Like many millennials, I prefer debit over other types of payment. Having the charge show up on my bank’s mobile app seconds after the purchase helps me track spending habits and better manage my money.
I love it. Except when it doesn’t work. I have overdrafted multiple times because a debit charge showed up a few days late, making me think I had money when I didn’t.
To understand these lags, one must look at the internal workings of a bank. At the center of the bank are the core banking systems. This is the big book in which the bank writes who withdraws or deposits money. These systems, many of which were built when the 8-track tape was still around, is updated only once a day.
When you see a withdrawal instantly on your mobile phone, it’s done by a slew of mirror sites, or backend reconciliation to fake the system out. There is no such thing as real time banking. Sometimes, the system lags.
The demands and expectations of millennial consumers for more control and mobility grow in tandem with the advances in consumer tech. Banks’ ability to build, within a reasonable time-to-market, modern services satisfactory enough and to retain such customers on top of the aging banking system is waning.
“Are you really going to build a Tesla from a Model T foundation?” asked Peter Olynick, senior practice lead for retail banking at NTT DATA, a business and IT services provider. Banks have done a good job in pimping out their Model T with ‘wrap around’ solutions, but this approach has limits.
According to a recently published report by NTT DATA, 80 percent of U.S. bankers would like to modernize their core deposit systems, but only 15 percent of bankers expect to install a new core deposit system in the next three years.
Replacing the core system isn’t just costly, it’s also risky. A migration mistake might affect every service the bank provides. Faced with the risk of a career-killing failed migration, a bank CEO would naturally prefer to patch things up and hope the system doesn’t fail on his watch.
The risk of not upgrading the core system is getting higher, though, as Delta Air Lines’ recent backend meltdown shows. It’s just a matter of time until something similar happens to a major bank.
Technology is also constantly getting cheaper, driving down the cost of upgrading the core.
When the cost of churned customers and the risk of imminent system failures will be higher than the cost and risk of overhauling the core system, CEOs will get on the upgrading bandwagon. Olynick calls this scenario the industry’s ‘tipping point’, and believes we are already there.
Perhaps he’s right. But the fear for one’s job might prove to be a stronger force.