Mizuho’s tech issues point to a legacy of unresolved merger issues

Whenever business leaders present a deal as a merger of equals, it’s tempting to dismiss it as a face-saving exercise for the acquired business with limited real-world consequences.

But Mizuho Financial Group, which was created by a three-way merger amid the banking crisis in Japan in 2000, shows the potential risks.

More than two decades later, analysts say one of Japan’s most powerful financial institutions still suffers from unresolved cultural and structural problems resulting from a merger touted as a combination of “equal minds.”

This legacy was revealed in technological problems serious enough for the regulators to have suggested the possibility of intervening directly in the internal management of the group.

Mizuho’s banking system has suffered seven significant problems in this year alone, resulting in thousands of blocked ATMs, swallowed bank cards and disruptions in foreign currency transfers.

Mizuho has struggled since the merger to curb a tradition of doing everything in triplicate, from rotating leadership roles to maintaining overlapping branch networks.

At the extreme of this practice was an unfortunate decision to combine several of its computer systems because it could not reach a consensus on which of the three systems and providers of the three banks to give up. It didn’t go well.

Following system failures in 2002 and 2011, Mizuho spent $ 4 billion to launch a brand new computer system in 2019 that he hoped would end a troubled history of trouble that had plagued the bank since its inception. .

But after the problems persisted, an alarmed financial services agency last week took the rare step of issuing an administrative order on Mizuho that goes beyond his past demands to improve the bank’s controls and compliance.

Under the ordinance, the bank is required to review scheduled upgrades to its IT system and notify regulators of a plan to implement them in a way that does not further disrupt. This effectively allows the FSA to look inside Mizuho’s banking system and intervene if necessary, analysts said.

Mizuho’s system failures add to a series of management problems at Japanese companies, including scandals at Toshiba, Mitsubishi Electric and Kobe Steel.

The technological causes of Mizuho’s problems seem to be different each time. But an independent investigation in June cited human factors such as lack of communication, low awareness of IT risks and a reluctance to directly resolve a crisis. “There is a corporate culture that prevents direct improvement,” the report concludes.

As Japanese companies try to adapt their operations to the digital age, Mizuho also provides a grim reminder of the costs of delaying investment in engineers and computer technology. The bank continues to insist that there is no structural problem with its main banking system, but confidence has weakened with each new problem.

As the $ 4 billion banking system is created on a whole new architecture, experts say it remains complicated as Mizuho has relied on four vendors, three of which have historical ties to banks that have been combined into 2000: Fujitsu (Dai-Ichi Kangyo Bank), IBM (Fuji Bank) and Hitachi (Industrial Bank of Japan). The system also used a newcomer: NTT Data.

While using multiple vendors isn’t necessarily a problem, Masayuki Endo, a former IT specialist at Mitsubishi UFJ Financial Group and now a professor at Shizuoka University, said Mizuho has not attached a leading role. to a single supplier to create the main architecture, making its design complicated.

A more serious problem for the Japanese banking industry is its lack of computer engineers and data scientists compared to American banks such as JPMorgan Chase and Goldman Sachs, which have spent heavily on recruiting talent and acquiring technology to fend off the threat. new fintech rivals.

“In Japan, vendors provide around 70% of IT engineers and the ratio of IT specialists in banks is extremely low,” Endo said. Therefore, when system failures arise, it is difficult for banks to resolve technical issues internally.

Having invested heavily in the new banking system, Mizuho may be reluctant to admit that there might be underlying flaws in its structure. But he must also recognize that the system crisis he is currently facing is one of the legacy costs of a failed full merger 20 years ago.

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