Monday’s excellent article in the Financial Times by Andrew Freeman is the second recent news item I have seen about the risks arising from banks’ business technology.
In his article, Andrew asserts that banks’ IT systems in general “are awful.” He fears that the ‘awfulness’ of banks’ payment systems poses a significant systemic risk to our payments network and hence to our whole society and economy. He suggests this is due to banks’ under-investment in IT.
He asks a crucial question: why would banks spend money on their payments systems as they appear to be unproductive parts of the business?
Clearly, Andrew feels banks should have spent, and should be spending, adequate money on their payments systems as they need to minimise the risks of these systems failing. He describes these risks as “banking’s hidden non-monetary externality”.
Adding to the perspective
I absolutely agree with Andrew’s analysis and in my mind, it really does strikes a chord with the Viewpoint paper I wrote last year on banks’ under-investment in IT (something I’ve termed IT Implementation Debt). This is based on an enterprise level version of the “technical debt” idea, where I see this under-investment as actually borrowing from future IT budgets.
It is not that under-investment actually avoids expenditure, it only defers it. The banks’ mistake is to believe this deferral of expenditure is ‘free’. I don’t believe it is. In my view, the expenditure required in the future is dramatically greater than the amount that would need to be spent today. I see this as similar to ‘interest payments’ on the amount ‘borrowed’ from the future budget.
In addition, the deferral of expenditure often also results in the delay of business benefit and the acceptance of risk. As the interest payments erode future budgets, the incentive to keep ‘borrowing’ – and indeed to increase ‘borrowing’ – increases. Ultimately, as the ‘interest’ burden mounts, the money available to deliver real business value declines to crisis point. Andrew seems to be warning that banks are at or dangerously close to this point with their payments systems.
Why now not later?
Characterising under-investment in IT as debt helps answer that crucial question; why would a bank spend money on a payment system? The clear answer is so that they would avoid having to spend significantly more in the future, potentially at a time not of their choosing.
In his article, Andrew equates RBS’ payments system problems last year to the death of a canary in a mine – the most serious warning to get out of the mine immediately! Thinking of this in terms of debt suggests banks may need to brace themselves for a dose of austerity.
Read Justin’s Viewpoint paper on: IT Implementation Debt.