This column was first published in SvD Näringsliv, in Swedish, on March 14th, 2021.

The big banks’ outdated software costs them market shares to fintech companies that run both faster and better by making things from scratch. By challenging in a niche and then expanding, a new banking world emerges.

It is August of 2020. An administrator at Citibank has just had the worst working day of their life. With a few keystrokes in an ancient computer system, the person has mistakenly made a payment that is almost 900 million dollars more than intended.

Even worse: a judge in New York, Jesse Furman, will later decide that the recipients of the money are not liable for repayment.

In his statement, the judge wrote: “To believe that Citibank, one of the world’s most sophisticated financial institutions in the world, would have made a mistake that has never happened before, in the billion-dollar district, would be almost irrational.“

The money was an old debt that belonged to the cosmetics company Revlon, and Citibank only intended to pay the interest on the amount. But after the employee at the bank accidentally clicked the wrong buttons in their system, the entire amount was transfered, whereupon the debt was inadvertently settled.

The question is whether it is really so irrational and surprising that banks make mistakes of this kind. The banking world has a large debt of a completely different nature than what is usually found on their balance sheets – their technical debt.

The term “technical debt” refers to the cost of redoing old technical choices that are now outdated and expensive to maintain. The banks’ infrastructure is a good example of this. In the United States, 95 percent of all ATMs use an old programming language called Cobol. Many Swedish banks are run in the same way. The problem with Cobol is that there are very few who can program in it, which in itself means great limitations. All banks know about this, but it is too expensive and cumbersome to get rid of it completely.

A large part of the success in fintech can be explained by the lack of technical debt. You simply start from the beginning. It initially takes longer, which is why fintech companies often focus on a limited part of the major banks’ total offering. The result is a company that is created to deliver a niche product and nothing else.

Thereafter, the company can expand and gradually compete with more services offered by the traditional banks. This is the journey that, for example, Klarna has made very successful. And that is also why the Klarna of today isn’t necessarily the Klarna of tomorrow.

Even outside fintech, people reason similarly. The Swedish company H2 Green Steel recently raised 500 million SEK to develop a completely new type of fossil-free steel. The assessment was that it is easier to start from scratch – completely without established structures and heritage – than to restructure an existing company.

Tesla and Apple – now competitors – share the same philosophy, that it is easier for software companies to learn how to build cars than for car companies to learn software. At least when it comes to self-driving cars, which is what they have in mind. The car industry has, of course, been involved in software for many years, but historically it has mainly been a side job. Now that balance is changing.

In a business that will increasingly be about software, companies’ attitudes and strategies around technology will be absolutely crucial. There is an enticement in starting something new to gain immediate benefits. But at the same time, the uphill battle of building such a company will be enormous.

The Swedish phrase “it sits in the walls” usually has a negative connotation, but everyone who has started their own company knows that there are components you would like to have brought with you from previous workplaces. Everything from culture to infrastructure.

Losing $900 million in one day is, of course, awkward – to say the least. But that figure should probably be seen as low compared to the values ​​the banks risk losing due to their slow actions. For each individual bank offering – from loans to stock trading – there are a plethora of competitors who are ready to take its place.

This column was first published in SvD Näringsliv, in Swedish, on March 14th, 2021.