Last week, the Reserve Bank of Australia (RBA) released a comprehensive report on the performance of the New Payments Platform (NPP) on its first birthday.
For a piece of financial infrastructure that had the potential to go horribly wrong, the NPP has performed extremely well on a technical level but there are niggling problems, best summarized by the RBA
“the slow and uneven roll-out of NPP services by the major banks has been disappointing and that this has likely slowed the development of new functionality and contributed to stakeholder concerns about access to the NPP.”
So, who’s to blame – the same old, same old, Big Four banks!
Unfortunately, the RBA has not named names, as it certainly should have done, but does highlight the fact that the so-called ‘Core Systems’ of some of the major banks are not fit for purpose. In an ideal world (that is one not without a Four Pillars policy) banks would be forced by the market to keep up to date with then latest technological innovations.
One of the key objectives of the NPP was to “promote competition and innovation in the development of overlay services without the need to make frequent or significant technical changes to the BI [Basic Infrastructure]”. But the feet-dragging banks have become a drag on innovation across the industry, as the RBA notes
“Given that payment systems are networks that often require a critical mass, the slow progress within some participants has delayed the development of some of the planned ‘central’ functionality – for example, no decision has yet been made regarding the request-to-pay and payment-with-document overlay services. The slower than expected roll-outs by some participants appears to reflect the complexity of their systems and underestimation of the degree of investment needed to meet delivery timeframes.”
In other words, the largest banks are holding the other (nimbler) banks and the whole industry to ransom, with real progress only taking place at the pace of the slowest of the Big Four.
The joke is that all of the major banks make a very big deal in their annual reports of becoming ‘digital’ banks. For example, Westpac: aims to ‘create a 21st century, digitised bank with multibrand capabilities”; ANZ: “One of our strategic priorities is to digitally transform the bank”; CBA: “We apply world-class technologies to meet the ever-evolving needs of our customers and our people”; and, NAB:” become increasingly “digital-first”.
Fine words for investors but, apparently, little action on the ground.
If the banks cannot handle the first step in digitization – the support of real-time small retail payments – how are they going to handle the tough stuff – like on-line lending and, since the Royal Commission, a very touchy subject – online financial advice?
Core systems are those systems that give an institution its license to operate, and include payments, mortgages, credit cards, statements, deposits, funding and so on. These are the basic services we expect from any institution that wants to call itself a bank.
All major banks provide those services but what we cannot see is the plaster and sticky tape that is holding these services together inside the banks’ core systems. Sometimes, thankfully not often, the core systems patchwork becomes apparent when a major bank, such as NAB, goes offline and ATMs and merchant terminals stop working for a time, inconveniencing customers and businesses.
The Core Systems of any financial institution are complex and usually a hodge-podge of many systems developed over decades using different computer languages, hardware and software. Individual components are constantly being changed as new banking products are developed and regulators push for implementation of new reporting. After a time, core systems become inflexible and more and more expensive to maintain and ideally should be replaced.
But Boards are often reluctant to undertake Core System Replacement (CSR) programs because they are costly, time consuming and very risky. A timid board will always find something else, less risky, to spend this year’s budget on, kicking the can down the road for their successors, until after they have retired.
Undertaking a full-blooded CSR program is one of the riskiest strategic decisions any board can take since success is far from guaranteed and can even be disastrous, as in the case of the failure of the Co-Operative bank in the UK amply illustrates.
It is examples like NPP that show how Australian bank boards have failed over decades to address the necessary refurbishments of their core systems environments to bring them to a level needed to support the requirements of a modern banking system. And it is going to get worse as technological innovations change the nature of financial services. Australian banks are already falling behind as regards use of technology, for example the Australian bank voted ‘best’ (by experts from Mozo) was ING – a digital only bank owned by a Dutch parent.
The Four Pillars policy protects the four biggest banks from real market competition but, as the Hayne Royal Commission showed aplenty, it also makes the largest banks lazy, arrogant and stuck in an old business model with antiquated technology and obsolete core systems.
It is way past time that the ACCC was tasked with investigating whether the Four Pillars policy can operate effectively in a rapidly changing technology world and the largest banks have become too bloated to be fit for purpose for 21st Century banking.
Integrating Strategy, Technology and Risk 