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Bank Systems & Technology: The Blog

I recently posted a blog about a sticky situation going on in the California government that, in part, deals with the difficulty in updating its payroll system because it runs on Cobol. I commented on how similar this situation sounds to what many financial institutions are experiencing. And I received some very interesting e-mails and comments. If what readers are telling me is correct, Cobol is alive and kicking.

I’ve written my share of articles for the trade journals about why bankers switch to new core systems, and I’m probably guilty of presenting, in part, the theoretical (or conventional wisdom) reasons. Now in this era of blogging, where spilling your guts is an OK thing to do, I decided to look back at the 321 projects I worked on to present the REAL reasons as expressed to me by REAL bankers while reclined on the VIRTUAL “consultant’s couch” in private and behind closed doors. That’s right, folks, there’s a lot of emotion and Kleenex involved in this decision process. Some of the statements I heard are as clear to me today as they were decades ago.

It looks like the banks aren’t alone in being held captive by defunct programming languages. A recent article in the New York Times discusses a situation in California involving termination and cuts in the pay of state workers. The massive cutbacks involved some 170,000 people—full and part time, as well as temporary. According to the article, the move was in keeping with a 2003 court ruling that such measures should be taken if the California legislature failed to pass a budget.

Put your lawyer jokes away, folks. I have worked for 22 law firms as an expert witness, and I have seen how smarts and hard work pay off. The midnight oil has burned a few times for me as a consultant, but lawyers have demonstrated a new meaning for "hard work." There's no bias in this message. The lawyers found me. I didn't know them. Do my impressions represent the total population of lawyers? Of course not. I can only speak about 22 experiences, but that's enough for me to establish a very high opinion of the profession. Maybe the credit should go to their clients who chose them. Here's what I discovered about all of them (small firms as well as the well-known).

There are 60 bank tech companies in Automation in Banking - 2008; 32 percent of them are small companies (six to 52 employees). The criteria used for entry (all companies) were subjective:
• Some were included because they are ubiquitous. Five company names appear somewhere in the total Financial Institutions population of the U.S.
• Some were included because they offered a specialized product or service that's in demand.
• Some were included because their category was defined as "every....." For example, every core outsource company and every core software company.
• Some were included because they were in my first book, Microcomputers in Financial Institutions, 1985, Dow Jones-Irwin. How's that for subjective?
• Size of company was never a consideration.

This is not intended to be a sales pitch for small companies. Instead, it's designed to balance the scale.

Two weeks ago, I blogged about the language that vendors use, and yet, I committed a faux pas by not explaining the dual meaning of integration. One meaning has to do with the task of the acquiring vendor's CFO. His job is to eliminate redundant positions, consolidate real estate and leases, slash overhead, consolidate data centers, consolidate software licenses, regulate purchase agreements, neutralize human resources policies such as benefits plans, and try to get the acquired company to adopt the acquirer's culture. Except for the last goal, the task of consolidating the business aspects of two companies takes about 90 to 120 days after the merger is finalized. It's a tough piece of work but doable, especially since good CFOs are constantly looking for ways to cut costs. The other meaning of integration has to do with how the disparate systems of each company will be meshed harmoniously, and that's the job of the CIO plus hundreds of techies. That task takes about five years and lots of money. Even after it's done some people will never be satisfied because "foreign" systems are never consolidated as well as single-designer systems.

I recently had the opportunity to meet with Clark Abrahams, chief financial architect at SAS, on a trip he took to New York. He has helped me out with some articles in the past and it was nice to put a face to a name.

Clark, who actually wrote a column for BS&T, is working on creating a new framework for the financial services industry around scoring the risk of customers/potential customers in a manner that's a bit more three-dimensional than the tried and true credit score. His progress in convincing the industry to accept this new concept, called the Comprehensive Credit Assessment Framework (CCAF) was the subject of our conversation.

If history were to repeat itself, and it often does in the pattern of behavior regarding bank tech activities, there will be 409 conversions to new core systems in 2008. Not one of them will make the news, because small financial institutions (FIs) are not usually noticed by the news media. On the other hand, if one of the 137 large FIs in the U.S. (over $8 billion in assets) were to convert its entire core system, you'd hear about it even if you were on sabbatical at the island of Tristan da Cunha.

