As promised, when I identified the ten groups of the banking landscape in a previous blog, there was much to explain about what goes on in the two-ends-of-the-spectrum. Here's my chance to explain.
The Four Giants
In the past 38 years, I have worked for all four of the largest banks, mostly for what is now BofA because they gobbled up more of my clients than the others. For at least the past twenty years, these banks have been the target of pundit criticism because their core technology dates back to the early sixties, maybe even the late fifties. Be that as it may, they deliver the results of IT processing to billions of customers every day accurately and on time. If any major disasters occurred that were covered up, they have managed to stay out of the press. Even Wikileaks hasn't told us of any -- yet.
--The biggest systems deficiency for these banks is not the age of their technology but the independence of each application. While today it is fashionable to implement an integrated suite of applications, large banks implemented one application at a time under proprietary rules that existed at the time.
--"Best of Breed" considered by many as first-class applications for first-class banks, is in my opinion a curse. It produces a patch work quilt where nothing relates to a single architecture. Try to create a customer relationship in that kind of IT infrastructure.
--On the surface, customization appears to be a noble justification for in-house applications development. But the idea that "We're different" is a myth. In truth, customization is the reason large banks spend 20% of non-interest expense on IT while software-buying banks spend 6% to 12% depending on size.
--In my opinion, CIOs at the major banks are exercising superb risk management skills by not undertaking massive conversions of existing core systems. Today's "baggage" was inherited. Dumping it for something better could be equivalent to a double dip banking crunch. What has survived for fifty-plus years may just be a legacy of the energy bunny variety.
--I would argue that among Fiserv, FIS and Jack Henry there are several powerful core systems that would drive any large bank. But that's not the problem. Converting from old to new is the problem, bigger than even Y2K for a large bank. And finding enough EXPERIENCED contractor technicians to do the job is a huge problem. Even Fiserv, FIS and Jack Henry combined don't have enough of them. And don't look offshore; it's a lot more than just a job for coders.
--And the job of converting for a large bank cannot be reduced by doing one app at a time. It's all or nothing. And the bank cannot close for a month (or even an hour in what we know as a real-time world) while the cut-over occurs.
So there you have it, folks. For the purists who are wondering why intelligent CIOs with annual budgets of $14 billion are sitting on 50-year-old core systems, there's only one answer. Because it works.
The De Novos
In assessing the IT capabilities of most de novos, one should begin with the organizers of the bank. They often come from very successful banks that were acquired by other banks. What made the acquired banks successful was then put to good use in establishing the de novo.
--Management had a very valuable opportunity -- a clean slate, no IT baggage.
--Management also had a culture advantage -- no ego.
--Management had hands-on experience; they knew exactly what they wanted.
--Management was spending its own money -- the business case was more than just an MBA exercise.
--Management brought their own kind of people to do the job -- no unnecessary haggling.
--NIH was fine for NASA, but for a bank, the make or buy decision took only minutes.
--In most cases, even the choice of outsource took minutes.
My comparison of the two extremes here is to prove one major point, that for years, sideline experts didn't understand. That only large banks possessed the power of great technology. The truth is that most de novos can deliver the same services that any large bank can. The difference is how much tougher it is for the large banks.