Banks today are  no strangers to wake-up calls. They come thick and fast in trade journals. They frame the digital transformation discussion. They resonate with traditional banks, especially when they're delivered  by FinTech companies. Here's one you might consider controversial, to say the least:

“The lack of competence in banking is sometimes overwhelming, and addressing it comes at a risk of being disliked”.

These stirring words featured in an article entitled “Legacy IT is the least of a bank’s problems” posted by the founder and CEO of Auka, Daniel Döderlein. He's probably worth listening to on the subject of legacy systems given that Auka was identified as the fourth fastest-growing FinTech company in the 2016 Deloitte Fast 500 EMEA, one of the 16 hottest Nordic FinTech startups by Business Insider, European Mobile Payments Platform of the Year 2017 by CFI magazine, and ranked in the European FinTech Awards Top 100 for 2017. (Auka is a VC-backed Norwegian FinTech company that provides a platform for banks to issue white label mobile payments products to their private and merchant customers).

When it comes to technology innovation in the financial services sector, Auka has credentials. Worth listening to, on a topic that is certainly worth exploring further. Döderlein suggests that “many banks are effectively running a horse and carriage set-up and they’re competing with folks driving Teslas”. The question is: Can it be that the situation really quite as bad as he makes out? 

Built to last

It's a universal truth that, in general, banks are struggling with legacy systems. One of the issues is the dwindling pool of legacy people; it’s not so easy finding people with the coding skills to provide support, maintenance and fixes for IT estates that for many were way outside their curriculum when they acquired their technology skills.

Big banking systems  produced in the 70s and 80s were written primarily in COBOL, which was introduced in the 60s. Few people are learning COBOL any more, and the average age among the coding community is  well into the fifties. Many coders have already retired, and are being persuaded back into extremely lucrative part-time consultancy to keep banking systems up and running. As this skills pool continues to shrink, the maintenance of legacy systems will present an exceptional challenge.

Legacy systems weren't designed for a digital age. The 70s and 80s was a different world; banks were masters of tech innovation. This was the period that saw the birth of ATMs, BACS and international card payments. It was a period of intense innovation. Many of the core systems that run the finance sector today are the same ones that were built in that first innovation wave. Things slowed up somewhat after that and although these systems were built to last, they weren't necessarily built to change.

Döderlein contends that when the next wave of innovation came along banks lost their impetus. Instead of seizing the opportunity in the early days of the internet, banks invested heavily in client-side software and CD-ROMs. When it became clear that this wasn’t going to cut it, Döderlein says, banks should have taken the opportunity to replace their monolithic legacy system designs. This is when they should have been developing new, simpler and more agile alternatives to deliver online services. They pursued a different strategy, building  modifications over existing proprietary systems.

That was then, this is now

One of the barriers to innovation has been that replacement projects are expensive and time consuming.  Big projects notoriously and frequently fail, damaging corporate and brand reputations, IT department credibility, and customer and shareholder confidence. The time and cost involved in system testing and the prospect of massive end-user retraining programmes can also be daunting.

Against such considerations a stable platform with tried-and-tested processes can look extremely appealing. Legacy systems may manifest aches and pains but, like old grannies, they are often held in affectionate regard. 

Sooner rather than later, banks will have little choice than to invest the time, money and resources necessary to modernise their IT infrastructure if they are to compete in the digital economy. Regardless of the emotion, rationale, fear, or even ostensibly stalwart business case that perpetuates the legacy system scenario, the fundamental truism that legacy systems are a handbrake on service innovation in the finance sector is a compelling wake-up call. It continues to come thick and fast.

Many banks are working through the problem by forming collaborative partnerships with FinTech companies. It's not so much a smart idea as an absolute mandatory strategy for long term sustainability. Things have changed since granny's day. She'd be the first to admit it.