Regulatory pressures to force banks into legacy IT systems upgrades, senior bank officials predict

Out-Law News | 19 Sep 2014 | 3:32 pm | 4 min. read

A majority of senior managers in the financial services sector believe regulatory pressures will force banks to upgrade their legacy systems, according to a new survey.

Temenos surveyed 198 senior bank industry managers from across the globe, including chief executives, chief information officers, chief technology officers and senior IT managers. The survey states that 53% believe their business will be forced into replacing their core IT systems by regulatory demands.

"A large number of senior bankers believe that, ultimately, it will be regulators and not management who will force the issue of IT renewal," Temenos said in its survey report (registration required). "More than half of respondents (53%) believe that regulators will ultimately force banks to update their mission-critical systems."

According to the survey, 77% of senior bankers said problems with legacy IT systems were the root cause of "recent IT glitches" at banks. Almost three quarters of respondents (74%) said the glitches could be described as significant or very significant.

The survey charted bank officials' belief that customer loyalty levels are dropping and their fear that digitisation brings a growing risk of competition from companies that have traditionally operated outside the sphere of financial services, such as technology businesses.

Expert in digital transformation Clive Seddon of Pinsent Masons, the law firm behind Out-Law.com, is surprised by some of the survey results.

"The view of many of our clients has been that, generally speaking, core banking systems have been shown to be reliable over a period of many years, often decades," Seddon said.  "The IT glitches have occurred in the complex systems and software that surround the core systems.  The core systems remain remarkably robust. There is no desire within the banking community to overhaul their legacy IT infrastructure. However, there is an increasing acceptance of the need to review and rationalise existing systems and applications to facilitate innovation. It is therefore an over simplification to blame legacy systems for IT glitches."

"Looking forward, the challenge is to ensure that the new technology and applications that provide new functionality is integrated with the core, underlying systems. Banks are looking to innovate across multiple channels in a bid to satisfy consumer demands for increasing accessibility to and convenience from digital banking and payment services. Risks to systems integrity and resilience are inherent with this integration process and demand that robust governance processes are in place for managing that risk," he said.

Seddon said that there are a number of regulatory changes on the horizon that will also affect the way that banks organise and manage their IT infrastructure.

"Mobile payments is an area that is coming into increasing focus for banks, particularly in light of increasing encroachment into this area from technology companies," Seddon said. "From next year, a new Payment Systems Regulator (PSR) will be operating in the UK which could see new, innovative payment systems developed in the mobile space fall subject to new regulatory requirements and overseen by the PSR. More fundamentally, the requirement to ring-fence retail bank operations from so-called 'casino' banking operations following the Vickers reforms will involve a necessary separation of IT systems and present another challenge for banks to address."

Seddon said that the need to harness the potential of 'big data' is also influencing how banks address digital transformation and decisions about the future of core banking systems.

"There is a general acceptance that banks have an opportunity to put the vast volume of data available to them to better use, but like many other businesses there remains a lack of clarity on how to glean meaningful customer insights from that information," Seddon said. "At a time when banks are still trying to win back consumer trust following the financial crisis it is vital that any rearrangement of their IT operations to facilitate better management and analysis of data simultaneously addresses concerns about data security and privacy."

According to the Temenos report, banks are focusing on innovation in response to the challenges facing their business.  24% of the industry managers surveyed said the "biggest corporate priority" for their bank is currently product innovation. Developing digital channels is banks' second biggest corporate priority, the survey report said.

"While the bulk of the investment dollars today are still being channelled into 'traditional' product innovation, that is, extending the range of existing products and services to appeal to a wider customer demographic (especially younger customers), we also observe more money be spent on initiatives around open banking," Temenos said. "These initiatives include creating app stores and in particular making available APIs. Partners can develop banking apps and ancillary services to extend the bank’s innovation capabilities at the same time as potentially creating new revenue opportunities."

Temenos said that 67% of respondents to its survey said their bank's IT budget is set to increase in the next year, compared to just 11% that expect their IT budgets to reduce. This is "the most bullish ever forecast" it had recorded for IT spending.

According to the survey report, the single biggest priority cited for IT spending was for improving or maintaining core banking systems. The second biggest priority for IT spending that was cited by respondents was spending on developing mobile and internet banking channels. Spending on big data, analytics and business intelligence, on risk, compliance and anti-money laundering systems, and on systems to improve customer relationship management were among the examples cited further down the priorities list for IT spending.

Temenos' report also highlighted the growing number of banks that run at least one cloud-based application - 86% now compared to 57% in 2009. However, only 1% of the survey respondents said their business run core processing activities in the cloud.

Data security and confidentiality concerns were outlined as the biggest barrier to cloud adoption. Regulatory hurdles were cited as the second biggest barrier to banks' adoption of cloud solutions, the report said. Temenos said, though, that it expects "all new core banking replacements" to be cloud-based by 2020.

Seddon said that continued change and disruption will put pressure not just on the technology teams but also on bank legal and regulatory departments. He said there is considerable pressure on them to have a good grasp of the contracts and licences which underpin bank systems and processes.