"Unprecedented.”

Possibly one of the most overused words of the past seven months. Perhaps even the most overused word. Personally, it is fast losing any meaning, and yet, it’s still undeniably appropriate. Across the globe, GDP has contracted dramatically, and the financial markets do not know how to anticipate the next move.

Among the many exports, Japan can take claim for - and many are exceptional - one of them is the term ‘Japanification’. The shorthand of this is that many of the challenges that dog the economies of the world today were first present in Japan twenty odd years ago. Among other things, this includes weak rates of growth, rising unemployment and persistently low rates of inflation despite vast amounts of policy support, particularly from central banks.

Sound depressingly familiar? Thought so.

What we’ve witnessed during spring, summer and autumn, is the deepest global recession in eight decades, despite unprecedented levels of policy support from the government. Professionally and personally, I’ve struggled to make sense of it as there is no historical anchor point to begin any form of meaningful analysis.

But something is clear. And has been for quite a few months.

Our understanding, consumption and reaction to financial market sentiments have been beholden to short-term indicators, such as headlines and statements, and not by longer-term economic trends. Why? Well, simply put, they no longer drive the situation as their relevance cannot be assessed.

And then there was yesterday. The potential Y2K IT nuclear bomb for the modern millennium. 

Unless you’ve long since buried your head in the sand, yesterday was potentially seismic. The venerable old lady of Threadneedle Street, the Bank of England, reached out to the banks and asked whether they were operationally ready for a potential zero-base rate.

All of this is on top of the lowest official rates for the past three centuries – yes, centuries - meaning the possibility of zero or negative base rates is getting nearer and is turning from hype to potential reality.

So, are we doomed? In a strict banking sense, no, not necessarily. The BoE hasn’t said it is moving toward an actual base-rate cut but would appreciate for the banks an indication, a finger in the air answer to a hypothetical question, on whether they could cope.

But in a systems, architecture and IT sense? Yes, there is a distinct possibility. By operationally ready, what the BoE actually meant was whether banks could do some jiggery-pokery behind the scenes and share their thoughts on the ‘potential for short term workarounds and solutions’.

So what does this actually mean? Basically, the BoE is worried that moving to negative interest rates will crash banks’ computer systems.

The general consensus on whether this is achievable? There is too much code. It’s too complicated. Would take a year, minimum.

The amusing aspect (we can either laugh or cry, right…) is that all of this depends on how many decimal places a banks system can cope with. It is also worth noting here that these are the same systems which have been built for resiliency and reliability over decades. Well before negative interest rates were a remote possibility.

What is particularly galling is this has been a possibility for months. And months. As always, it is the weeds which trip us up; with public policy now quickly needing to be assessed and implemented in the real world of financial markets.

So, what to do?

Clearly, speed is at a premium, and agility must now become a way of life for banks.

But, we have a spoiler alert; it is pretty clear that banks are very risk-averse when looking to tinker with or replace, their legacy systems. Probably, rightly so, given how embedded and business-critical these systems tend to be. However, the tried and tested replacement method holds banks back. As does their expectation that new systems and solutions integrate with their existing stack of channels, data architecture, security systems and middleware.

And that’s without taking into consideration the significant customisation and development that has updated the business logic over the cause of several decades.

To do the above, it would be a pretty tall order to replace and a pretty hefty investment. Read high risk, high cost. Not a great combo. And not much appetite for it.

So, there’s a need to gradually migrate from the current to the new over an agreed, but accelerated, timeframe. This approach means banks can decommission their redundant systems, simplify their functionalities and processes, and improve their tech skills, specifically across automation, digital and cloud.

Ultimately, to overcome this current Y2K-esque interest rate challenge, and to be fair, many others, the BoE needs the banks to implement the strangler approach; where they can identify, tackle, replace and repeat. You won’t change the monolith, but you’ll adapt new capabilities which can be plugged in extremely quickly and cost-effectively. Two key priorities in this day and age. 

It means banks will need to pivot to systems which can be designed to support a reduced set of functionality and processes, but with a versatile toolkit across software development and API capabilities. This approach will also enable banks to plug gaps and/or capabilities via their fintech ecosystem and traditional supplier network. It’s a huge opportunity to develop and extend a broad, and relevant, ecosystem.

One fit for a future shock such as C-19 version 2.0

We expect banks to be continually challenged; customers will continue to embrace digital and hybrid channels while visits to branches will decline. What will set banks apart is their ability to optimise digital capabilities and customer channels whilst successfully competing with a wide variety of traditional and non-traditional competitors and market dynamics.

We’re here to assist our clients not only in navigating their immediate challenges but also in creating responsive, adaptable and intelligent technology-enabled solutions that will build resilience for the future. Contact us today to set up a free initial discussion.