Legacy banks are preoccupied with blockchain and Big Data, but is this really the answer to save them from extinction?
The view from my home office window was better than usual. It was 10 pm and there were no clouds in the sky. Have you ever tried to count the stars? Neither have I, but there are apparently billions of stars if which 100,000 can be seen (maybe a few less if you live in London).
Imagine that each star is a single application within a bank.
Add a metaphorical sticky note to each star and write down the cost of software licences, annual support and infrastructure for that particular application. This is typically included in figures when banks talk about Total Cost of Ownership for an application. Now let’s add the costs for operation, maintenance and DR tests. Are you with me so far? It’s about to get complicated.
Dependencies
Next, draw a line between a few of the stars. Each line represents the flow of data. Calculate the extra cost for each application for these dependencies, allowing for up and downstream costs due to dependencies and increased lead times. Put a sticky note against the star. I guess the sky is starting to cloud over now, what with all these pink and yellow sticky notes.
As you can guess, there are a lot of lines for dependencies. Let’s come back to the reason each application was put in place; usually, a business case that was intended to increase profit or meet regulatory requirements. However, the more complex the dependencies, the longer it takes to realise a new application and benefit from that business case.
If a particular business case indicates a profit increase of £1 million per month, every month of delay equates to £1 million in missed profits. Multiply that by X-hundred applications, and you can see that this has a significant impact on the bottom line. A quick glance back at those sticky notes will show the Total Cost of Ownership for each application.
What can we learn from this?
The architecture of legacy banks has evolved over the decades, adding layers of complexity that have resulted in huge costs with a very high run rate, low flexibility and low agility. This might not be such a major concern, except that there is now a new generation of banks around the corner. In an age where money is data shifted between accounts rather than stacks of bills under lock and key, who do you think are likely to move in on this space?
The FATBAG (Facebook, Amazon, Tencent, Baidu, Ant and Google). These companies have many advantages. They don’t have the same internal politics, they don’t have staff who are mentally tied to legacy vendors or solutions, they don’t behave or look like a bank, they understand data, and they are often much better at designing the user experience. In other words, they are focused on realising the functionalities that they require to efficiently scale at a very low run rate.
There’s a new sky on the horizon
At the moment, we have a galaxy of stars scattered chaotically all over the sky and weighed down with sticky notes. However, when the FATBAGs enter this space, the sky will contain only a handful of bright, clean stars that look like something from a simple animation. Which one do you think will be the most efficient?
Chris Skinner often writes about the subject of banks being preoccupied with blockchain and big data in his excellent blog, The Financier. New technology is a good thing, but I suspect what needs to change is the business model and not necessarily blockchain. Focusing on the technology alone is like adding a new coat of paint (or a digital interface) to an old car, but this doesn’t make it faster or more efficient. The question is, how much time do banks realistically have left to change?
Whenever I have presented my proposals on how to transform a bank’s architecture, I am met with concerned faces and objections such as: “The proposal is indirectly questioning earlier investments,” or “someone who is still working here made that decision and they will not like this new proposal.” The time for internal politics is over. If the banks want to survive a battle with the FATBAG’s, they need to learn and act fast.
Otherwise, the FATBAGs can and will eclipse banks as we know them today.
