savings will come from areas such as software licensing, ATM performance and outsourced vendor contracts, it says.

<>System upgrades often cost more than banks originally expected and have even scuppered some merger and acquisition deals, such as Santander's purchase of branches from RBS.

Few banks are attempting to remove entire systems, fearful of disrupting services. "A lot of banks are trying to move to two-speed IT - to make changes to the back office while being nimble at the front end," Mr Parker says.

In contrast, new "challenger" banks that have not inherited legacy IT systems have the opportunity to select modern, scalable, resilient technology platforms.

Alex Letts, founder of Ffrees, a digital current account provider, says: "Changing platform is a hugely risky business for the banks as they are operating with millions of live customers transacting billions of pounds daily. A mistake in moving real time accounts to a new system could be simply catastrophic.

"This makes them vulnerable to new challengers like Metro or Aldermore, for example, who by and large use new, modern platforms."

For these challengers, experts say, success will depend on their ability to harness technology to chip away at the market share of the incumbents, which still lag some way behind.

Branches still have a place in modern banking

The rise of digital banking may seem inexorable, but branches are not yet dead.

Handelsbanken, with headquarters in Sweden, is an example of a lender that is successfully expanding its business with a focus on expanding its branch network.

The bank unveiled record annual profits in February, with operating profits rising 6 per cent. A lot of its growth has stemmed from expanding in the UK, where the bank now has more than 190 branches.

Matt Symmonds, a partner at Bain & Company, a business consultancy firm, says that despite the rise of mobile, more traditional channels such as branches "remain critical" for effective service, marketing and selling.

Recent research by the company of more than 80,000 consumers worldwide shows that about half use a combination of digital and physical routes for banking, supporting the idea of "omnichannel" banking.

Mr Symmonds also argues that mobile remains an "untapped tool" for influencing bank product purchases, with many customers still making mortgage applications, for example, in a branch.

In Europe, banks have been slower to digitise and move away from a branch-focused model, says Paul Thomalla of ACI Worldwide, an international provider of payments software. He says banks are "still investing in branches in Europe", although the pressure to digitise is starting to mount.

Some lenders in the UK are reducing their branch network in tandem with launching enhanced mobile and internet services. Lloyds Banking Group, for example, has announced plans to close 200 branches, amounting to 6 per cent of its network.

However, a number are revamping their existing branches with digital improvements. Nationwide, for example, recently committed to invest £300m in its branches. This will involve new formats such as "Nationwide Now", comprising digitally enabled features and branch locations in order to better connect people to its staff.

© The Financial Times Limited 2015. All rights reserved.
FT and Financial Times are trademarks of the Financial Times Ltd.
Not to be redistributed, copied or modified in any way.
Euro2day.gr is solely responsible for providing this translation and the Financial Times Limited does not accept any liability for the accuracy or quality of the translation