VIDEO | Banks are at a crossroads with their aging infrastructure, faced with the choice of maintaining costly legacy systems or upgrading them to unlock new revenue streams. The debate at the session “The tools out there to nail the settlements” at PostTrade 360° Nordic 2024 centered on whether these outdated systems, some over 30 years old, are merely a financial drain or an untapped asset that could drive profitability.
The divide between cutting-edge front-office technology and outdated back-office systems is stark. “Front-office systems are the most modern systems in the world,” said Arjun Jayaram, CEO and founder of Baton Systems. However, as soon as a trade is completed, it is handled by systems built decades ago. Moderator Sean Tuffy noted, “These old systems may not be as real-time as we’d like, but they do work.” Yet their inefficiencies are widely acknowledged as a barrier to further growth.
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While many financial institutions attempt to modernise by implementing robotics and automation on top of their existing processes, this approach may miss the mark. Per Nyquist, CEO of Brokerway, cautioned, “Are you going to implement a robot on top of your ordinary process without actually changing the underlying problem?” The warning was clear: such short-term fixes often divert funds from addressing the core issue of outdated systems. “Legacy systems can stay, but they need to change all the time,” Nyquist added.
Banks often hesitate to overhaul these systems entirely, fearing potential disruptions. “Nobody wants to touch those systems because you don’t know what else is going to break,” said Jayaram. As a result, institutions continue to invest large sums to simply keep these outdated platforms running.
Transforming costs into profits
Despite the hesitancy, some leaders in the industry believe that upgrading these legacy systems could create significant new business opportunities. Jayaram emphasised that by improving back-office technology, banks could reduce risk and generate additional revenue. “If you fix those systems, you can reduce risk and freely bring in revenues,” he explained. The ultimate goal is to turn back-end systems from cost centers into profit generators.
This transformation would not only reduce operational costs but also enable banks to expand their customer base and take on more risk without overextending resources. Tom Woolfenden, director Product Design at OSTTRA highlighted the broader potential for institutions willing to invest in their infrastructure.
The role of regulation
Modernising these systems is further complicated by regulatory challenges. Unique Transaction Identifiers (UTIs), designed to track trades throughout their lifecycle, are meant to bring transparency, but their proliferation has caused issues.
Nyquist argued that global standards are essential for improving efficiency in the system. Institutions like SWIFT were mentioned as potential collaborators to help streamline UTIs and other post-trade processes. “We need clear rules,” he remarked, underscoring the need for regulatory clarity to foster greater efficiency and innovation.
A new approach to legacy systems
As financial institutions weigh their options, many industry experts are calling for a reevaluation of how banks view their legacy systems. Rather than seeing them as unavoidable costs, Jayaram urged banks to recognise the potential for these systems to drive profit. “By just improving your systems, you can see a 30-basis-point improvement on your total asset base,” he noted.
Panelists:
Jennie Baisch, securities expert, Swift
Per Nyquist, CEO, Brokerway
Tom Woolfenden, director, Product Design, OSTTRA
Arjun Jayaram, founder and CEO, Baton Systems
Sean Tuffy, independent consultant
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