When Fannie Mae and Freddie Mac not just pioneered but mandated the use of automated underwriting in the mid-nineties, some feared the 'black box' making the decisions. Minority advocates, for instance, queried whether models would make middle-class existing homeowners the standard against which they would be found lacking.
No, the agencies insisted, pointing early to improved credit quality and less biased credit decision making from automated agencies.
Now we learn that the government-sponsored enterprises -- long deemed "too big to fail" are essentially getting a cash injection to ensure they don't (access to the Fed's Discount Window). It has to make one wonder how technology did so little to prevent Fannie and Freddie from massive mortgage losses.
We now know loan quality is bad. We know Hispanics, for example, are among the worst hit by foreclosures.
Yet, it's been known since 2003 that foreclosure rates were at then record highs. Though tiny compared with today, five years ago there were signs that subprime loans were witnessing their first test in economic down times and failing.
Where did automated underwriting go wrong? Did corrupt brokers or borrowers commonly falsify information, like claimed income, fed into these systems when everyone was too busy making loans to notice? Or, did the industry keep changing the rules of these rules-based systems so long as everyone was making money? In other words, did technology just served to rationalize a collective insanity?

This weekend, since our contract with Verizon expired, we switched our cell phone plan to AT&T (because my husband made me get an iPhone). Also on the plan are two other family members who just wanted simple phones (I swear, that’s all I wanted too!). So AT&T added them onto our “family plan” and said those two phones would be about $10 a piece after I mailed in the rebate information. Great. So that means I’ll be getting back about $50 or $60 from AT&T, right?

Whoever is writing the marketing announcements that tech vendors are using today, ought to get a makeover to remove the meaningless phrases that are just as bad as comb-overs, brilliant Chicklet-like teeth, and shiny stretched skin that makes the beholder's eyes pop out at you. You know who you are Donald, Kenny and Wayne. Is this what banking is all about today?

Seven days into my new job at BS&T and I have seven new password and log-on combos.
You can imagine how it struck me when security veteran RSA announced a new security token to authenticate customers for online banking that fits in your wallet like a credit card and, the release boasted, can bear the name of each bank issuing such a card. Great! It's not enough that I have two credit cards and one debit from JP Morgan Chase, alone, for example; I can look forward to having to carry additional cards to back up the original plastic online.

The story behind the story of the operational crisis and ongoing reorganization at Citi is one of technology.

In last week's blog, I attempted to alert the "suits" in banking that there are some downsides to the proliferation of the hottest new banking apps in the past two years. Security systems, fraud detection systems, risk management, regulatory compliance measures, dual authentication for online users and anything resembling protection are in vogue whenever bankers get squeezed by the unexpected. But when these systems do their job, they also create a huge workload for bank employees as they are now required to test all possible suspects. In other words, for every good technology there's a "gotcha" somewhere that no one anticipated. The CIO is claiming victory, but the head of operations is cursing.

By Mike Fenton, Parascript, LLC

Since the establishment of the first ATM networks in the early 1970s, ATMs have become an essential component of consumer banking technology that continues to evolve. Customers have come to rely on them for convenience and ease in accessing their financial institution and making transactions without the need for a human interface or bank teller. This type of service answers the demands of our fast-paced society and may seem unconditionally attractive. However, security is a big concern for both banks and consumers and is one of the reasons limiting ATM usage.

Bank of America announced last week it is cutting 7,500 employees. Unfortunately, it's not because of improved technology—it's because of Countrywide. The best employee-reducer in banking is acquisitions. I'm sorry to report the bad news, but today's technologies are going to make bankers at the top work harder and overworked bankers at the bottom will be welcoming additional coworkers. Before you take that double-shot of Jose Cuervo, hear me out.

By Alan Tenenbaum, Cohen Pontani Lieberman & Pavane, LLP

Over the past few years, we've seen an enormous amount of patent litigation against companies in the financial industry. The patents at issue in these litigations primarily concern business methods, covering such things as financial email alerts, systems for trading treasuries and other securities, Check21 technology, pre-paid gift cards, and online credit applications, to name a few. The trend is continuing, with recent infringement suits brought by Edge Specialists LLC for patents that concern systems for automated options trading, and by Lincoln National Life Insurance Co. for patents that concern computerized methods for administering annuity products.

When vendors tell Wall Street not to expect much in 2008, you know we're in a leveling off period.

Here's my take on the subject.

Sometimes I like to post stories about my personal experiences with banking technology. I think what happened to me the other day with my debit card fits the bill.

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