Topic: maybe the big opponents of bitcoin are not the banks but their IT providers (Read 637 times)

Banks’ old IT systems buckle under strain

Igor Feitoza, a Brazilian-born entrepreneur, left an angry message on his bank’s Facebook page this week. “I want to see if you guys will pay my overdue bills and my employees as I can’t access my money which I . . . deposited last Friday to pay them,” he wrote following a “ridiculous” three hours spent at the bank. Mr Feitoza is not one of the many frustrated Royal Bank of Scotland customers hit by the latest technology failure this week. He is a client of Commonwealth Bank of Australia, the country’s biggest bank by market capitalisation, which had its reputation as one of the most digitally advanced lenders tarnished by an outage in its payment and online systems late last week.

As well as provoking outbursts on social media, the technology glitches at RBS, which caused some 600,000 payments and direct debits to go missing, and CBA underline how the world’s biggest banks are often failing to get to grips with the growing demands being placed on their IT platforms. Banks spent about $188bn on IT last year and that figure is expected to grow at close to 5 per cent a year, taking it above $200bn by next year, according to Celent, the research company. Many banks, such as RBS, are plagued by computer systems that have been built up over several decades through acquisitions and new product launches to form a costly and complex patchwork of systems. “A lot of these programmes get three-quarters done,” says a senior technology executive at one of the largest US banks. “It’s one of these technical debt problems that builds up over the course of time. If you have one thing happen it might cause the whole thing to fall down.”

The cost of maintaining these often ageing and unwieldy systems eats up three-quarters of banks’ IT spending, according to Celent. That leaves only a quarter to spend on innovations to keep up with the rapidly emerging threat from the many technology groups and start-ups trying to steal market share in areas such as payments. “For a sector that spends significantly more on technology than most other sectors in the world, it is the least innovative, so there is a paradox here,” says Bill Michael, head of financial services in Europe at KPMG.

As many banks struggle in the post-financial crisis environment to generate returns above their cost of capital, these spiralling costs and inefficiencies are becoming increasingly unacceptable to managers and shareholders. Bank-IT-spend-chart “The banks are all putting their hands up and saying: ‘Help, I no longer want to do this alone any more — can someone else come and help, whether that be a cloud services provider or a partnership with a start-up’,” says Mr Michael. RBS, which last year paid a record fine to regulators for a bigger systems outage in 2012, hoped to solve its problems by replacing its core processing engine at a cost of £750m. But in a recent interview, its chief executive Ross McEwan conceded there was still a big job to reduce the number of systems and applications at RBS from more than 3,000. Andrea Orcel, global head of UBS’s investment bank, says: “The challenge for most banks is that they are not technologists … As technology continues to evolve at a fast pace, becoming ever more critical to their business, they are having to navigate a space that is both highly complex, and does not play to their core competencies.” Asian banks spend more than Europeans or US rivals on IT; their spending is growing faster; and more of their IT dollars are going on new projects than on maintenance. However, they are hardly glitch-free.

In January, a problem in the system linking accounts at Industrial and Commercial Bank of China, the country’s largest lender, with securities brokerages, disrupted Rmb4.9bn in fund transfers, affecting nearly 55,000 customers at 90 brokerages. Bank-IT-spend-chart As regulators make ever growing demands on banks to provide them with vast amounts of data for everything from stress tests to anti-money laundering checks, banks are racing to keep their systems up to speed. Deutsche Bank insiders blamed its failure in this year’s US stress test on years of under-investment in IT that made it unable to meet US regulators’ demands.

Concern is growing about cyber security after a string of high profile hacking attacks, such as last year’s theft of data on 76m customers from computer systems at JPMorgan Chase. Executives say this focus on cyber security is a catalyst for change, pushing banks to simplify and upgrade their IT systems. “Making something secure requires it to be consistent and clean and up to date and well managed,” says the US tech executive.

James O’Neill, senior analyst at Celent, predicts that within a decade most big banks will have switched from using costly mainframe computers for overnight processing of customer data to using much more flexible cloud-based services. If nothing else, the shortage of developers trained in the Cobol programming language that drives most bank mainframes will force them to make the switch. Australia’s CBA has moved to a cloud-based system, while Deutsche recently outsourced many of its applications to a cloud provider. Bank-IT-spend-chart “The story about legacy systems impeding innovation is a bit oversold,” says Mr O’Neill. “I’m not saying they will go on for ever, but they have done a pretty decent job of supplying new products and services.” Like many sectors, however, banks are realising the need to harness the power of “big data” to offer better digital services to their customers. Mr Michael at KPMG says his banking clients know the stakes are high. “They have seen what technology has done to music and home shopping and so far they have been relatively slow to adapt — but the longer they wait the harder it will get.” Additional reporting by Ben McLannahan, Emma Dunkley, Jennifer Hughes and Gabriel Wildau BBVA tackles the US via digital banking

Francisco González, the former software engineer who is now chief executive of Spain’s BBVA, is scathing about the messy compromises that many banks make to patch their IT systems together. “Most of the banks have started at the rooftop. How did they manage to work without the foundations and the floors? Just middleware — more spaghetti on the spaghetti.” he says in an interview with the Financial Times.

After rounds of acquisitions, many large retail and commercial banks are tangled up in legacy systems which run the risk of breaking or presenting opportunities for intruders to gain access. At the same time, banks are building on more features because they need to present an attractive digital product to consumers. At the same time, financial technology start-ups are nibbling away at the business, presenting what Mr González asserts is an existential challenge for lenders. “My view is that many of them won’t make it,” he says. “They don’t know that. That is my opinion. We are ahead of the pack and we aspire to be the disrupter, coming from the conventional world, the banking sector.”

BBVA has spent more than €850m annually on technology for the past few years, including the painful and expensive decision to replace legacy systems — Mr Gonzalez’s loathed spaghetti — with a modern data centre. The chief executive now feels ready to tackle the US, where he has the country’s 33rd largest bank by assets, branded BBVA Compass, which last year acquired Simple, a digital bank. The bank’s active Silicon Valley ventures arm has also invested in Coinbase, a bitcoin platform. “For us the US is the most promising market,” he says. “It’s the largest market in the world, one of the most digital societies in the world, and the retail banking system is quite a bit elementary.” “The gap has to be filled by someone and we want to be one of the guys. BBVA Compass is the platform. We need to be a digital challenger in the States,” he says. “We have installed all the platforms, and we can connect start-ups to it. BBVA Compass will roll out a complete universal bank in the digital world.”