One of the biggest problems for banks and large corporations that have been in business for decades is outdated IT systems. These gigantic programs, at least 10 years old, are often referred to as monolithic or legacy systems, referring to the weight of years. Also a characteristic of old corporate systems is that they have an interweaving “spaghetti code” inside them. This is because programmers over the years have been trying to implement solutions to many of their customers’ problems, the end result of which is a complex mass that is impenetrable to the outside observer.
This leads to a series of technical and organisational difficulties, as it is difficult to replace those who have been working on a system for a long time, while for new programmers socialised in new technologies, developing legacy systems is not a very attractive option. In addition, development is challenging because of codes interlocking like cogwheels, and connections that are difficult to decipher. It is not easy to find out the reason for system downtime, and debugging can take hours because of the interconnected code.
As a result, a new legal development obligation or the tracking of changes in customer needs places a significant burden on companies, including banks, and represents a resource expenditure that is difficult for outside observers to understand. Non-updatable versions of software are the biggest challenge, because they do not allow new services to be added on their bases. In a banking environment, the situation is amplified by the fact that processes and systems cannot be changed overnight due to critical functions which are always in use.
Many companies have now reached the point where the situation can no longer be sustained, and they need to rewrite their legacy software. User-friendly, easy-to-use services that meet modern expectations can only be achieved by a major transformation of the technical background.
Customer first, followed by everyone else
A common way to rewrite IT systems is to break them down into small units. Each small package contains some closely related business process functions, called microservices. To give a sense of scale, the process is often compared to chopping up a mammoth. However, there is no specific recipe for the operation, or if you like, there are multiple solutions. Most banks aim to eventually split up the entire code into “mini-services”. Other banks are for the time being only converting parts of the code that are absolutely necessary. This technical issue and the desire to provide modern services that are easier to use than at present go hand in hand.
We asked the IT managers of three banks, and the Managing Director of UpScale, an expert on the subject, how they started to modernize and replace their backend systems, and where they are in the process. All of the banks surveyed acknowledged the need for modernization, with Intesa Sao Paolo, Erste and KBC all setting similar priorities. Regulatory requirements, such as the introduction of PSD2-compliant services or the already implemented Instant Payments, were considered to be key.
From a business point of view, the first priority is typically to modernize functions that are more visible to customers, such as internet banking or mobile app functions, and to expand digital facilities in branches. The second priority is to upgrade the systems of sales staff, i.e. the digital interfaces that sales staff see when they are in a branch. Only third place goes to upgrading the tools of the back-office teams, such as HR’s recruitment and candidate selection systems, marketing’s newsletter management and registration capabilities, or the legal area’s document management functions. At the solution level, however, different paths emerge due to parent bank requirements and the way banking groups work together.
Parent bank expectations may arise
A common feature of successful innovation efforts is that they start rethinking the monolithic system holistically and in unity with the business strategy, says Szabolcs Pinter, Managing Director of UpScale, a modernisation and development company. This also means that there is no single proven recipe, although importing a successful modernisation experience in-house can save months or even years for an organisation. UpScale’s banking modernisation experience shows that a multinational background can be both an advantage and a disadvantage for a financial institution in Central and Eastern Europe. On the one hand, sharing a wide range of international knowledge, solutions and best practices can be a great help, but on the other hand, local specific needs may inevitably be subordinated to cross-border standardisation efficiency efforts.
According to Csaba Gallo, Intesa Sanpaolo subsidiary’s head of IT, the bank’s channels had become outdated by 2017, for which the parent company developed a retail banking solution that included its subsidiaries. The subsidiary also took part in the pilot project, in which the frontend, i.e. the application interface that is visible to users, and the aspects responsible for the user experience (UX) are provided from the “headquarters”. However, the processing is already done in-house: the deployment and operation of the whole cycle is in the hands of the developers of the home company. In the corporate banking sector, the situation is different, and because of the numerous local particularities, Intesa Sanpaolo looked for a domestic solution. Although the basic functions work at group level, there are also specific functions, such as products developed for diamond clients.
