Ex-Google engineers have spent 2 years secretly trying to solve 'the hardest problem in banking'
London-based Thought Machine has been working on its VaultOS system behind closed doors for two years, with over 50 engineers dedicated to the project.
The project is one of the first bottom-up attempts to built a modern computer system for banks, which can be used out of the box by any bank and then tailored as necessary. The platform draws on the latest technology such as cloud infrastructure and blockchain.
Thought Machine and VaultOS are the brainchild of Paul Taylor, who sold his speech recognition startup Phonetic Arts to Google in 2010 and spent three years there running its text-to-speech operations. Another ex-Googler, former AdSense engineer Will Montgomery, is director of applications at Thought Machine.
VaultOS is a bit like Amazon Web Services or Google Drive, but for what's called "core banking" - the technology that allows banks to hold deposits and accounts. Essentially, it's the heart of banking, around which everything else is built.
Mark Warrick, director of creative and design at Thought Machine, told Business Insider that bringing the technology up to date is the "hardest problem in banking" because of its critical function.
Today, most banks run on old systems, some dating back to the 1970s, strapped together with metaphorical gaffer tape. Banks are too afraid to update them for fear something goes wrong.
Often these systems don't talk to each other, so another bit of software - or even sometimes manual input - is needed to translate what's happening in one place to another.
In short, it's slow, costly, and unreliable. The failure of core banking is what leads customers of banks like Royal Bank of Scotland unable to withdraw money from cash machines or those with HSBC missing their payday before a bank holiday.
'It was like having a computer science history lesson'
Taylor discovered the problem with core banking while helping a high street lender with the problem of automatically categorising transactions.
Warrick told BI: "They were looking at the banking infrastructure and they were just amazed. It was like having a computer science history lesson walking through the bank, but the weird thing was all of those systems were still in place and running, from 1970 onwards.
He added: "Last time Paul had cracked what people thought was impossible before - speech technology - now he wanted to crack the biggest problem for the banking system. You need a proper banking operating system at the heart."
Warrick, who has worked as a software engineer at Deutsche Bank and RBS, said: "Banks can't deliver to their customers the innovations that you're seeing in other sectors simply because their fundamental core systems are not able to react."
VaultOS is based on "smart contract" technology that allows people to tailor their own products such as mortgages, loans, and overdrafts.
Warrick said: "If you want a future bank where, if you've got 16 million customers and you've got 16 million different configured products for each of those customers, and maybe they've said when they want their payment holidays, or say can you have a look at my expenditure profile and make my mortgage payments bigger in the months where I spend less - that sort of thing is totally available."
He compares the feature to NikeID, which lets people chose custom colours and fabrics for their shoes online.
Warrick said: "The fundamental engineering is that customers on the street can now have their own products bespoke to them, just like they can design their own trainers."
'This is a long, burning time-frame problem'
So why haven't banks update their systems in so long?
Warrick said: "There are so many demands regulatory-wise put on banks that they have had to mutate their systems on top of existing ones to meet those regulatory marks.
"The second thing is until recently, maybe the last five years, banking has never needed to meet the kind of consumer expectations that other industries have. Only in the last five years are consumers waking up and starting to see the likes of Mondo come in and say, well actually we can come in and do things faster and slicker."
Startups have been reluctant to tackle the problem too, he said: "It's the hardest problem to solve without a doubt in finance. There is so much momentum that you need with a bank to change it's core banking platform. This is a long, burning timeframe problem."
Banks are slow to adopt anything and even if they do move to VaultOS, Warrick said they will likely need to run it in parallel to their existing systems for at least a year before fully switching.
Two banks are currently trialling VaultOS, a high street lender and a private bank, Warrick said. Thought Machine is now inviting other lenders to try out the system, both startup, challenger banks and more established banks.
Warrick said: "We've had quite a few banks come in under the radar and take a look at VaultOS. They've been hurt by the regulatory change so much, simply because it's so hard to change their existing systems to meet the regulatory demands, stress testing, and everything else.
"We are having CTOs and CIOs saying to us: 'We need to do this because it's gone on too long and now is the time to invest'."
Warrick won't disclose Thought Machine's backers, only saying that the company is "heavily funded."