An Improved Legacy System Is Still a Legacy System | Bank Think
1. 1/11/16, 11:41 AMAn Improved Legacy System Is Still a Legacy System | Bank Think
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An Improved Legacy System Is Still a Legacy
System
By Ghela Boskovich
January 11, 2016
Banks by and large recognize the need to adapt their legacy systems to the demands of today's
digital technology. But the problem they encounter is that making enhancements to a core system
with ingrained inefficiency is like the expression popularized in modern times by the 2008 U.S.
presidential campaign: putting "lipstick on a pig."
Most banks are bound to legacy core banking systems, where data is obstructed from moving
between silos, thus inhibiting a number of possibilities. Take pricing, for instance. In legacy core
systems, all pricing is hard-coded inside the system. To change a price or offer a discount, an IT
team has to go in and manually recode the price in the core and the multiple systems that the
core connects to, including the customer relationship management and billing systems.
Translation: seemingly simple updates take months to complete.
Several U.S. bankers have told me in private that making a single change to a product can take
more than 400 consecutive days to complete, with some taking well over 500 days, because
products are hard-coded inside the core system and various silos.
That's just one example — there are plenty of other reasons — why it's time for banks to pull the
trigger on modernizing the ancient core system.
When the very system that administers the entire bank is old, creaking and breaking can occur.
That was the case in recent system failures at Westpac, HSBC, NatWest and SunGard. And
sticking with a legacy system can hamper an institution's efforts to innovate its product offerings.
Trying to add digital channels on to the aging core just magnifies the defects of a legacy system.
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To support digital channels, banks have built layers
upon layers onto their legacy cores. But that data
still remains bound by business line silos. The
result? There is no clear view of customer need,
no enhanced customer experience and no new
way to win customer hearts and wallet share.
The need for traditional banks to change their
foundational technology is only increasing as
guerrilla-style market wars between incumbent
institutions and disruptors are quickly becoming
the norm. In the U.K., for instance, new digital
banks like Starling, Atom, Fidor and Secco are
emerging. Modern core systems, which the
challenger banks are using, are created to be open
and flexible so data can move quickly and
ubiquitously, and optimize price on the fly.
To date, U.S. banks have had a regulatory moat
protecting their territory. But American customers
are demanding better services, products and
experiences from their banks. Since a good
offense is the best defense when it comes to
battling digital challengers, American banks should
study the U.K. market for clues to drawing up
attack plans that should include overhauling their
core systems.
To be sure, the high risk of a core replacement
project is well-documented. Industry skepticism about the return on such an investment is also
high. Yet the payoff in achieving greater efficiency through replacing or modernizing a legacy core
is also high. One other alternative is to enable non-core application programming interfaces —
known as APIs — outside of the base core. The Open Bank Project and even regulations, such
as a recent European Commission directive, have supported the adoption of alternatives to hard-
coded core functionality, for instance.
If the challenger bank model is a blueprint, with API adoption as the battle plan strategy, American
banks can augment their current core systems with a middle layer blueprint where silos are
breached, functionality is flexible, and APIs can be easily integrated.
Banks must face the fact that their disruptor competitors are not slowed down by the question of
what to do with an old core system. Already, challenger banks — mobile-based platforms
