/Which banks are leading digital (and who are the laggards)?

Which banks are leading digital (and who are the laggards)?

What could banks gain by embracing digital and updating their core systems? Story by Chris Skinner.

I’ve written a lot about legacy and the challenge of old systems, so it’s interesting to read a few press reports on said subjects. Yolanda Bobeldijk writes in Financial News that 92 of the world’s top 100 banks still rely on IBM mainframes.

Now that’s not an issue if those systems are well maintained and refreshed regularly. The issue is that most are not. I recently visited Ant Financial, for example, which runs Alipay, and they tell me they refresh their systems architectures every three or four years. How often does your bank refresh its systems? Some haven’t refreshed their back-end systems since the last century.

Banks typically spend 80% of their IT budgets on legacy technology maintenance, and a tier one bank could easily spend up to $300m a year on existing software that constantly needs expensive updates in order to meet regulatory requirements.

Why so much? Because most of those systems are written in programming languages that no one knows any more. Anna Irrera writes on Reuters that 43% of US banks’ core systems are written in Cobol.

$3tn in daily commerce flows through Cobol systems. The language underpins deposit accounts, check-clearing services, card networks, ATMs, mortgage servicing, loan ledgers and other services.

Hmmm. It’s not all bleak – sad and bad, though. In another report, Autonomous Research said the banks with the most potential to do better than analysts’ profit expectations (because of digitisation) were:

  • JPMorgan Chase and SunTrust in the US
  • Spain’s CaixaBank
  • Lloyds Banking Group in the UK
  • KBC in Belgium.

Autonomous ranked the banks based on two criteria: their current level of digitisation and their transformation outlook. It assessed 18 attributes from customer ratings of mobile banking apps to IT expertise on the board of directors. Banks viewed as being behind on digitisation included:

  • HSBC
  • BNP
  • Credit Suisse
  • Intesa Sanpaolo
  • Standard Chartered
  • the three biggest Japanese banks: MUFG, Mizuho and Sumitomo Mitsui Financial Group
  • the four big Canadian banks: TD Bank, Royal Bank of Canada, Bank of Montreal and Bank of Nova Scotia.

Australian banks could only manage to hit the middle of the rankings, and aren’t viewed as leaders, which many disagree with. In fact, unsurprisingly, many banks would argue that they’re not laggards, while I would argue that some of the banks viewed as leaders (such as Lloyds) are a mess in their back office.

Interesting how research can create such discussion. Meantime, I did agree with Autonomous that banks would be reducing their physical distribution structures. Its research suggests that digitising operations would help cut €30bn of the combined €233bn of branch network costs.

Autonomous forecasts that banks would cut their combined branch numbers by 40% over the next five years. “Nobody can seriously believe that Europe needs 195,000 bank branches,” it said. “There are over 32,000 bank branches in Germany compared to 7,370 supermarkets and 15 Apple stores. That 32,000 figure is going to shrink massively.”

The report estimated that banks could improve their ratio of costs to income by six percentage points by 2021 as a result.