Banking on failure

THE only really remarkable thing about the recent case of crashed computers at Ulster Bank, Nat West and the Royal Bank of Scotland is that it hasn’t happened more often and to many other institutions around the world.

 

As far back as 1987, former Citibank chairman, Walter Witson said banks around the world were already trying to play catch-up in the technological sense. He added that the time it would take to bring in new systems would be measured in years not months and the costs would be in hundreds of millions, rather than the millions.

What he was referring to in that article in American Banker were the core technologies that banks use to run their businesses and the problem remains unresolved to this day. While the banking sector was among the first major industry to adopt modern technology and computing it has, because of the nature of its business, been unable to effectively move with the times. Because “downtime” to update their systems is essentially impossible, banking institutions are still running on the same old technologies they adopted in the 1970s. I have heard one analyst describe the process of a bank upgrading and overhauling their core systems today as being equivalent to carrying out engine maintenance on a jumbo jet while it cruises at 30,000ft.

For this reason, the reluctance of the banking industry to grasp the nettle is fairly understandable. It is not, however, excusable. We are all used to the significant charges that appear on our statements from time to time detailing the money our banks charge us for holding our money for us. Given the willingness shown by these institutions to charge their customers for simply doing their jobs, it will be interesting to see how willing they are to pay for their mistakes and compensate those affected when their systems crash.

It is very important that a precedent be set in this case. If these particular banks are allowed to get away with causing this level of disruption to their customers’ lives without suffering reasonable and appropriate consequences, it may produce a blasé attitude in the sector in terms of a similar occurrence in the future.

The catastrophic breakdown in the systems of Ulster Bank and other banks in the group was partially caused by the problem being spoken about by Mr Witson back in the 1980s. When one banking institution takes over another, their core computer systems are incapable of communicating. It is best understood as them speaking different languages. This is addressed in all kinds of ways and for the most part successfully.

However, this recent meltdown highlights the deep-rooted problems with this inability to communicate. Ulster Bank’s problems could not even begin to be solved until RBS and Nat West were sorted out first. The accusation by Ulster Bank customers that they were being treated as second-class citizens could in a sense be said to be true as they were bottom of the pile in terms of having their issues addressed.

Given the central role of banks in everyday life, it seems more than a little odd that the looming spectre of severe technical problems is not more openly discussed outside the world of banking. As employees, beneficiaries of State benefits or even everyday citizens in the modern world, we are forced to use bank accounts. Our wages are lodged directly to accounts and, in a lot of cases, our bills are paid directly from there. We never get to handle the money.

Combined with this, there seems to be a concerted effort to get people to stop using cash altogether. People can now just touch their card off a device to pay without using a pin number at all. You can pay a bill with your phone. These are all marvellous examples of modern technology but the question should be asked if it is a wise road to be following, given that banks’ core systems are already creaking under the strain of the basic banking processes.

One of the reasons given by the politicians involved why banks in Ireland and Britain were saved in 2008 was to prevent the prospect of people going to ATMs on a Monday morning and finding their money was no longer accessible. The chaos that would ensue from such a scenario was too much for any government to countenance, so billions were poured into the banks to stave off the possibility.

Of course, if more banks succumb to the kind of technical glitches experienced by the most recent three in the coming months and years, customers will eventually be able to access their money once the glitch has been rectified. That is the theory anyway. According to American Banker, “Mark Hurd, president of Oracle Corp, recently told a group of financial services executives an anecdote about a large bank customer that required 9,000 applications to keep its old core system running.” This has all the hallmarks of a situation that is unsustainable. Eventually, either the core systems will have to be replaced or the whole system will crash.

With the banks being held together by so many interlocking pieces of code, the systems are also vulnerable to cyber attack. If either of these scenarios comes to pass, maybe the money that exists now only in digital form in people’s bank accounts might be erased from reality. This is a doomsday scenario but it is not beyond the realms of possibility. In the blink of a digital eye, life savings could disappear with no comeback for the disenfranchised.

The move towards a fully virtual system of financial exchange seems irrevocable but if the people pushing this move are themselves unable to cope effectively with the transition, let alone the full changeover, it would seem to be a dangerous exercise at best and utter folly in the darkest of potential scenarios. The skeleton lurking in the closets of financial institutions must be shown to be a potential source of financial loss for them. If this does not happen, the attitude to the public cost of their actions we have seen in the banking sector in recent years will be repeated to the detriment of those who can least afford it.