Will the UK Government’s Support for FinTech Destroy Big Banks?
Written by Mark Cresswell, CEO of LzLabs
At the beginning of March, the UK government announced its Digital Strategy, a section of which detailed its design to spark competition in the FinTech industry. FinTech has seen a rapid evolution of products to support more agile and accessible financial solutions for both business and the consumer. Enabled by ubiquitous global internet connectivity and smart phone advancements, the speed and efficiency of a wide variety of financial solutions can be improved dramatically.
The blight of the big banks
The challenge for many, when enhancing digital financial services, is that the longer established portion of the financial industry, much like the global public sector, remains awash with legacy systems born during the first FinTech revolution of the 1960s and 1970s. These systems continue to support business models built well before the internet, and when consumer banking was provided by branches and ATMs. It’s estimated that over 70% of global transactions are processed by mainframe applications running on COBOL code, often written over half a century ago. While these core banking systems continue to provide reliable back-end processing, they can be extremely limiting in today’s modern, globally connected world. Furthermore, these systems are highly dependent on a workforce whose culture, education and reference points are changing, as the baby boomer generation (1946-1964) marches inexorably towards retirement. As the technical and business knowledge of these systems decline, the global financial community needs to take advantage of the power and flexibility of modern computing solutions.
This transition can be painful, both technologically and financially, if organisations aren’t careful. Managing the transition to modern platforms, more adept at supporting FinTech solutions at a more effective price should be done in an evolutionary way. Modernisation is a continuum, but procrastination is no answer. Hope is not a strategy. Solutions are available that can reduce the cost of continuing to execute these reliable back-end systems, minimising the financial impact and risk of the effort. For many financial institutions, the reluctance to modernise is based on cost and risk concerns. In such a highly-regulated industry, risk must be managed. And few financial institutions, whether prodded by the UK government or not can spend vast sums of money to completely replace these systems.
Incentivise IT modernisation
Born-on-the-web FinTech companies benefit from regulation including the recent Competition & Markets Authority (CMA) directive, and the EU’s planned MiFID II – If the UK government really wants to drive the FinTech industry to invest in systems that can “support those who struggle to access financial services”, they should incentivise IT modernisation projects within the financial industry. Investment in digital platforms that can support greater ease of access are often held hostage to the high cost of continuing to operate legacy systems on expensive and often proprietary platforms. These costs limit financial institutions’ ability to continue to grow their FinTech investments that would broaden the options available to a broader UK constituency. The problem is not a lack of FinTech solutions, but rather a continued dependency on legacy systems and their restrictive cost models that are highly limiting to investment in modern solutions. The financial industry HAS invested in FinTech solutions, but the broader growth envisaged by the UK government’s digital strategy can only be achieved if these institutions can free themselves from the bondage of legacy system’s costs and limitations.
The Challenges of Legacy Modernisation
Legacy modernisation projects have been started and stopped in all industries for the last two decades. Some succeeded. Some did not. Several challenges must be overcome to ensure successful modernisation projects. First, the project needs to be justified on sound financial and business principles. Cost reduction alone is sometimes enough, but often better business justifications are warranted. Second, the technical challenges of modernisation encompass a number of issues. Most IT modernisation projects today impact the underlying infrastructure on which the legacy applications have been implemented. These changes affect the application technology, operating environment, often the data base management system (DBMS) underpinning the application and a wide variety of operational practices that have been honed over the decades that these systems have been executing. Risks can be managed utilising a variety of modernisation practices that have been available for a number of years. Overcoming political, cultural and generational resistance to change is another matter. For the UK government’s digital strategy to be successful in the financial industry, they should focus efforts on combatting these challenges.