Will PSD2 and FinTech Competition Present Insurmountable Tech Pressures for Big Banks?

The Challenge for Traditional Banks

The challenge for many financial organisations, when enhancing digital services, is that the well-established portion of the financial industry, much like the global public sector, remains awash with legacy systems born during the first financial tech revolution of the 1960s and 1970s. These systems continue to support business models built well before the internet; when consumer banking was provided by branches and ATMs. It is estimated that over 70 per cent of global transactions are ultimately processed by mainframe applications running on COBOL code, many of which were written over half a century ago. Against this backdrop, born-on-the-web FinTech competitors continue to gain market share over traditional players, energised by systems that have open-source and the cloud at their core.

The Pressure for Legacy Modernisation

The recent Payment Services Directive II (PSD2), implemented in January 2018, has made headlines due to its focus on opening retail banking APIs to third party product providers. FinTech banking providers will likely experience minimal disruption when integrating this into their open technology stacks. For larger, traditional banks, the cost of integrating this, and other, new digital initiatives on top of proprietary platforms will be a significant inhibitor to compliance and, ultimately, competition.

The problem for these organisations is not a lack of new available platforms, but rather a continued dependency and lock-in to legacy systems that are stubbornly resistant to change. The financial industry as a whole has developed a range of new ledger, mobile and cloud-based technology strategies, to name a few. But the broader growth necessary to compete with agile challenger banks such as Monzo can only be achieved if these institutions can free themselves from the bondage of legacy systems’ costs and limitations.

Legacy modernisation projects have been started and stopped in many industries for the last two decades. Some succeeded. Some did not. But most companies opted to “kick the can down the road” as the risk profile of the transition was considered too high. However, the prevailing cultural and generational resistance to modernisation is now on the wane. Newer modernisation technologies have emerged to make the transition to contemporary systems far easier than the conventional wisdom would suggest. Furthermore, the projects can be undertaken using widely available skills.

With an acute skills shortage for support and maintenance of legacy system, and inability to adapt these systems to counter the threat of FinTech challengers, failure to modernise now is a decision with existential ramifications. Kicking the can down the road is now the riskiest option.