Banks with legacy core systems in a decade’s time will die, says Chris Skinner. In which case, it’s probably wise to get your skates on.

I’ve been saying for so long now that banks need to replace core legacy systems, that I’m boring myself, but here I go again. The reason I’m talking about it again is that, even though some disagree and think they can fudge the issue with plug-ins, I believe that the new competition will decimate banks that don’t replace their core systems.

I say this because I talk to firms such as Ant Financial, who refresh their complete systems architecture every three or four years, and think that this mindset really hits to the heart of the difference between a technology company that happens to do finance (techfin), and a financial company that happens to use technology (fintech).

If you are tech first, your singular focus is on agility. It’s about fast change cycles in a microservices architecture using an SDK (software developer kit) network of APIs (Application Programming Interfaces). It’s about speed, change, service, updates, vision.

If you are finance first, your singular focus is on stability. It’s about slow change cycles in a monolithic architecture using control systems and sign-off structures that avoid any exposures. It’s about risk, security, stability, control, management.

These two opposites are difficult to marry, and the example of 40-year old legacy systems is a clear example of the latter camp. Keeping a core system operational that was first implemented in 1976 is an indictment of a bank, and it has to change. Some say not, but imagine Amazon or Alibaba having systems that were untouched for 20 years, except by operational maintenance updates. Could they function in their fast-change online environment today? I don’t think so.

And this is why I give banks with legacy core systems a maximum of 10 years to change. In 10 years, we will be in 2027 and not far off the timelines that Ray Kurzweil originally envisioned the Singularity, where machines become more intelligent than humans. In a world where machines are coded to talk, walk, think, see, hear, touch, smell and feel, how would an IBM mainframe (92% of banks’ core systems machines) with a COBOL program (43% of US banks’ core systems code) feel? Well, it just wouldn’t. But the banks stuck with such machines would have to compete with fintechs and internet giants who are using such machines.

A slow, creeping death

In 2027, where the fintechs and internet giants are analysing trillions of transactions per second in real-time with artificial intelligence, how would the banks’ core system working in batch overnight updates manage? It wouldn’t.

In 2027, when the competition between all industries and all industry players is about data analytics, how will the creaking old mainframe system deal with the competition? It won’t.

Banks with legacy core systems in a decade’s time will die. They won’t literally explode, but it will be a slow, creeping death by a thousand cuts of code, and the bank will get acquired or folded by regulators and competition. So, this sets the timeframe for a banks’ death: 10 years; and their legacy core systems are their 10-year ticking time bomb.

How long does it take to replace these legacy core systems? I would claim that a bank that wants to refresh its legacy core systems will need a five-year timeframe to do this. The reason I state this is that, especially for a big bank with lots of systems, it’s a highly complex task. It’s not risky if done right, but it’s not simple.

First, the bank needs to create an Enterprise Data Architecture. It needs to consolidate, rationalise, analyse and organise its complex data across multiple systems and silos, into a single, clear structure. Second, it needs to move that data to the cloud, and separate content (data) from processing (servers). Third, it needs to gradually identify what to replace, and when. There’s no big change here, but lots of small swap-outs. After all, you don’t eat an elephant in one bite. You eat an elephant one mouthful at a time.

It’s this last part that requires a five-year strategy. Five years. In other words, a bank that hasn’t determined its core systems change strategy will be starting in 2018, and by the time they finish that change programme, it’s 2023, which is four years before the time bomb explodes (assuming the time bomb I’ve identified explodes in 2027).

Will it? I think I’m being kind, to be honest, because I think the bomb will explode in 2022, in which case you’re already too late. But let’s be kind for the sake of your hearts. It’s 2023+. In other words, whatever timeframe the bomb explodes, we are almost at midnight for those legacy systems.

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– This article is reproduced with kind permission. Some minor changes have been made to reflect BankNXT style considerations. Read more here. Photo by Fer Gregory,

About the author

Chris Skinner

Chris Skinner is an independent commentator on the financial markets through the Finanser, and chair of the European networking forum the Financial Services Club, which he founded in 2004. He is an author of numerous books covering everything from European regulations in banking through to the credit crisis, to the future of banking.

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