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Mike Gardner is the chief executive officer of Agreement Express.

In 2012, Bruno Iksil, a trader known as the "London Whale," lost $6.2-billion for JP Morgan. While the underlying reasons why are complicated, one of the contributing causes was that the bank's value at risk was being manually calculated through spreadsheets. Unfortunately, outdated IT systems resulted in an inappropriate tool, in this case Excel, being used for a mission-critical process.

It's a familiar story, such as The Royal Bank of Scotland's system crash in 2012, locking customers out of their accounts and costing millions in fines, or MF Global's collapse as a result of its dependence on outdated IT systems.

"If it ain't broke, don't fix it."

It's one of those clichés that, unfortunately, many Canadian organizations have adopted when it comes to their IT legacy systems. Some are still running on systems that were put in place during the Cold War.

While new financial technology (fintech) is permanently changing how financial institutions operate, it could very well be that the biggest threat to Canadian financial institutions is not fintech challengers, but the legacy systems that prevent them from adapting.

In fact, this could be the next major problem that the Big Five banks have to tackle. Dave McKay, the CEO of Royal Bank of Canada, has publicly stated that the biggest threat to financial services is not from without, but from within: "Regulation is not the problem. The biggest barrier to adapting is the incredible legacy systems."

The legacy problem becomes more confounding when you consider that banks have some of the smartest leaders, and some of the biggest budgets of any type of business in Canada. So what gives?

To begin with, everything is riding on these systems. The risk of a system going down during a transition, even for a few hours, could have devastating ripple effects. Another fear that comes into play is, "What have we connected our legacy systems to that we may be overlooking in our replacement systems?" It's these kinds of questions that are holding back financial institutions from offering truly innovative, delightful products that could have customers singing their praises. It's these legacy systems that are the biggest threat to our Canadian banks, not the fintech challengers that threaten to disrupt them.

Financial technology is changing at such a rapid pace that in order for financial institutions to keep pace with modern systems, they would have to institute potentially dozens of separate IT teams tasked with fixing bugs, pushing out updates, and keeping up with comparable technology in the market.

If banks aren't willing to go big on their internal IT strategy, they will have to go big the other way, and get out of the technology game entirely, to partner with external technology companies. In other words, to truly modernize, they have to make a choice: either they will become technology companies, or they won't. They're either all in, or all out.

Financial institutions such as Capital One are going big on their internal technology strategy, hiring top talent from companies such as Amazon and Microsoft. Other institutions, such as HSBC, are going the opposite direction, making big technology partnerships with cloud companies such as Oracle to overhaul their legacy systems with a modern cloud infrastructure. Both are viable options.

But the in-between will no longer continue to work for Canadian institutions. If they're not all in or all out, the legacy system spectre will continue to haunt financial institutions with the looming danger of an outage, a critical limitation or, perhaps worst of all, a rigid foundation that will prevent them from iterating over time and meeting modern customer expectations.

The world is changing. When banks are unable to change with it, they become their own worst enemy.

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