What the heck happened to technology in the financial space?

A chat with Tony McCarthy, former Group CIO at Deutsche Bank.

We had the pleasure of sitting down with Tony McCarthy, former Group CIO at Deutsche Bank and former MD at Morgan Stanley, who sits on the Advisory Board of untapt. We talked about a lot of good stuff — everything wrong with the traditional financial services industry, what the current state of technology is in the space, and where good things could happen.

Tony’s a smart guy with a lot of experience, and our conversation was invigorating and highly insightful, particularly in regards to the intersection of FinTech startups and big banks. Below are the highlights of what we learned from him. Consider this Part I, and stay tuned for more from Tony on the future of technology in financial services.

Formative Years and the Financial Services Boom

A cliche term perhaps, formative years, but Tony’s adamant that the time he spent in the financial services space (FinServ) — from his early twenties when you’re soaking it all in, through his growth to Group CIO of one of the largest banks in the world — really shaped the way he views the state of the industry as it stands now.

His early time at Morgan Stanley and then at Deutsche Bank was a period of huge change for FinServ, specifically in terms of technology. All the major banks were going heavy on tech, and FinServ itself grew immensely, with banks seeing large profits even through rough patches like the S&L Crisis. These were the boom years.

During this period, banks were playing offense, and technology strategies were put in place to support the speed of growth. CIOs had big budgets, and plenty of technology to spend on.

Then the world changed. Post 2008, the FinServ industry became a difficult one to be in, as did the role of the CIO. Regulation increased significantly, there was cost cutting across the board (particularly in IT), cyberattacks exploiting the very technology tech teams had been structuring for years, and unsavory actions by some, resulting in a big reputation hit for all.

As Tony saw it, every single dimension of his job went from offense to defense.

Today’s banking industry

There are still some good things about the industry, but, at least for Tony, they seem terribly underwhelming. A lot still works, and banking is still absolutely critical for most major financial processes — anything from creating liquidity, to fulfilling major consumer financial needs, to structuring government deals.

But past that, it’s a gloomy picture. In addition to the effects of what Tony calls “the age old human weakness of power and greed”, technology took a big hit, maybe one of the biggest.

Because of the nature of profitability for the industry and the pay structures that were in place, the industry had never been a real bastion for innovation, and it finally caught up to everyone when they had much larger things to deal with. The banks who could power through earlier crises couldn’t do it in 2005–2010, and a crisis that theoretically could have been handled similarly ended up being of such a size, extent and contagion level that the entire industry went into defense mode and hasn’t gotten out since.

Let’s shift. If you look at the automotive industry, healthcare or telecom, they’ve all gone right to the brink in a similar fashion. In almost every case, the response was structural reform followed by technology sets that changed the industry by making it leaner and more efficient, and the ones who didn’t change were out. Telecom is the most recent example. With an explosion of mobile and the risk of structural breakdown, the industry embraced the need to change. Many of the telecom companies did a great job of changing their platforms and culture to move forward and not only survive, but excel. It wasn’t crippling, it was an opportunity.

FinServ has seriously struggled with this. If you talk to any CIO, their biggest frustration by far has been that most of the budget spend is on legacy structures that get older by the day. If you were to actually let many of the top CIOs put their budget and effort where they felt it was best, they’d spend a massive amount on transforming and modernizing their systems and ways of doing business.

If CIOs know this, why isn’t it happening? Because it’s reached a point at which there’s no good way forward. The systems and build-outs have gone for so long and are now are so engrained in every major daily function of the bank, it’s just “too difficult” to bite the bullet and do a refresh.

A CIO’s job these days largely stinks, and there’s very little internal or external support to ease the pain.

It’s a bank thing…. and a technology thing

The technology space as we know it today — the systems that have been built to support modern companies — were built by people learning as they went along. Modern technology hasn’t been around long enough, so getting across-the-board best practices, structural consistency, or standardized strategies is still an art, not yet a science.

It’s not IT or developments’ fault — there are a ton of great engineers in the industry. But when FinServ finds itself in a situation reliant on older technology and still focused on speed-to-market, that’s when trouble starts.

During its boom years, FinServ focused almost exclusively on optimizing speed-to-market at the expense of quality and cost. You got technology out quickly, but it was higher cost and lower quality. Then cost caught up with everyone at some point, while the focus remained on speed-to-market. What happens? Costs were cut and quality took an even bigger nose dive. There was no QA, no strategy.

It’s what Tony calls spaghetti or patchwork, and no one knows how to deal with it at this point. Teams operate by doing tweaks around the edges and they rely on the Oracles and IBMs of the world to continue to build faster, better hardware that can handle everything.

Most CIOs would back massive transformation it if they knew they had the support. But with an almost unescapable dependence on legacy systems, regulators everywhere, and heightened cybersecurity issues, finding support, plus the time and money, is nearly impossible.

Today’s FinTech reality

Firms — banks or startups — can’t go it alone anymore if they want to survive. They’ve got to partner up and embrace new ecosystems of work. Maybe it’s a full replacement of some part of your operation that you’ve had in-house for decades. Maybe it’s a new team structure, or new software. But if you don’t figure out new ways to work and new ways to partner, you don’t stand a chance.

The ones who recognize most quickly where they’re weak, where they need to leverage the strength of others, and where they’re willing to fully commit to making those new ecosystem and relationships work will survive and flourish.

More to come on this topic….