Legacy Transformation - Making the move from a vicious circle into a virtuous circle…. 

For some time, I have been pondering the position in which most of the major banks around the world have found themselves - and it is not a happy place. Perhaps best summed up with one word “Legacy”. 

One area of Legacy much discussed recently is around the core systems conundrum, Deloittes’  excellent white paper (http://bit.ly/1qeqc8X) this week is a great example providing a lot of useful information on the topic.  My question is - how on earth can banks refresh all their core systems while they are spending such a high percentage of their change budget on regulatory requirements?  With the huge recent fines being handed out to any bank that steps outside the regulator’s guidelines, ignoring the regulator is just not an option and regulatory change must remain a key priority. 

Anti-money laundering is a prime example where the risk is so great - with recent fines running at levels greater than some countries’ GDP! 

However, it is not just the Banks’ core systems which are legacy, but as brilliantly described by Andrew Tarver, CEO and Founder at Bold Rocket, at the EBA Day conference (http://bit.ly/1qeHB1j), their whole approach to the market, products and customers is now well off target.  Unless they radically change, and to do this means resolving the legacy IT issue, their market will be attacked by new entrants. There are numerous examples of this already happening, with new players taking the high value parts of certain transaction types - for example, Paypal on e-commerce payments.  Paypal now “owns the data” on a huge percentage of e-commerce transactions, all the banks see is the amount.  They’ve lost all the transaction detail, and therefore have no information on where or on what their customers are spending money.   Simply put - “no customer data means no customer knowledge". 

Banks used to be the consumer’s most trusted brand - but following the banking crisis in 2008 and the continual drip feed of new scandals since have continued to erode their brand value, compounding the go to market problem. Alongside this, many major Banks have experienced serious outages - which truly disrupt and upset the consumer further. The problem for the consumer up to now is that there is little true differentiation between the players, and therefore nowhere to run.  

So an unhappy place –

• the big banks have brand value at all-time low levels;
• investment in innovation is almost impossible due to legacy system & regulatory changes eating up their IT budgets;
• innovation is essential to reposition in the digital world;
• the banks truly are stuck in a vicious circle with no easy route out. 

So some radical thinking is required.  One idea I have is for the banks to set up a completely new bank brand, not just an internet bank but a full service bank with a shiny new brand.  Set up costs would not have to be as high as you imagine.  Deloittes’ paper suggests that some of the core banking software providers could provide new core systems for about £10M with running costs of circa £5M per annum – a fraction of what it costs to legacy today.  There is clearly space for some of the major IT services and outsourcing organisations to set up a “bank in a box service”, utilising standard software packages operating on secure cloud technology, automatically enabling scalability and resilience.  Flexible commercial models could be agreed with the service providers enabling the banks to buy the service on a click basis, meaning costs would rise in line with the business expansion.  In the UK with the new account switching service in place, simple on boarding of new customers and the easy migration of any existing customers on their legacy brand could be provided. 

One example of this strategy starting to be deployed is through the challenger bank, Sainsburys, who will now have their data processed by FIS, rather than continuing to use a legacy bank service through a white label service. This approach is interesting as it moves some of the regulatory change costs onto the service provider. By using standard software packages FIS can dramatically reduce their spend on regulations and by sharing it across multiple clients they can concentrate their spending on the things that matter.  This is part of the story. 

One bank has already set up a true spin off.  In October 1989, Midland Bank set up a new brand - First Direct, originally as a telephone bank.  With no social media or on-line marketing they built up 100,000 customers in 18 months (an average of over 180 new accounts per day assuming 7 days a week).  All these accounts were either new or migrated from other banks, and this was before the days of the new UK Account switching programme, something First Direct could only have dreamed of! 

The benefits of this approach are immense - and the costs could equate to a small % of today’s IT budget, but just spent in a much more innovative way.  Once the new brand is up and running there are several strategies that could be deployed for the legacy brand whilst the new brand significantly enhances shareholder value and return on equity.  

While I have heavily referenced retail banking above - the approach is even more compelling for transaction banking - where the legacy problem is exacerbated in that almost all bank products also sit in silos so that any regulatory change or modernisation has to be multiplied across several systems.  This makes any true integration of products and the delivery of a modern customer experience across a single channel difficult and expensive or in most cases probably impossible. 

As vendors have launched integrated platforms, maybe the time really is ripe to take a radicle approach. The big IT service providers, software providers and outsourcing firms could jump into this space and help banks make this move from a vicious circle into a virtuous circle, where the movers will be the winners.