Banks should focus on back office technologies in order for them to stay nimble and safe, meet regulatory requirement, and compete with start-ups, research by Accenture shows. According to the consulting firm, while on demand digital solutions for front end banking services are rapidly proliferating, including mobile and online banking channels, the back office at many banks still operates under legacy systems.
The banking industry is in many ways already inherently open to digitalisation. Much of what a bank historically did in the back office, such as the processing of numbers on pieces of paper, has been transferred to digital means. And while the back office has long been digitalised, the front end remained visibly analogue, with branches, paper cheques and cash and more recently, plastic cards.
A recent report from the BBA in partnership Accenture, titled ‘Digital Disruption: UK Banking Report’, finds that today the digital situation is rapidly changing for the customer facing end. Changes in consumer behaviour in favour of digital transactions as well as the advance of technologies are opening up the potential for a wide range of banking services to being offered in digital space. Banks, in response, have started developing and delivering more and more of their traditional services through digital channels.
Mobile banking for minor services, such as account checking and transfers, has grown rapidly and more than triple in four years, with monthly usage levels of 8% in 2010 jumping to 27% by 2014. The kind of services offered through digital channels is also on the increase. In 2014, 45% of UK customers surveyed by Accenture that purchased a banking product in the previous twelve months did so through the internet channel, of which 6% via a mobile device.
While the front end has recently shown considerable progression in terms of digitalisation, the back office – according to the Accenture report – is proving to be a serious difficulty for banks wanting to create digital services and meet the increased disruptive competition from start-ups. The central issue is the ‘hardwired’ complexity which exists in the back office of many large banks. The ‘core’ of a bank’s backend is often a wide and complexly interacting interdependent network of legacy systems.
This complexity exists in a number of different forms. One is that a variety of rules regarding functions, which may no longer be of these times, continues to exist in the program code in ways that makes removing the process difficult. These include according to the consulting firm: “the general ledger, the bank’s product factory and business rules.”
Other issues exist in the synchronisation processes and the web of rules that manage the delicate balance and harmonisation required in operating a real time current account. The ‘evolution’ of the system on top of itself in sometimes ad hoc ways means that “such complexity is the result of an accumulation within banks of thousands of minor software patches and variations, sometimes over decades. Systems have evolved, but not by design, and the outcome for banks has been the creation of enormous and intractable complexity.”
The consequences are multi-varied according to the report, including decreased security as legacy systems have more holes for smart hackers, increased risk from things going wrong in one or more subsystems, reduced agility as legacy systems need to be considered in any IT development, and increased costs associated with keeping it all running.
The lack of engagement with dealing with the problem of legacy systems and complexity in the back office also has a number of external consequences for banks. Regulators continue to be keenly interested in the transparency of banking entities, which makes intractable complexity an issue. It is not however merely oversight that is at issue, new entrants to the market are coming in with highly sophisticated back office ‘off the shelf’ banking solutions and will soon be competing for customers expecting full digital service. Metro Bank, Aldermore and Shawbrook can be seen as examples.