The Sickly Legacy of Banking: A Decaying Industry Held Hostage by Outdated Systems
It’s time to face the brutal truth: the banking industry is rotting from the inside out, crippled by the very systems that were supposed to enable it to thrive. The latest forecasts from Gartner predict that IT spending in the banking and investment services market will increase by a paltry 8.7% in 2024, reaching a whopping $1-trillion by 2028. But what’s the point of throwing money at IT if the same outdated systems continue to stifle innovation?
Legacy Systems: The Silent Killer of Innovation
Forrester research reveals that a staggering 95% of ATM transactions are still run on ancient Cobol programs, with a mind-boggling 220 billion lines of Cobol code still in production worldwide. This is a ticking time bomb, a digital equivalent of a nuclear waste dump waiting to be cleaned up. The industry’s reliance on these crumbling systems is a recipe for disaster, suffocating innovation and limiting the potential for growth.
Neo-Banks Not Immune to the Problem
Neo-banks, often touted as the saviors of the industry, are not immune to the legacy problem. They too will eventually hit the same wall as traditional banks, struggling to modernize and innovate while trapped in a sea of outdated technology. It’s a vicious cycle, where the industry’s inability to modernize perpetuates its own stagnation.
Regulators: The Key to Unlocking Progress
EU regulators made a significant dent in the industry’s legacy problem with PSD2 regulations, paving the way for fintech innovation. Now it’s time for regulators to take a tougher stance on system risk, standardizing technology standards and forcing institutions to modernize. This could be the game-changer the industry needs, driving innovation and progress.
Central Bank Digital Currencies: The Ultimate Game-Changer
Central bank digital currencies (CBDCs) offer a glimmer of hope for the industry. The South African Reserve Bank’s Project Khokha 2, focused on a wholesale CBDC and bank-issued stablecoins, could be the key to unlocking regional payments in Africa. The ZARP stablecoin is a notable example, showcasing the potential for innovation in the sector.
Limiting Core Functionality: The Only Way Forward
The industry’s only hope lies in limiting core functionality, focusing on keeping regulators happy while allowing institutions to innovate through partnerships with agile fintech firms. This coexistent core approach allows for a gradual migration to new technology, reducing the risk of massive capital outlays and operational disruptions.
The Author’s Perspective
As CIO of Global Kinetic and CEO of FutureBank, I’ve seen firsthand the devastating impact of legacy systems on innovation. It’s time for the industry to take a hard look at itself and acknowledge the need for drastic change. The author, Sergio Barbosa, urges the industry to collaborate and find solutions to this sectoral challenge, limiting systemic risk and driving sustainable innovation.
Will the industry rise to the challenge, or will it continue to suffocate under the weight of its own legacy? The choice is theirs.
