As banks address the ongoing challenges of digitisation, many are quickly realising that implementing technological change is not as simple as they had previously assumed. However, there is a more nuanced way of integrating new technologies into legacy infrastructure.
Antiquated technologies prove hard to budge
Despite its age, the technology infrastructure underpinning modern day banking has demonstrated a remarkable resilience owing in part to its scalability and reliability. Those same monolithic systems are, however, coming under criticism for being excessively cumbersome, making it difficult and costly for organisations to integrate new processes and architecture into their legacy infrastructure. So structurally important and interconnected are these systems to the operating models at banks that many financial institutions are simply reluctant to overhaul their technology systems in case it triggers severe disruption or worse.
Sweeping away legacy systems
Nonetheless, it is becoming very obvious that this status quo cannot survive indefinitely as a failure to innovate will create existential problems for the securities services industry. Firstly, it exposes the dominant incumbents to potential disintermediation from fin-tech providers who are offering clients more user-friendly solutions. Moreover, the enduring reliance on inefficient manual intervention and human intermediation at banks also makes it difficult for them to minimise overheads at a time when their revenues and margins are facing serious pressure.
As the securities services industry strives to identify internal cost synergies while simultaneously delivering a wider range of solutions to its customers, market participants are increasingly leveraging disruptive technologies such as Blockchain (otherwise referred to as distributed ledger technology or DLT); artificial intelligence (AI); robotic process automation (RPA); application programming interfaces (APIs) and big data analytics. “The digitisation of everything is coming. We need our processing and data platforms to be able to cope in a structured manner to embrace and lead disruption,” said Stephen Man, head of Banks & Broker Dealers technology at HSBC Securities Services. By doing this, the industry is looking to deepen its product suite for institutional clients beyond just commoditised services such as asset safekeeping, clearing and trade settlements.
Implementing innovation: Finding the right medium
The integration of new technologies can be executed in one of two ways. Aside from doing nothing, banks could replace all their existing systems with new technologies giving clients a more digital overall experience. However, such transitions can be very expensive and risky. Furthermore, these projects are often vulnerable to delays as it can take a long time to acquire critical mass whereby there is sufficient functionality enabling for clients to be moved away from the old systems onto the new infrastructure. “Interfacing technologies like DLT, APIs, and RPA with legacy systems is very hard to get right,” highlighted Stephen Bayly, Chief Information Officer at HSBC Securities Services.
The second, more pragmatic option, continued Bayly, is for financial institutions to follow a principle commonly referred to in technology circles as the “strangler pattern” (also known as the “strangler method”). This is a premise derived from natural sciences, specifically an ecological phenomenon in which a Strangler fig germinates in the upper canopies of a tree and grows downwards before eventually enveloping and subsuming the host specimen.
The digitisation of everything is coming. We need our processing and data platforms to be able to cope in a structured manner to embrace and lead disruption, said Stephen Man, head of Banks & Broker Dealers technology at HSBC Securities Services
Contextualising the strangler pattern
For many, the strangler pattern metaphor is a useful reference point when crafting best practices around integrating new technologies into monolithic legacy infrastructure. The strangler pattern approach is considered to be a safer strategy by which to deliver innovation. In contrast to initiating a sudden upgrade or switchover, technology transitions – using this strangler methodology – can be performed incrementally without excessive disruption to the existing infrastructure and clients. Rather than replacing legacy technology outright, Bayly said banks should build data layers above it allowing old and new systems to interoperate in parallel. “This approach allows new technologies to gradually replace old systems. It is a less risky process and does not require a big bang migration,” he continued.
Practice what you preach
As an institution, HSBC’s Custody business has a monolithic infrastructure, which is spread across multiple markets and regions. Many of these different systems perform similar tasks resulting in significant duplication on a group-wide basis. Not only does this inflate the bank’s cost base but it can allow for mistakes and errors to creep in. However, HSBC is now moving away from its legacy infrastructure towards a microservices-orientated architecture and in doing so it is leveraging the core principles of the strangler pattern to excellent effect.
“By wrapping over the legacy IT with our Unity framework – which is HSBC’s technology infrastructure equivalent of the strangler pattern – we are able to instantaneously mirror the legacy information onto a new data framework using the latest technologies. Some organisations would simply stop there and create data “lakes” or “warehouses” to give clients the impression that they have a unified platform. We are going further and are using the Unity framework to build out our micro-services oriented architecture, so we can systematically eliminate the legacy IT on a process-by-process basis,” explained Man.
There are other benefits to this approach too. Historically, product testing was conducted just prior to launch, which could occasionally contribute to delays and added costs. HSBC is developing new products in parallel to existing systems, allowing the bank to make mistakes more freely and learn from them without disrupting clients or HSBC’s proprietary operations.
“The Unity framework was born from the ‘One Custody’ proposition which is our next generation custody platform. We quickly learnt that we could apply the strangler principles and Unity on BAU (business as usual). As a result, we are now able to delivery strategically and propagate these new solutions into BAU allowing our clients to benefit as we go along our transformation journey. An excellent example of this would be our trade status APIs, which Unity allowed us to rapidly deploy in 14 markets this year,” said Man.
|The strangler method approach to innovation helps drive efficiencies when providing responses to client inquiries about trade status updates. Historically, such information requests were typically fielded by phone or email leading to delays and mistakes. Chatbots are now being utilised as a process for a quicker and more seamless information exchange between the bank and its clients.|
Charting a new course
Previous technological upgrades or product launches on monolithic legacy systems often took years to complete, and could sometimes only be implemented on a market-by-market basis. Right now, such transitions can be finalised in a matter of days. In an era where technological disruption is happening at lightening pace, it is crucial financial institutions adapt fast to this changing environment. However, those same organisations – given their systemic importance – must evolve their businesses in a way that is safe and does not endanger client security. A balanced approach towards innovation is being made possible through the strangler pattern and it is a strategic model, which HSBC has fully embraced for the benefit of its clients.