Daniel Döderlein, Auka: Banks have been adding features as slap-on verandas to a tall building

Daniel Döderlein, Auka: Banks have been adding features as slap-on verandas to a tall building

A recent Reuters article explored how companies like Cobol Cowboys make a fortune helping banks who struggle to keep their legacy systems running.

To some extent, I can relate to bankers inability to get started on IT projects. They feel locked into legacy IT systems and closing their eyes and hoping for the best seems a viable option right now. But in fact, the real problem is not legacy IT, that’s just a symptom of the root problem in banks… the decision makers.

The lack of competence in banking is sometimes overwhelming and addressing it comes at a risk of being disliked. Pointing fingers at legacy IT systems may indeed cost a banker his job and I myself was tempted to leave this subject alone. But as an organisation, we believe in sharing uncommon amounts of information and being completely honest. Staying true to our values, I felt the need to address this.

I salute the senior programmers (referring to those who are actually in their retirement years and know how to write Cobol) and their exploitation of financial institutions. Those institutions who have built their business on systems which haven’t been updated or modernised for decades.

It’s ironic now that banks were amongst the first to adopt new technology back in the “good old days”. The sad truth of the matter is that they jumped off the early adopter curve the moment the first installation was done. It’s almost like they said, “great, now that’s done, let’s get back to counting money”.

Many banking legacy systems have been running for more than 30-years. An estimated $3 trillion passes through Cobol systems daily. Through the years, the demand for new core banking systems and services hasn’t really changed that much.

The revolution of digital payments wasn’t driven by banks. International card schemes made it happen with the help of banks distribution and marketing team. But the actual systems were run by the schemes themselves and their myriad of vendors and processors. Banks represented the first and last mile by distributing cards on one end and authorising transactions on the other.

Everything that was technologically grunty was done by others. So, the systems inside the bank basically stayed the same through the first real “banking revolution”.

The second wave occurred when the data behind transactions needed to be made easily accessible to customers via the internet.

At this point, vendors in the banking sector had a blast. As the systems hadn’t really changed for the last few decades, experts in this thing called the internet could basically dictate how everything should work. Banks were forced to invest to meet customers demands of accessing their financial information from home. Most banks listened to the advice of vendors and bought client-side software that would be installed on the banking customer’s home computer. These were all intended to offer an unparalleled user experience bundled with the best security money could buy.

Remember Homelink? The UK’s first home banking software? It’s ok if you don’t, not many people do. Installing software to bank from home, unsurprisingly, didn’t catch on in a big way. Without considering the growing number of different computers and operating systems, banks invested in proprietary software that was distributed on CD-ROMs. Eventually, it was figured out that client-side software was a mistake compared to the standards established for internet traffic and finally worked out that a website worked way better for a fraction of the cost.

Hindsight is the only exact science and I’m not blaming the bankers who were lured into sending out CDs while the internet and web pages were doomed by certain experts to be a short-lived fad. But I’ll be pointing fingers left, right and centre when history repeats itself several times after the crash of proprietary internet banking software. It happens every day, again and again.

When implementing access to data stored deeply in the already legacy core systems proves ridiculously expensive the first time around, do you think the bankers decided to change the design of their systems? Wait for it…

Sure, you may lose your job proposing to replace a bunch of legacy systems for something lighter, fresher and more useful. After all, the phrase “nobody ever got fired for choosing IBM” instructs you to choose the larger, more established option. This is not because of any intrinsic quality but solely because it’s the larger, more established option. If IBM, Oracle or Microsoft failed on you – and all technology will eventually have some flaws – at least you could blame them and keep your job.

Sadly, bankers making these types of decisions have failed to understand that their job is not to just keep their job. Their job is to build better products so the bank can serve customers better and by that I mean… make more money. Only recently it seems those in decision-making roles within banks have figured out, to some extent that is how you actually make more money, in that order.

Looking at the core needs of the customers and then adjusting the IT needs of the bank accordingly, by rights, should have happened back in the late 1990s and early 2000s. When the popularity of internet banking made the direction banking was heading in, apparent, imagine if the majority of banks had made the right choice immediately and started to move away from the monolithic system designs they are still struggling with today. But they did not. Again, not surprisingly, customers needs and legacy system problems did not shrink.

So, as the Cobol Cowboys and the like reach an age where their families start to plan inevitable funerals, legacy bank systems face the risk of being buried alongside.

Many banks are effectively running a horse and carriage setup and they’re competing with folks driving Teslas. The only reason the Teslas in this scenario haven’t dominated yet is because of two things: 1) consumer inertia (which will dissipate in time) and 2) the bags of money yet to be handed over.

Fintech companies are applying new technology to service consumers and businesses in ways that banks are completely unable to. To use the Tesla analogy again – they are not dominating in terms of market share yet because of the very same dynamics that banks currently benefit from. The inertia of the general population to adapt to new things spreads across generations. It’s not enough to only hit home with millennials, you have to convince the wider audience. Or, put frankly, wait for them to die before you own the market.

Further, an inherent trust in established brands and their big bags of money makes them resistant to sudden death. But make no mistake – they are bleeding out and will eventually die unless they change dramatically.

Unless older carmakers transform completely and become leaders in a new digital age driven by technological advances and a passion for solving problems of their customers – they won’t survive. Today Tesla is the most valuable car manufacturer in the world. The way of the market trumps everything.

I expect exactly the same to happen to banks. The dynamics are identical.

So equally, unless banks turn around and leave their legacy mindset and technology behind, shifting gears to user-centric product development backed by cutting edge technology, the myriad of fintechs just waiting to become the next Tesla will inevitably wipe the floor with them.

It’s too late now to turn around the whole legacy IT system of a bank. Each and every bank I have met, who are on this journey, burn ridiculous amounts of money trying to make it work but so far nobody has really transformed. Systems are down, projects take forever, IT is always held up by something other than making problem-solving solutions for customers and the story goes on.

Ironically, the core functions of a bank are ridiculously simple. If you handed the brief to any development team worth their salt today, the core features would be done in a flash. In fact, most popular systems today are a thousand times more complex. Facebook, WeChat, SnapChat – these are all examples we know, but CRM, access control and third-party integrations on the systems of most semi-successful startups beat the complexity of a bank’s. I know first-hand as I have built one and work with banks every day.

The complexity grows mainly out of the lack of knowledge. Most people inside banks do not know how their systems actually work. Combining this lack of knowledge with the myriad of motley added patches from all kinds of vendors making the whole operation run does make it complex but it does not have to be. Rather than running a service architecture, banks have been adding features as slap-on verandas to a tall building. The result is a skyscraper without an architect or a building owner.

By Daniel Döderlein, founder and CEO of Auka

  • Bill Hinshaw 2 June, 2017 at 1414

    Great article and it further reinforces our belief on what’s happening in banks and other industries worldwide. I like to say COBOL is still going strong like the Energizer Bunny — wagging its tail at non-believers. [SOME ADVERTISING WAS REMOVED]

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