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6 Reasons Why Banks Can't Transform Legacy Applications

During a meeting with the CIO of a Top 5 bank in Germany, I was introduced to a lady who was retiring that same weekend. The CIO averred that she was the last employee in the bank's IT department who knew the nitty-gritty of a certain mainframe application. I pitched for a project to transform the legacy application to open system. The CIO promised to internally discuss the risks of moving from legacy to open systems and get back to me. This was in 2002 or so.

Fast forward to 2013: The bank still uses the same old mainframe application.

It's easy to conclude from this incident that banks are stuck in the old world of legacy technology. Like many others, it might even be fashionable for me to make doomsday predictions about the future of banks.

However, that would be turning a blind eye to how technology vendors have thwarted the change to the status quo.

There are at least six issues with open systems that hamper legacy transformation.

Three of them are:

  1. Impractical open standards. The sheer heterogeneity of banking landscapes - at least in the developed nations - precludes compliance with BIAN and other open system standards. For example, the payments landscape at a Top 5 European bank I know of comprises 84 disparate systems, out of which not more than five can step up to open system compliance. 
  2. Buggy code due to shorter release cycles. To quote a personal example, the social media archiving software I use keeps releasing new updates every 15 days. Most updates fail to install on the first time. This causes loss of productivity and, if the same were to happen with banking software, tremendous reputational risks and penalties. The leading retail industry analyst RSR Research puts it nicely in its article RSR Software Quality: What the Heck Has Happened?: "...as we move into the Cloud, I really hope we keep our feet on the ground and our heads OUT of the clouds."
  3. Low uptime. Not to single out Twitter, but its "fail whale" epitomizes frequent outages of cloud software. A C-level executive at a leading payments processor told me that, with the best of intentions, they weren't able to deliver more than 80% uptime. As one who is wont to whipping out his calculator and doing quick-and-dirty calculations, I was dumbfounded when I heard this figure. Even with a 98% uptime, I'd estimated in my blog post Skating Away With Online Payments that one in 12 payments failed. Now, if one of these systems only has an uptime of 80%, the uptime falls precipitiously to 74% (0.98*0.98*0.98*0.98*0.80) and the failure rate quadruples to four in 12 payments. In other words, one in three payments fails, which is an unacceptably high failure rate for a mission-critical business process.

In Part 2 of this post, I'll cover the remaining three factors that hold banks back from abandoning their legacy applications. Watch this space and, meanwhile, feel free to share your thoughts in the comments below.

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Comments: (4)

Daniele Astarita
Daniele Astarita - ACI Worldwide - Naples 03 December, 2013, 11:472 likes 2 likes

Hi Ketharaman

I read your blog with attention , and have now a twofold kind of feeling about it. 

First of all let me say that it is very interesting, rich of references (either pat 1 and 2) and providing a snapshot of what might be the reality in the Financial Banking community...BUT only somewhere...and here we are on the second part of my thoughts..

From what I read though, it does not look like we are discussing Global Transaction Banking here...let's see

Impractical open standards ? it is not all about Payment Service Hubs resolving this issue ? I mean the solution is exactly the reason to transform legacy applications, not its stopping point, isn't it ? 

Low Uptime ? I believe, at 74% uptime (but even close to 80%) no mission critical bank application system can operate at all, not to discuss the CTO maintaining his seats for more then a week...am I wrong ? 

Sudden loss of functionalities ? but are we discussing of GTB or consumer software runnig on android ? 

All in all I believe all the issues described in the blogs - real ones of course - are for sure just confirming the mandatory requirements for Banks to RUSH away from legacy applications TODAY, and move toward a solid Payment Hub without further delays. Thanks and regards

Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 03 December, 2013, 14:45Be the first to give this comment the thumbs up 0 likes

@DanieleA:

TY for your comment. My post covers retail and corporate banking in general. But, given my payments background, what I've said is equally well applicable to GTB in general and payment hubs in specific. 

This is not the forum to shame anyone in particular but, if you contact me privately,

  • I'll tell you the names of not one, but many banks, whose online payments have low uptimes and, when I last checked, their CTOs hadn't changed for years. 
  • I'll also tell you about a bank which was hoping to replace all its legacy applications with a spanking new open systems payments hub. Over time, it found out that it needed one hub for FPS, another one for TARGET2, a third one for emerging market payments, and so on. Not to blame the bank or the vendor concerned (not ACI) but, for whatever reason, the bank today has a "legacy of payment hubs" and has barely managed to sunset 20% of its legacy landscape.

In this day and age, mobile apps are as relevant to banking as backend core banking systems and payments hubs, so I'd be remiss if I'd ignored Android apps. 

IMHO, if solution providers looked at end-to-end business processes in a holistic manner instead of just thinking about their own point solutions, they might achieve greater success in persuading top management of banks to ditch their legacy applications and embrace open systems.

A Finextra member
A Finextra member 03 December, 2013, 15:27Be the first to give this comment the thumbs up 0 likes

Great piece, Ketharaman and some good insight. Look forward to hearing more.

Is the prohibitive cost of replacing the system and end-2-end processes holding banks back from embarking on such programmes. Is it the rapidly evolvig trends, technologies and standards (by the time you have done the transition, the industry has moved on) 

Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 05 December, 2013, 08:101 like 1 like

@SunilP:

TY for your kind words. Part 2 of this blog is already live:

Why Banks Can't Transform Legacy Applications - Part 2

Cost of replacing legacy systems is not prohibitive. It's actually the opposite. However, as I've mentioned in Part 2, cost reduction doesn't work as the GTM message. Packaging this in a different manner to appeal to customer C-Suites has helped a tech vendor succeed in legacy transformation.   

Technology and trends can keep moving on. But the underlying business processes have remained virtually unchanged in retail and corporate banking for ages. Which is part of the reason why legacy transformation for the sake of embracing latest technology hasn't happened.

Among others, the 6 factors I've described in my two part blog post are holding banks back from ditching their legacy applications.