According to Gabor Fejer, IT Director of Erste, the banking environment in our country is significantly different from the rest of the Erste Group, which is why Erste does not see the possibility of “copying” the solutions of the banking group due to specific local needs. For example, when choosing the platform behind the Instant Payment system, care was taken to choose the same as the Czech and Slovak subsidiaries did, but the developed solution itself meets the requirements of the local National Bank, which differs from the solutions of other countries. In Erste’s case, the parent bank tends to provide only high-level guidance anyhow, for example on how and by whom the subsidiary banks use the cloud service. One of the few exceptions is the online banking platform George, which can be considered a common project within the group and which should look and work in the same way for all subsidiaries.
KBC also does not have any constraints, but rather focuses on “working together”, according to Balazs Nemeth, Innovation Director. Within the group, there is a wide range of solutions to choose from and, depending on the circumstances, solutions from KBC Belgium, for example, can be brought in. The members of the group participate in many events together and constantly share their knowledge about innovations on different employee forums and internal channels. The teams see their goals in terms of a common strategic roadmap, but trend analysis and the opportunities offered by big data or artificial intelligence, for example, play a major role. In this case, however, it is already necessary to think architecturally about how much monolithic systems tie the hands of programmers.
From monolith to microservice?
Banks are also facing challenges from outdated systems. Intesa San Paolo, Erste and KBC are transforming their IT systems to be able to serve customers faster, so that it is easier to turn an idea into a marketable product. But all this is happening in the background, in parallel with the development of current business needs. We have asked bank IT managers about the strategies they have put in place to make time for these modernization efforts.
Intesa Sanpaolo aimed to achieve spectacular results relatively quickly in order to motivate its developers to modernize. First, the team looked at which standalone services within the system could be easily packaged separately. For example, the much talked about Instant Payments system has already been designed on this basis. The tricky part of the modernization process is only just beginning: the main question is how to slice up the monolithic system into smaller parts along the boundaries of the monolithic system. The plan is already in place, awaiting approval from the parent bank, which the IT team hopes to receive later this year.
Rather than immediately chopping up the old system, Erste started to tackle the monolith years ago, based on the latest demand. Their strategy was that when a new project came to the bank’s team, they would look at the related part of the monolithic system and start to redesign this part of the ‘mammoth’. The problem with this idea was that it was difficult to “squeeze” IT needs into the business scope and it was not fast enough. About four years ago, the local management of the bank realized that the legacy system was a barrier to everything, that it was not possible to build on outdated software versions, and so – breaking with the previous approach – it was the first bank in the group to put its renewal plan on the table. Recent innovations have all been built on microservice foundations, such as digital signatures, tablet sales, online onboarding (credit card, account opening), mobile banking, CRM and the online platform George. The end of the transformation is scheduled for the first quarter of 2022.
KBC is also following a slightly different strategy, primarily looking to replace parts of its legacy systems when they are nearing the age of their service life, but there may be other cases when replacement is needed. The head of innovation revealed that they currently have to deal with the “largest core system” precisely because of the ageing process. So, in this case too, they have started to split the monolithic system into smaller parts and to separate the big whole from the front-end systems using APIs, i.e. application programming interfaces and microservices. However, at KBC they are not insisting on a complete fragmentation of the monolithic system on time. However, modernization of the core system is essential to implement the automation and robotization improvements planned for the near future.
Szabolcs Pinter, Managing Director of UpScale, said: in their experience, it is now common for large enterprises to start breaking up their outdated systems and packaging them into microservice units. However, all this change must be done in a way that users do not notice any problems. The transformation can be approached in different ways, as can be seen from the approach of banks. This can help large banking organizations to remain competitive against small fintech start-ups and giant technology companies entering the financial markets. Modernization will enable financial institutions to work with more flexible, simpler processes, be more cost-efficient and go to market faster with new products and services.
