Ovum’s recent report, ‘A Change for Good in Core Banking Systems’, is an interesting read. It suggests that banks’ core systems will assume greater prominence from 2010 as they continue to adjust to the altered competitive landscape and a revised set of priorities. For me, this report hits the nail on the head, particularly given the new entrants to the banking space. With Tesco Bank working under the banner of “every little helps” and Metro Bank going all out to woo consumers with everything from penny counters and dog bowls in their stores, the new entrants are significantly challenging traditional banks.

So what can traditional banks do to fight off the challenge of these new entrants? Well, apparently, IT might be the solution. According to the Office of Fair Trading (OFT), IT accounts for up to two thirds of start up costs and is proving to be a major barrier to new entrants.

So do traditional banks have a competitive advantage here?

Well, I’m not so sure. Vernon Hill, the founder of Metro Bank, is quoted as saying that legacy core systems are a critical stumbling block to the provision of great customer service by UK banks. Ovum agrees, stating that banks’ success and survival will require the transformation of existing strategies and processes and that this will necessitate significant changes to existing core banking systems. This transformation will take time and significant investments, however, change must be made if more traditional banks are to remain relevant and competitive.

So is this a stalemate? Traditional banks with cumbersome legacy IT systems versus new entrants with high IT start up costs?

Traditional banks need to start ridding themselves of the burden of inflexible solutions which were designed and implemented when the financial world was a very different place in order to introduce the flexibility and agility required to meet the needs of today’s customers. New entrants need to think about pay-per-transaction deals and bank-out-of-the box solutions. In my experience, it has always been regulatory compliance and marketing that have been on the critical path in launching a green field bank. But given the right solution, IT doesn’t need to be.