The financial industry needs to invest in modernising IT infrastructure or risk losing out on customers and revenue, according to a report from UK trade association Intellect.
Following the launch of its Financial Infrastructure Programme earlier this week, Intellect claimed that the complexity of existing systems used throughout the financial sector are hindering the ability of companies to serve customers, and monitor their operations.
In a report published alongside the launch of the programme, Intellect said that the failure to modernise systems has had clear repercussions in recent years. The financial crisis highlighted the inability of banks to extract and analyse data relating to their exposures to risk, while the industry saw a number of high profile bank infrastructure failures last year, such as the RBS IT failure which affected a number of retail banks. RBS has since indicated that it would invest £80 million in updating its systems.
In addition Intellect said that the lack of clear oversight of operations has left companies open to fraud, such as the presence of rogue traders.
Many of these failings have been attributed to faults within legacy systems. Part of the problem is that UK financial sector infrastructure has been developed over 30-40 years, with new systems effectively ‘bolted-on’ to legacy infrastructure, creating layers of complexity. The report acknowledges that this is to an extent unavoidable, due to the importance of keeping systems online at all times.
In addition, the effects of mergers and acquisitions, such as that of Lloyds Banking Group’s acquiring of HBOS, has led to significant consolidation of IT systems from data centres to integrated platforms for retail banking, further exacerbating complexity.
However regulatory requirements in the financial industry could offer companies the opportunity to upgrade infrastructure, according to Keith Saxton, chairman of Intellect's Financial Services Programme, with many organisations having to invest in infrastructure anyway.
Saxton commented: "The challenge for the banks is to see that changes being driven by regulatory mandates are an opportunity to improve their operations and infrastructure on a broader basis - as they will be changing them anyway - and render them more adaptable to a changing market.
Lack of funding
“Those banks that act upon this will ultimately benefit from doing so,” Saxton said. “Those that don't will ultimately risk losing business to competitors that are able to react in a timelier manner to the demands of their customers."
Ben Wilson, Associate Director for Financial Services Programmes at Intellect commented that UK banks are at a “major inflection point” with regulatory changes and market realignments taking place in the industry, meaning that old ways of working could see traditional big hitters facing a strong challenge from new market entrants.
One of the problems cited by Intellect and its members is a lack of funding outside of core operation infrastructure. It is estimated that 80% of bank technology budgets are spent on basic systems, aimed at essentially ‘keeping the lights on’. This compares with only 4% invested in non-regulatory driven innovation, such as improving the way a bank operates, or customer experience.
As part of the Financial Infrastructure Programme, Intellect seeks to create an open forum among banks, regulators and technology innovators, for the discussion of opportunities and challenges facing the industry’s infrastructure, helping to facilitate a regulatory road map and 'cohesive vision' to work towards.