Can incumbents finish the race to become digital?

„If it ain’t broke, don’t fix it!“—What does sound like a cliché has actually been roaming around for decades among the IT departments in the financial service industry, with detrimental effects on innovation and change! Finally, after these decades, it isn’t a surprise that the legacy systems of banks and insurers are rather a handicap than an enabler to finish the race to become digital:

However, the financial services industry as a whole still has a lot of catching up to do in the race to become digital. While the expansion of digital platforms has increased (think online consumer portals and mobile apps), the capabilities of core systems to connect with the outside world and at an enterprise wide scale are still heavily anchored to the past. This has created a serious handicap when it comes to focusing on innovation efforts – despite the compelling predictions associated with making the technology investment.

While the race of modernization is accelerating its speed on and on, incumbents are sticking in a mess of challenges that have become meanwhile to serious problems. So it is no wonder that industry experts won’t still longer hold back their concerns, in fact they have taken a entirely new tone: „Legacy systems: the next financial crisis?“

Tough words for summarizing the status quo in banks and insurers, one might think, but the situation with their legacy system is in fact real. Finding and hiring the right IT staff, for instance, is such a real issue, and that is because IT skills are highly needed that are far away from being up-to-date, and which in today’s universities and colleges are not longer be taught. There aren’t master programs for languages like COBOL or PL/1, and if there would be any, not many would like to enroll.

These systems operators, many of whom apply the same skills today that they learned in college during the 50s and 60s, are retired or retiring, and charge a handsome sum for their time. Furthermore, the newer, younger IT professionals in finance want to be on the front lines of innovation, developing solutions that give their firms the edge and expanding to cloud and open platforms, not learning a language that restricts them to an ageing back office system.

It is easier to call for a new build of core systems and all its surrounding processes than to actually do it. That is why still many of the traditional institutes in financial services do think that the cost of replacing the system is not worth the return on investment. 

Does that make any sense? It would mean to run a company on a 25 year old legacy technology:

The truthful answer is, it can, just as you can run a modern company on a mainframe. You can also ride a horse to the office. But is it something you should do? That’s where I would say “no.” Because the friction between your current requirements and the problems you solve today, and the way you solve them, relative to the requirements that were well addressed by products from 25 years ago, are fundamentally different. Yes, some elements of these technologies have been updated but often the underlying engine hasn’t.

 

 

Photo by Joshua Sortino on Unsplash

Dennis Grönger

Strategy advisor for InsurTech and FinTech based in Hamburg, Germany. 20+ years of experience in insurance and banking with a special focus on digitalization.

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