Failed Banks May Not Have Had Failed Systems

For reasons that I cannot fully explain, the quality of a bank and the quality of its IT systems may not necessarily correlate. For example, the three largest U.S. banks run on 40-year-old legacy core systems. Even though anything is possible these days, I don't believe Citi, BofA or Chase will fail. I should know about this disconnect situation because I used to work for a first-rate bank (eventually acquired at a 40 percent premium by BofA) but our systems were "also-rans" at best. I believe one can find similar situations of non-correlation today with one big difference-the failed banks screwed up. Their systems did not.Asking a failed bank which system they used is like going to a funeral and asking the widow which brand of scotch the deceased drank. Who cares now? So I have not tried to look at the 19 banks that failed so far this year to see which core systems they were using. Instead, I will list a few anecdotal experiences that relate to the disconnect between institutional performance and systems performance.

• In the mid-seventies, I worked on a consulting project, as a sub, to upgrade the admissions and registration systems at Georgetown University. Georgetown knew very well that its systems were cumbersome, antiquated, labor intensive, error prone, and plagued by negative feedback from innocent freshmen who were quite vocal about their frustrations. So I expected we would be doing site visits to some of the better institutions of higher learning to see what they had. But Harvard, Princeton, Yale, Dartmouth, Brown, Columbia, Cornell and The University of Pennsylvania were not the places we visited. They were still using quill pen and parchment. We went to a community college in Colorado to see the slickest admissions and registration system for educational institutions in the U.S. That was my first observation that institutional rank and systems excellence don't necessarily match.

• Then I spent five years in the healthcare industry (thanks to a bank CEO who was a trustee at a top five medical institution) with particular focus on names that would impress patients who traveled from continents afar to seek the ultimate in U.S. medical excellence. Deserving as they were in their reputation as a healthcare provider, information technology was based on the Mont Blanc pen, paper records, lost records, and more important to physicians who had an ownership stake, lost revenues due to inadequate Medicare claims reporting. The electronic patient record was unheard of. The urgency of retrieving a medical record was reliant on the quality of the ball bearings of the skates worn by the retriever and his/her ability to track down the last physician who forgot to return the file when he/she was finished with the recording of procedure/diagnostic notes. One of my favorite statements delivered to medical practitioners was, "Financial institutions carry more bytes of data on a customer's wealth than medical institutions carry on a patient's health."

• I'm not sure how much of BofA's acquisition price was based on Countrywide's technology, but BofA made strong statements to the press and Wall Street about the superiority of Countrywide's technology. I don't think they were referring to Risk Management.

• The 19 banks that failed so far this year probably did so because they made irresponsible loans and bad investments. The only other mistake that could have done them in was to go home without locking the vault door. To blame technology is so ludicrous that, so far at least, no banker has tried it. My logic is based on this. Seven companies represent 78 percent of the marketshare for U.S. financial institutions. They earned that sizable marketshare by delivering good stuff and people-based support to their customers. So I'm saying the 19 failed banks were probably using the systems of the seven most popular vendors. The challenge for any energetic skeptic is to see if the 19 banks were using systems delivered by 23 other companies whose technology may not be up to snuff. If that exercise proves to be correct, and in contrast to my reckless assumption, then the title of the skeptic's blog should read, "Nineteen Banks Failed So Far This Year Because They Were Using Weak Systems."