Banking

The complex impact of fintech and legacy systems on banking

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A recent article in The Globe and Mail, The biggest threat to banks? Legacy systems, not fintech (November 2016), by Mike Gardner seemed to go viral on my Twitter stream. In the article, Mike describes huge losses for JP Morgan and the collapse of MF Global caused by IT systems and the use of inappropriate tools that may have been put in place more than 25 years ago. With the rapid mass adoption of digital, mobile and other innovative technologies, fintech is forcing banks and other financial service organizations to modernize and to keep up with technology advancements that are accepted in other industries. The attitude of “if it ain’t broke, don’t fix it”, might be leading banks to become their own worst enemy.

After reading Gardner’s article, I decided to tap into some of the fintech experts I’ve engaged with and see what their thoughts are on legacy systems and fintech as threats to banking. I also wanted to get their opinions on whether legacy systems constitute a cause of disruption for the banking industry. I began with these questions:

  • We’re hearing that the biggest threat to banks is their legacy systems. Do you agree?
  • And what can be done to turn this challenge into an opportunity?

Fintech experts weigh in

Banks continue to evolve and innovate in response to the fintech revolution, and making investment in APIs has become an integral element of every bank’s strategy. These APIs enable banks to embrace new technologies easily and cost-efficiently, work with third parties and, in some cases, build out their own disruptive offerings. Thus, to say that the same legacy systems that are being integrated and connected to drive the value that an API economy brings are also an Achilles’ heel for Canadian banking seems oddly incongruous. Further, those same legacy systems now being used as a source for revenue are the impediment to the rapid innovation banks need to stay competitive.

The reality is that the global banking industry is facing a nexus of unparalleled societal, technological and economic change. Against this backdrop of volatility, Canadian banks have also seen consistently downward pressure on return on equity (ROE) over the past three years, with margins slipping on everything from interest income to operating costs. With fintech challengers already nipping at their heels, decreased margins and increasing market volatility, the biggest challenge Canadian banks may face is not legacy technology, but rather gaining consensus on which of their many challenges to tackle first. —Joanne Friedman, PhD., CEO at ConneKted MInds Inc.

Yes, legacy systems are part of the problem. But I think that the way of thinking and doing things in banking is also legacy, which has been key to this driving force. Banks have operated for so long with the if it ain’t broke… mind-set and just lived in that comfort zone. And while a comfort zone is a beautiful place, nothing ever grows there. 
What can be done to turn this challenge into an opportunity? Learn from pioneering organizations, invest in fresh-minded talent and change the game by tapping into the right data and truly knowing the customer well and in real time. —Danielle Guzman, Global Solutions Marketing Leader, Investments Mercer

Legacy systems are indeed a big problem for banks. Incumbents spend a lot of money to maintain their legacy systems that likely cannot handle future customers’ needs. The simplest theoretical way to solve that problem is to buy a challenger bank and slowly migrate customers to a new, continuously evolving infrastructure. Once migration is done, close the old bank. However, realistically, that approach is hard to do, takes a lot of time and requires excellent management skills and great leadership—something that I do not see in many incumbents. —Spiros Margaris, Founder, Margaris Advisory

In the digital age, legacy has become a four-letter word. Yes, legacy applications and systems are an anchor holding back many from achieving digital transformation and providing real-time services for their customers. But the legacy problem is more than just technology; in fact, technology is often the easier problem to address. Legacy impacts many other parts of a company’s ecosystem. Legacy approaches to risk management; release management; process management; and talent acquisition, management and retention all result in the ongoing talent drain that is a much greater impact on the financial services industry than simply legacy tech stacks, in my opinion. You have to address not only the tech part, but also the people. Until a company holistically addresses the legacy problem, then digitalization is simply a pipe dream. —Sam Maule, Head of Digital and FinTech at NTT Data Consulting, Inc.

Banks are facing some significant challenges today in their innovation journey, such as the underlying culture that resists change, increasing regulatory and risk management pressures, and the silo nature of data platforms and IT systems. I agree that one of the biggest threats to banks is the heavy presence and disconnected nature of legacy systems. This opportunity for banks to partner with fintechs to solve the problem is fabulous. It can be done in two ways.

On the one hand, banks can partner with fintechs to remove silos, one silo at a time. Each system can be replaced by a digital product—either built in or brought in from the outside. Or each system can be coupled with fintechs through application programming interfaces (APIs) to create a market-ready digital product. On the other hand, as most banks have decided to handle the fintech opportunity, they can decide to plug in a digital layer on top of their legacy platform to create and launch digital offerings quickly to the market. Whichever path the banks choose, one thing that is clear is that banks need to move faster and offer a consistent, meaningful digital experience to the customer. Legacy systems might be in the way, but the ways to get around them and get on with innovation are definitely available. —Devie Mohan, Keynote Speaker on Fintech Innovation, Cofounder, CEO and Researcher at Burnmark (@burnmark_)

If legacy systems were their biggest threat, banks would flourish over the next several decades by swapping a legacy infrastructure for a fancy new platform. The truth is that while legacy architectures, point-solution integration and data management are massive challenges to banks today, and they should be addressed, these challenges are symptoms of an even bigger problem.

Financial institutions today are still run and managed by humans, who often make decisions based on inertia—what feels safe or the way we’ve always done it. As long as banks are managed and run by humans, then humans need to adapt to completely new data-driven solutions—from adjudication and delivery, to marketing and analytics, to customer service and experience. The threat is not so much legacy infrastructure as it is legacy thinking. The single biggest threat to banks today is imposed by those people who run them. —John Waupsh, Author, Bankruption: How Community Banking Can Survive Fintech > (Wiley, November 2016)

A technology sandbox for fintech

As with all complex situations, a single way forward is rarely evident. Discarding current solutions and systems is not viable and would likely cause more negative disruption than is imaginable. With careful strategic planning, legacy systems can be swapped out with modern technology. During the transition the challenge is to make sure the new technology stack coexists with the legacy systems until they are finally removed. Fintechs are acting like research and development sandboxes for established banks, and hybrid cloud solutions provide the flexibility for organizations to plan system upgrades in the areas in which the most impact can be achieved.

IBM understands the need and challenge in transforming a business in an extremely volatile and fast-changing world. It is using this knowledge to help others transform. Consider IBM as a giant research and development sandbox. It is focused on fintech where you can find all the latest technologies including blockchain, cloud computing, cognitive computing, machine learning, the Internet of Things and more. These technologies are all under the umbrella of a single technology company possessing a deep know-how of the financial industry and legacy systems.

Content Director

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