Digital age is not foolproof

The Ulster Bank/RBS crisis was an IT disaster waiting to happen, writes Eamonn Walsh

THE Ulster Bank computer glitch highlights the importance of advanced computer systems in our daily lives and just how badly things can go wrong.

The failure of the software upgrade created two problems for Natwest, RBS, and its Irish operation, Ulster Bank — the first was the lack of access for millions of customers to their money, the second was the massive backlog once the glitch was cleared. After just three days, that backlog was more than 100m transactions — that gives you an idea of the scale of the problem.

Essentially, payment systems comprise many layers of software and hardware that have been developed over the past 40 years.

In general, these developments are welcome. Readers over 40 will remember how overseas travel used to require the purchase of currency, travellers’ cheques, and credit cards in advance of a trip. The very idea of online banking was revolutionary just 25 years ago.

However, despite the clear improvements, these innovations led to the creation of more complex systems and hence the possibility of a failure. As one eminent software engineer explained to me, these systems are largely glued together with hope.

The downside of these great leaps forward is that people take the resil-ience of systems for granted; because many of us have never experienced a failure, we expect everything to work and modify our lives accordingly.

For example, if one were considering an overseas holiday today, one might bring a single cash card and assume there will be no difficulties.

Within large organisations, senior managers and boards have probably taken the resilience of their systems for granted as well.

It is easy to understand that the nuts and bolts of payment systems have probably received very little attention in the past few years.

The aftermath of the financial crisis — bad property loans, government re-capitalisations, and the re-constitution of the banking sector — must have taken their toll on senior management attention.

It is notable that none of the competing banks have sought to exploit Ulster Bank’s unfortunate predicament for their own gain.

The upside to the unfortunate events at Ulster Bank will probably lead to these IT issues being top of the agenda at senior management meetings over the coming weeks.

Payments failures have occurred in other countries and will happen again, but what can be learned from them?

First, ignore calls for greater regulation of payment systems. While, the events of the past week were highly inconvenient, the upside was it did not involve a leak of personal information. Indeed, despite banking systems’ complexity, they have been more successful than other sectors at maintaining confidential information.

Calls for greater oversight of payment systems will inevitably undermine innovation. All of us have benefited from the tremendous advances made in online banking and international payment systems.

It would be most unfortunate if regulatory initiatives slowed the pace of technological improvements.

Second, citizens should be aware that systems may fail and take precautionary actions. For example, travelling overseas with a single means of payment is probably placing too much reliance on payment technologies.

It contrasts with the under-reliance on payment systems associated with travellers 30 years ago. Then, multiple means of payment were the norm. The basic idea was redundancy — if one were unable to cash a traveller’s cheque, then some other means of payment was available.

Finally, the incidents of the last week do highlight a downside to over-reliance on these technologies. Just 12 months ago, populists complained that granting time to civil servants to cash cheques was a medieval practice that should be abolished. However, many citizens do live from pay cheque to pay cheque. The payment system failure highlights the difficulties that are faced when alternative means of payment are not available to these individuals.

One hopes that the Ulster Bank fiasco will ensure some alternative fall-back mechanisms are created for those that suffer most when a technological glitch gives rise to unanticipated consequences. The benefit of the glitch is that it will now enable us to anticipate those consequences.

* Eamonn Walsh is a professor of accounting at UCD’s Smurfit School of Business