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Banking and Technology -- Reaching an Inflection Point

The banking industry today is one of the drivers of innovation in Information Technology in Canada and around the world. Yet, many of the established big banks have legacy systems that threaten to drag them down in the coming tsunami of change. In times of great change and confusion, there are opportunities for the wise consultant.

It wasn’t that long ago that banks were using green-screen technology and were still doing so long after rolling out the first ATMs. They weren’t often thought of as being leading-edge users of newer technology; after all, they needed certainty of operation, maximum uptime, few errors. Bleeding-edge technology was often a bit risky in these respects. Furthermore, the processing that theydidneed required very large and very expensive (and very consistent/predictable) mainframe computers. They were a large investment that was needed to scale with the banks’ growing businesses. Much of this changed with advent of internet banks who limited the physical requirements of typical brick-n-mortar facilities and offered ubiquitous convenience of anytime, anywhere banking (providing you had access to the internet). These new banks were nimble, technologically-advanced and great marketers. Seemingly all-of-a-sudden, new products, new ways to reach people, and new technologybecame key differentiators for market disrupting upstarts and innovation became a necessity to the slower-to-change institutional banks.

The big banks’ world was changing and they were being ‘leap-frogged’ by these borderless entities. The change was on! Today, Toronto and Montreal have a large share of the IT talent supply in Canada (45%+ of all talent in Canada) and at least some of this is the result of the strength of demand/needs coming from the strong banking sector. New technology and new ideas are being envisioned, piloted and rolled-out by even the stodgiest of banks. Digital and business transformation, the new paradigm taken up by so many of today’s companies and organizations,is absolutely rampant in the banking industry.

Ok… You’re saying, ‘So tell me something I don’t know’.  Well… How about a short history lesson that might shed some light on what the banking industry may be facing?

For those of us with some grey hair, this situation is quite reminiscent of what happened around the turn of the century in the Telco space. What happened there was that large, ponderous, Regional Bell Operating Companies (to use the old vernacular) had been implementing massive telephone technology systems, incurring huge costs to do so and then amortizing the expense of it all over decades. They had near (or actual) monopolies, long distance calling rates were atrocious, and they had time on their side with little enticement to innovate. Canadian company, Northern Telecom (later Nortel), was a mainstay in the industry, selling their telephony solutions to the world. Then came Internet Protocol (IP)… and the game changed for them and for the RBOC’s, seemingly overnight.

In reality, it wasn’t really all that fast (not by today’s standards) but they were about to be one of the first large industries to learn the lessons that disruptive technology has taught to so many since then. Smaller, more nimble telephone companies began popping up everywhere (CLEC’s – Competitive Local Exchange Carriers) leveraging newer technology that took advantage of high-bandwidth data trunks and new switching technology. Although still expensive, they were able to piggy-back on the networks that the RBOC’s had built (Gov’t regulators demanded the RBOCs allow them to do so). The cost per call was dropping dramatically as a result and data was able to be transmitted in volumes that actually made sense for businesses. The internet had its highways. What came of this was that the well-financed old equipment companies and the quick-and-nimble upstarts were pitted against each other — companies like Nortel coming from the high-reliability world of telecommunications and those like Cisco coming from the world of data-networking. Initially Nortel joked that they’d learn to spell ‘IP’ before Cisco could learn to spell ‘reliability’ and, for the most part, they were able to hold their own. At one-point, Nortel employed over 60,000 people in their research-and-development facility (BNR – Bell Northern Labs) alone. Both sides created great new products. Nortel had age-old client relationships with the telco’s on their side along with excellent quality products, and the likes of Cisco produced innovative and cheaper alternatives. It was the ‘space race’ of the telecommunications industry. Fantastic new products were coming out quicker and quicker… which sounds great …until it wasn’t.

Their customers — the RBOCs and the CLECs — were in a feeding frenzy of buying. It seemed that every 6 months, a better, faster, more progressive solution was coming out. CLECs were leap-frogging the RBOCs to offer better and cheaper service to consumers. Then the RBOCs would leap-frog them back again. The problem for all the players in this industry was that they no longer had time on their side. They didn’t have time to amortize the very high costs of the new technology before the next iteration came out and they were forced to buy/implement/replace or be unable to compete. It was a global race to the bottom and RBOCs and CLECs alike were running out of money — especially the CLECs, many of whom were relatively new business start-ups, part of the dotcom craze. Nortel’s clients couldn’t afford the new gear anymore so Nortel began ‘selling’ their new products and taking equity in these companies as payment. The whole industry and their supply chains became dangerously over-leveraged, a veritable house-of-cards. Then the dotcom bubble burst and most of the CLECs went out of business, dragging the over-leveraged Nortel (and many of their suppliers) down with them.

So, back to the Banking/Finance Industry today. Some of the obvious parallels are the ‘old guard’ who were titans in the industry with wide moats to protect their market share and had relatively little technical innovation for many years. Then come the upstarts, leveraging new technology to change the game. And then the response from the established banks to modernize to be able to compete and, in fact, push on the boundaries of what was possible before. The big banks also have a similar challenge to the Regional Bell Operating Companies, and that is they are somewhat handcuffed by the older, legacy systems that they’d deployed. The new companies don’t have this to worry about. They can move 100% to new technology, whereas the big banks have huge investments tied up in their mainframe technology and, worse, no easy or quick or cheap ways to get off this technology.  As the legacy banks struggle with this piece, the staff that they have managing this infrastructure move dangerously close to retirement — and there are not a lot of Cobol programmers out there ready to step into the vacated roles!

Of course, there are a lot of differences between the Telco and Banking scenarios as well. It has been almost 20 years since the dotcom crash, and everyone has seen lesson after lesson on the disruptive impact technology can have on entire industries, and people are quicker to react to the challenge. And banks are definitelynotcash strapped — they have the ability to invest in new technology, in transforming their business, in moving into or out of markets. And, most important to IT experts/contractors, they have the ability to hire many of the best IT people the market has to offer!

Banks, old and new, need to get their technology/business process mix just right. Their continued market success and very survival depends upon it. Innovation = Technology + People. With enough money, the Technology part of this equation is easy… the People part is what is strategically important! As I mentioned earlier, in times of great change and confusion, there are opportunities for the wise consultant.


I’m going to pre-acknowledge (before anyone chooses to call me out) that, for the purposes of this blog post, I’ve oversimplified the Telco/Nortel/Cisco/market crash scenario. There were many, many additional factors that played out. However, this is how I remembered it and the lessons that I took away. I worked during those years for Northern Telecom, and a failed CLEC (Norigen), and was part of companies (Anixter and ADNS – Ameritech Data Networking Solutions) building out the data-highways to which I refer in this blog post. I was part of the industry at that time and lived through the ups and downs of it. So, I ask that I be allowed to share my opinion based on what I witnessed directly.

That said, if you have other opinions or experiences of your own and would like to share with our readership… please do so by leaving a comment below!