Co-operative Bank report reveals challenge of legacy IT replacement

A report into the £1.5bn losses at Co-operative Bank has revealed numerous failures in a project to replace core banking systems, which describes the difficulties faced by UK retail banks in modernising their IT.

The report, commissioned by the Co-operative group, was carried out by Sir Christopher Kelly, a former senior civil servant. 

It details how the bank cancelled a project to move to the Finacle off-the-shelf core banking system from Indian IT services supplier Infosys. The report also reveal how the bank underestimated complexity and lacked internal communication.

In September last year the bank ditched its plan to migrate its core banking system to an off-the-shelf system from Infosys, amid huge losses. The report reveals how the planned migration or "re-platforming" was a contributor to the bank's losses.

When the bank changed its IT, it had the choice of continuing to run the systems in house and improve internal systems, known as remediation, or the more ambitious replacement of core banking system and upgrade of other applications. It chose the latter, which became known as re-platforming.

Co-operative Financial Services originally signed an agreement with Infosys in 2009 to implement the platform, known as Finacle, but this was put on hold in 2012 during the planned integration of Lloyds customers and branches. The deal with Lloyds fell through, and the migration to Finacle ended. 

A Co-operative Bank statement said at the time the project was scrapped: “The directors have concluded that the IT assets previously under creation to replace the core banking platform will no longer be implemented as they are inconsistent with the bank’s strategy going forward, resulting in a write-down of £148.4m.”

Infosys said the Co-operative’s decision to discontinue the project had nothing to do with any performance issues relating to Finacle. “In fact, even today, the bank is running successfully on our Finacle Internet banking solution," said the IT services company.

Had the project been completed, the Co-operative would have been the first big UK bank to move to an off-the-shelf core banking platform. The report was clear that the project was a major one, with 40-year-old legacy systems and layer upon layer of software added over the years.

“[The bank] had originally built its core banking system in the 1970s, as had many other UK banks. An array of new components had been added over the subsequent decades as products evolved and new services were developed.”

“The age and complexity of the system, and the many interfaces between its components, meant that the bank’s technology platform was unstable, expensive to maintain, complex to adapt and ill-equipped to support its business requirements.

The report said legacy IT meant high running costs, difficulty upgrading to comply with new regulations, such as the UK Faster Payments Scheme, and limitations in capacity meant the bank narrowly avoiding serious difficulties in processing the large number of transactions resulting from its role as the clearing bank for Northern Rock.

The bank had considered restructuring its IT systems in 1996 and again in 2001

The report said the bank felt it had little choice and that it had considered it before: “The bank had considered restructuring its IT systems in 1996 and again in 2001. On both occasions it decided that the costs and difficulties were too great.” 

But on revisiting the issue in 2006 to 2007, when it was developing a new retail banking strategy, " it concluded that the weaknesses in the legacy systems, and the need to support a more customer-centric approach, meant that it could no longer defer taking action,” said Kelly’s report.

The project was also hampered by a confluence of factors, including some beyond its control, such as the departure of the projects driving force, CIO Gerry Pennell, who became IT chief for the 2012 London Olympics in 2008, just after the project got going.

Pennell had been the driving force behind the replatforming. “With his departure, the organisation lost some of the capability and drive necessary to make the project a success,” said the Kelly report.

The report said the bank underestimated the complexity of the move. This was the result of the board being mislead about the challenge doing what no major UK bank had done before by moving from legacy IT to an off-the-shelf core banking platform. 

“Internal presentations and communication, including papers prepared for the Bank Board described Finacle as a 'bank in a box'. This description may have given a misleading impression.”

Warnings from third party consultants, such as KPMG, were ignored and costs rose

Other problems included a lack of communication within the project team, with key members of the programme leadership across these different parts of the business not enjoying functioning working relationships, according to the report.  

"An internal review in late 2011 identified significant programme management dysfunctionality and unconstructive working relationships," the report said.

"Several interviewees told this review of personal animosity between the various team leaders required to work together. A consequence was that at various times there was inadequate clarity about who bore responsibility for which deliverables.”

Warnings from third party consultants, such as KPMG, were ignored and costs rose from the original expected to be £184m to £948m and the de-scoped with an expected cost of £663m.

Andrew Bailey, CEO at UK banking regulator Prudential Regulation Authority (PRA), said a plethora of banking shows the time has come for legacy replacement at major banks.

As the report outlined the Co-opertive bank is small compared to the likes of Barclays, HSBC, RBS and Lloyds so the challenge is clear.

Nationwide Building Society has already made this transition. It committed to spend £1bn on replacing core back-end systems that had been built in-house decades ago with off-the-shelf banking software from SAP. At the same time it chose to move its customer-facing delivery channels onto Microsoft software.

Then there is Spanish bank Santander. It has its own in-house core banking platform known as Partenon. Santander bought Abbey, Alliance & Leicester and Bradford & Bingley (B&B) and integrated them to Partenon. The platform uses in-house middleware called Banksphere and is built on an IBM database platform.

Jean Louis Bravard, former global CIO at JP Morgan and senior adviser in the IT services sector, recently told Computer Weekly that “the challenge is that you cannot stop the machine, and building new solutions will cost huge sums of money,” he said. “Typically, banks have neither the time nor the budget to build/replace, so they maintain what is increasingly unmaintainable and the regulator has so far never been capable of crying wolf.”

The new brands getting into financial services can indeed build from scratch using latest technologies and architectural trends

Bravard cited Santander’s Partenon system as an example of how to replace core banking systems. The Spanish banking giant has acquired numerous other banks and moved them on to its in-house core banking system. “But that has been painful and I seem to believe that moving that into the UK is not easy,” he said.  

Bravard said there are off-the-shelf core banking systems, but they have limits and could introduce further risks. “Each bank is so different that the package would only be a start-up kit and any later deployment would annihilate the value of a 'package' while incorporating risk from any supplier,” he said.  

But banks might need to do something with regulators eager for more competition in the sector and non-bank companies, such as internet giants able to harness technology to offer services normally provided by retail banks.

A banking industry source said there will be threats to banks from competitors that are more nimble and state-of-the-art in IT terms. “The new brands getting into financial services can indeed build from scratch using latest technologies and architectural trends,” he said. “I am expecting Facebank, Googlebank, Amazonbank, Ebaybank, PayPalbank and Wongabank to emerge soon, just picking on a few examples.”