Tech Troubles
IT: The trouble with legacies

Banks are wrestling with a complex and expensive challenge of streamlining their IT platforms in the face of rising customer expectations and intensifying regulations. ANDREW STONE reports

A year ago, The Co-operative’s online banking service faced a storm of public criticism and the bank found itself apologising on Radio Four's Moneybox when small business customers complained about problems logging in or carrying out basic tasks online. Like many other banks, The Co-operative was struggling to meet competing demands with legacy systems that were never designed to meet them. Its woes were emblematic of the multiple pressures facing bank IT departments today. Customers expect online banking to be available at all times, and simultaneously regulators are making far greater demands. Legacy systems, some of them built decades ago, just haven’t been up to the job.

And the size and complexity of the task in upgrading and integrating legacy systems has been intensified for many banks by the raft of recent mergers and acquisitions.

The ambitious One HSBC project illustrates the challenge. Launched two years ago, it aims to create a single ”gold suite” technology platform by the end of next year – replacing 55 separate core banking systems, 24 credit card systems, 41 internet banking systems and 40 desktop standards in
the process.

It’s expensive: this year alone, HSBC has invested $1bn in the project. But the bank is already measuring the benefits. “It is now paying dividends in excess of its costs,” says Ken Harvey, chief technology and services officer. The project, which also shrinks HSBC’s 130 data centres to four pairs, “aims to improve customer experiences,” he explains, “and it happens to have a significant cost advantage as well.”

It’s not as smooth as that for everyone. In August this year, Santander experienced some of The Co-op’s anguish when retail customers faced delays accessing their money online as the bank transferred five million Alliance & Leicester customers to its systems.

The incumbents are carrying out these transformations in the teeth of competition from newcomers. Some of the new players, like Metro Bank, are starting effectively from scratch, inventing their own platforms unencumbered by the need to integrate legacy systems.

Tesco Bank isn’t quite so fortunate. In devising the new platforms to accommodate its planned expansion of in-store banks, it’s also having to disengage from the customer data systems previously provided by Royal Bank of Scotland before the supermarket giant bought-out its 50% share of its joint venture with the bank.

And the new players have their own hurdles to overcome in terms of near-impossible timescales, complexities, IT skills, bottomless budgets – and much more. The key to staying competitive in this environment lies in simplifying existing systems while providing long-term space for genuine innovation, says Peter Redshaw, Managing VP for banking and investment services at Gartner, a leader in IT research and advice.

That must start at the top, he insists. “Few CEOs can talk about the contribution of IT to the business. They tend to see it as an overhead. There’s a tendency to ignore the business benefits or look at how you might tie investment in IT to your financial indicators. There’s often talk of the need for the IT function to be aligned with the business, but in practice very few are.”

Under-investing is often at the heart of underperformance, he says. Gartner’s IT Intensity Measure, which examines IT spending versus profitability, shows that many banks short change themselves by scrimping on IT spending. “Very few banks have a grasp of how their IT spend relates to profitability. Spending more can lead to better profitability.”

And here, the example of the credit card industry is instructive, says Janice Horan at the solutions and software business, FICO. “Card issuers who didn’t keep up with the times and didn’t innovate in terms of access saw the quality of their portfolio deteriorate as customers sought out better customer offerings. The same principal applies to banks and their attitude to IT.”

Banks have also been slow to adopt innovations such as cloud computing and virtualisation, both potentially powerful tools in cutting costs and making outsourcing and consolidation easier, says Redshaw.

“Banks have a reputation for being on the technological leading edge but in many cases they’re behind and are cautious about deploying it. Very few have a formal innovation programme. In many cases, they’ve become cost-driven and forgotten about revenue, how to leverage the assets they have.

Banks have lots of information about their customers, for example, but very few monetise it, even those with their own credit card operations.”

But before innovating, they must streamline. “Banks have to simplify their IT portfolios drastically. They have to keep consolidating and standardising. That's a pre-requisite, otherwise you’ll never fully leverage the costs and other benefits of outsourcing and you’ll limit your flexibility to bring things to market quickly.”

Outsourcing by process will be the way forward. “It means having one vendor throat to throttle if things go wrong rather than letting different suppliers blame each other.

“We also see that, rather than buying packages, they will be buying components – and dynamically assembling apps as they need them. It could be hugely powerful, it could transform things but it’s not simple to implement at all.”

The Co-operative Bank’s Paul Jackson would probably agree. “We have implemented a strategic partnership with a leading banking software provider and we are adapting and implementing strategic components from them, the first of which is the online function,” he says. This has transformed its small business banking operation but it was a complex process.

“It was harder than we expected. You can’t just unplug your legacy stuff and start again. The interfaces to the legacy systems are myriad and complex. We did not understand well enough what we were working with when we started. Understanding your legacy is key.

“The process also required a greater level of trust and relationship building with our supply base. We underestimated the work our supplier had to do in terms of compliance to regulations and timescales.”

The results have more than paid off however, and will meet the long term needs of the business, he says. “It has worked really well. Our small business customers have by and large been ecstatic. The feedback has been unbelievably good. We can also see further enhancements and innovative service offerings down the track.”

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