Banks all over Europe are becoming increasingly hamstrung by their own legacy systems, allowing new players an easy entry into the market because existing ones can't react quickly enough.
Established banking organisations are typically relying on core systems built in the late 1970s and early 1980s, according to financial services analyst TowerGroup. These systems have survived because the risk and cost of replacing them has deterred their owners from ripping them out. Some of the few replacement projects that have gone ahead have ended in failure, said the analyst — damaging the careers of the IT leaders put in charge of them.
As a stop-gap, core systems have been shored up by what TowerGroup senior analyst Bob McDowall refers to as palliative solutions, with the encouragement of technology vendors.
But he said: "It's not just a technology issue any more, it's a business issue. Banks cannot now respond quickly enough to competition from non-banking new entrants to the market."
McDowall acknowledged that chief information officers are wary of suggesting replacing core systems at the risk of ending their own careers should the project fail. However, he urged them to educate their boards on the commercial dangers if they don't.
He said: "This a main-board issue. CIOs need to demonstrate that unless they migrate from legacy systems to solutions based on open systems architectures, and can provide such functions as data mining, these organisations will erode shareholder value."
Seen in business rather than technology terms, hanging on to legacy systems will increase the cost and risk of failure of a merger or acquisition bid. It will also increase the cost of divesting any part of the business.
McDowall said: "One insurance against the risk of migrating from legacy systems is sharing the risk of the project with a specialist contractor. There is a cost to that, of course. A last resort would be to establish a greenfield technology operation running in parallel. It would be a bold organisation to do that."
Whatever they do, banks across Europe that rely on legacy core systems need to address the problem soon, said McDowall. "Those organisations that don't have a migration strategy are just building up a bigger stack of cards. Their ability to respond to commercial pressures will just get slower as time goes on," he said.
