The single Euro payment directive will force retail banks to consider replacing legacy banking systems as it opens up markets to competition from US players.
Many European banks are still using 20 to 30 year-old systems, because migrating from legacy systems has proved to be a high-cost, high-risk challenge, according to new research from TowerGroup.
By prolonging the life of core transaction processing systems, banks have introduced complexity, costs and risk to IT systems, says the analyst firm. Banks have added software and hardware to address tactical problems, while keeping their legacy systems in place.
But TowerGroup says legacy systems may pose significant cost and risk hurdles to consolidation and divestment of banking businesses. It also “inhibits the ability of banks to compete and innovate” said the report
TowerGroup analyst Gareth Lodge says: “Instead of replacing these systems, the banks, over time, have added to them in an organic Frankenstein fashion. It increases complexity and cost and makes the whole system susceptible to collapse. Further, the skilled IT staff that maintain these systems are retiring, moving on or being made redundant.”
Lodge says the single Euro payment directive (Sepa), a European Commission (EC) and European Payments Council (EPC) initiative that plans to remove the barriers to cross-border Euro payments, is driving banks to overhaul payment systems. Sepa comes into effect 1 January, 2008 and will impact banks operating in 31 countries - the 27 EU member states, as well as Liechtenstein, Iceland, Norway and Switzerland.
Lodge said European banks tend to put off a technology refresh unless there is a compelling reason to change. Sepa is that reason, and larger banks are now re-evaluating their payment platforms to work out how to have more flexibility.
Although Sepa is supposed to create a level playing field for European banks, Lodge says US banks are poised to take advantage while European banks “drag their heels” about technology projects.
"The vision for Sepa was to create a more competitive payments field for Europe. But in actual fact, because European banks are waiting so long on these projects, the US could make sign inroads into Europe, before European banks take advantage. There will be some major casualties and knock-on effects as large enterprises will have a lot to gain from rationalising their banking relationships to one or two providers," he said.
With compliant transactions due to be live in 2008, banks will lose payments revenue as a result of Sepa. But Lodge added that banks may gain some operational savings from renewing their IT infrastructure, outsourcing or streamlining payments processes.