UK Fintechs Wage Battle Against Legacy Systems
UNESCO lists 1,752 languages around the world as “definitively,” “severely,” or “critically” endangered. To that list it might add COBOL, a programming language first developed in 1959, which is still used by companies that originated in that era. COBOL use is concentrated in the financial sector, which is particularly resistant to change. As of three years ago in 2017, IBM reported that 92 of the top 100 banks still use COBOL for their core operations.
Because almost no younger tech talent is learning the mainframe-based language, COBOL programmers now command a significant premium in the market. Aside from the price, there are quantitative shortages as well, particularly in crisis situations like the current coronavirus pandemic or previously in the Y2K debacle.
COBOL, short for “COmmon Business-Oriented Language,” marked an innovation at the time towards functions with well-defined inputs and outputs. Its genesis from the business world rather than academia redefined the scope of further technological development. COBOL however missed several subsequent revolutions in computing, from non-relational databases further onto image and video processing. A simple “hello world” program takes 14 lines and generates over four pages of technical information.
Detractors have been predicting the demise of COBOL almost since the day it was released, but it lives on, now becoming one of the oldest extant programming languages. Although it’s certainly possible to build new systems on the top of older ones, the connection is never seamless, creating pain points for traditional banks and opportunities for startups.
On August 20, several fintech startups participated in the 3rd of a series of FinTech Talks, held at the Fin & Tech innovation village and organized by TABF with the help of the UK Trade and Investment office in Taipei. One of the main themes was ways to deal with the legacy systems that are found throughout the finance industry. Five UK companies participated in the session via video link.
John Berven, Director of APAC for Solidatus, introduced the concept of data lineage, representing one approach to this problem. Each piece of data in a bank’s core operations should have metadata addressing the 5 W’s: who, what when, where, and why. Who is responsible for it, what is the definition of the data, when was it created or modified, where does it come from and go, and finally why does it need to be kept in the first place?
The answers to these questions are useful for a number of purposes. Regulators around the world are becomingly interested in data governance, particularly as it relates to issues like bank capitalization and personally identifiable information (PII). Understanding the source and purpose of data such as market information can ensure the quality of banks’ decision making.
One of the most basic forms of metadata is formatting information. Berven gave the example of a bank moving its internal interest rate data from a four-digit to a seven-digit format. It turned out that this change would have affected one of the older systems into which the data fed forward. This is not a particularly infrequent problem during any software development process, but with a large financial institution, visualization becomes necessary to understand the full scope of the data ecosystem. This process provides one solution to the existence of legacy systems within a large organization: isolate them.
Operation of modern banks is not just about cash flows, but also information flows. From a software perspective, thinking on information flows has been transformed from the time of COBOL. It has become clear that the largest challenge in most practical projects tends to be organization of business goals, rather than algorithm optimization.
The other approach is of course to start completely afresh. Thought Machine provides a service allowing banks to set themselves up directly on the cloud, or else partially migrate at a pace at which they feel comfortable. Nick Wilde, Managing Director – Asia Pacific, said that the biggest disadvantage that financial institutions have from not being on the cloud is an inability to make use of its features. This often makes it necessary for startups to bribe customers, affecting profitability. “Customer acquisition costs are a tax on your lack of differentiation,” he noted.
Wilde also said that cloud migration had recently achieved years’ worth of results in only several weeks, showing that the process is doable in the short term with the proper motivation.
Other participants in the August talk used a platform business model made possible by technology-driven aggregation. Tradeteq is a platform for trade finance distribution, acting as a securitization-as-a-service intermediary between borrowers, banks, and investors. Instruments like letters of credit have much terms than other securitized assets like mortgages, explained Head of Asia-Pacific Mattia Tomba, so Tradeteq’s advantage as a nimble technology-driven provider lies in being able to ensure a constant stream of available assets rather than in complex tranching schemes.
Calastone, meanwhile, is a software-driven global network for the funds industry. Frictions in manual systems make processes like reporting and dividends distribution create substantial costs for both the funds themselves and their institutional or individual investors. Managing Director and Head of Asia Leo Chen also noted an accelerating pace of digitalization since the COVID-19 crisis, which in particular benefits the parts of the finance industry which are ready for it.
Finally, Algodynamix is an algorithmic financial risk advisory firm which issues alerts based on market behavior, rather than any secondary data sources. This approach is useful because it doesn’t depend on any assumption that the past will be like the future. Since the COVID-19 outbreak, for instance, CEO and co-founder Jeremy Sosabowski noted, longstanding correlations have lost their predictive power, giving the negative relationship between gold and equities as an example.
The success of these companies in a variety of different corners of the fintech universe shows how innovation can transform all aspects of finance. The concepts of banking are the same as they ever were, but almost all details of the business are changing. The successful players in this generation will go on to define banking and finance far into the future.
After hearing from American, Israeli, and now British fintech innovators, the final event in the series, scheduled for September 10, will showcase several rising stars from Australia.