Banks running risks with “20-year old technology”

Too many banks are running old technology that could make them vulnerable to operation risks, BNY Mellon Pershing says.

It is crucial that financial institutions future-proof their technology and implement new architecture onto legacy systems carefully so to avoid any unforeseen operational risks, according to BNY Mellon Pershing.

There is a huge amount of regulatory and operational change underway in capital markets, the firm said. Target2 Securities (T2S) will require significant, on-going investment in technology so as to enable connectivity across markets. Equally, technology systems must be scalable, and this is something firms need to urgently address if they are to handle T2S.

“It is important financial institutions future-proof their technology, and make it sufficiently holistic so it can deal with unknown scenarios down the line. This might be regulatory change, for example.  One of the challenges is that organisations have to deal with considerable amounts of regulatory reporting and they are layering legacy systems on top of legacy systems to cope with this. It is essential firms make sure their legacy systems are capable of dealing with market changes such as the Central Securities Depository Regulation (CSDR) or T2S,” said Mark John, head of product and business development EMEA at BNY Mellon Pershing.

One of the challenges is that many technology systems are up to 20 years old. “The business strategy should be driving technology investment and development. However, what we see sometimes is technology being a limiting factor to business operations,” said John. While the technology has been tweaked and modified significantly since to deal with the new business landscape, the underlying infrastructure has not been developed accordingly, and this could make it tricky for firms to adapt to a post-T2S environment.

A number of financial institutions – speaking at FundForum Berlin and NeMa Dubrovnik – have lauded Blockchain as a solution to many of the technological challenges faced by financial institutions. Blockchain is an interesting concept and could certainly play a role in certain functions within capital markets, but it does need to resolve some issues before it can be embraced wholeheartedly.

“One of the biggest challenges and concerns I see would be if financial institutions add too much new technology onto existing technology or legacy systems. This could cause some operational problems,” said John. Other problems faced by Blockchain include regulators’ reaction to the technology; limited – if any – standardisations among providers; and fears about cyber-security.