If banks don’t replace their old inefficient and expensive IT systems soon they will find themselves out-competed, out-performed and out of business. They are in the last sector to be still writing its own software and it’s killing them. David Arnott, CEO, Temenos, writes
On average banks spend 15% of their total costs on IT; other sectors spend an average of 7%. This is crazy and it’s leaving them vulnerable to the more nimble, more modern, more profitable new entrants. Companies like Lending Club, TransferWise and Apple are already successfully picking off high-margin business and leaving the dull, boring low margin stuff to the slow moving banks.
But that’s not all. The IT on which they are spending all this money is old, decrepit, and not fit for purpose. They are spending a fortune just to keep it together, ticking over – and sometimes not even managing that. These systems certainly aren’t able to help the banks grow. They fall over, don’t talk to each other, keep data in silos, offer no real time visibility and just can’t compete in the modern, fast banking market.
Banks are sitting on significant systemic risk. For years they have been held together with sticking tape and today the risk of failure is significant – just remember how one bank’s customers couldn’t take cash out at ATMs last Christmas, and similar outages are happening regularly across the sector. When this happens, the damage to the brand can be huge and given the changing nature of customers’ relationships with their banks, it can also be very costly.
While today more people use banks than ever before, they increasingly have multiple relationships, picking those that offer them the best deal, the best service, or simply do what they want when they want. The choice means customers are becoming more and more fickle – the Capgemini 2015 World Retail Banking report indicates less than 50% of Gen Y customers are likely to continue with their primary bank in the next six months.
To give an idea of how much this is costing banks you just need to look at private banking. Traditionally, the next generation would take on the family bank with their inheritance; today they do not. Instead they look for alternatives that offer phone, internet and real-time banking so that they can actively manage their own portfolios. If just 10% of the billions inherited each year leaks away, you’re in real trouble.
Banks can no longer assume they will keep this money. Instead they must compete with the new players, deliver new services from robust platforms that don’t fall over, improve efficiency, leverage their customer data to develop cross-selling campaigns to capture more of the business, and deliver real time account management.
This means new IT. But who can afford the bespoke systems they have always commissioned? Today, the solutions have got to be generic, off the shelf and customisable – which means much lower cost.
Banks that have installed new generic software can cut IT expenditure from 15% of their total costs to around 5%: one Asian bank recently cut its IT headcount from 87 people to just seven. For Tier One banks this represents a huge potential saving, where IT departments typically run between 3,500 and 4,000 staff to patch and maintain their systems.
New IT packages can be customised for regional and local markets, taking into account different regulations and the sophistication of the customers. They will allow the banks to launch new services, effectively cross-sell using customer data, and offer robust 24/7 services, enhancing their reputations.
Many of our clients come to us because their systems just can’t cope anymore and are deeply concerned about outages and compliance. Regulation is piling on the requirements and the systems have to produce more and more reports, sliced and diced in a myriad of ways.
But they are also aware that new systems will allow them to compete with the newer, fresher, players and develop new brands. Bank Leumi in Israel, for example, recently launched an internet bank to which it is moving existing customers.
Today’s modular systems mean that banks don’t have to rip it all out and start again. They can upgrade piecemeal, doing mortgages, then payments, then deposits. It’s less risky and provides quick wins.
Now is the right time to change. Today’s banks have gone through six years of restructuring and that process is largely complete. Investors are starting to look for growth and new management teams are working out how to deliver it. We’re about to reach tipping point where those that are left behind will struggle to survive. They just won’t be able to compete.
It’s a no brainer. These new systems are cutting costs, increasing revenues, building new brands and creating value. With the sector priced for growth, banks that don’t install them soon will not only see their profits slump, but their share prices too.