Technology and financial services – with power comes responsibility

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Financial services institutions were early adopters of technology and have used it to transform their businesses. The earliest areas of IT spend were on accounting software in the banking and insurance sectors where technology could automate highly manual processes, dramatically increase accuracy and reduce costs.

This spending was initially focused on process automation in areas where benefits were clear and easy to define, such as clearing and settlement. The entire middle office was, in effect, removed, resulting in huge savings.

The trend of replacing people with technology gathered pace during the 1990s and vast technology departments were created, often employing as many staff as traditional non-IT banking.

However, by the end of the 1990s rapid expansion of technology across all areas had led many financial services organisations to create huge IT silos that were not always aligned to core business strategy and were too large to be agile and responsive to rapid changes in market conditions. More and more ways to introduce technology were found and the business case for investment became increasingly blurred.

Fast forward to 2008 and we are now seeing a change in direction. The most progressive financial service institutions are dismantling their IT silos and realigning their IT teams with the business units they serve.

Now the chief information officer will often come from an operations background, bridging the gap between the business and technology. And CIOs are receiving recognition and a place on the board where they can help define business strategy, rather than simply provide a commodity service.

Today, the trend is for technology spend to be focused on business value and clearly aligned to strategy. For example, investment banks are using technology to automate trading where the risk levels can be set and activity monitored. And clients are offered on-line portfolio aggregation where they can move between asset classes at the press of a button and the entire process is completed quickly and accurately using straight-through processing.

Technology has helped the financial services industry become the being it is today. Without technology, traders would still wear bright coloured jackets and leap around energetically, insurance claims would take weeks to settle and banks would not be able to offer products such as offset mortgages. It has also allowed investment banks to exploit tiny arbitrage differences to make vast sums of money, enabled back and middle offices to be dismantled creating huge cost efficiency and enabled the creation of highly complex financial instruments.

Technology can also produce problems: we are going through a banking crisis in which technology played a part. The creation and globalisation of collaterised debt obligations (CDOs) was based on complex packaged debt rapidly sold via cross border, electronic trading.

To move forward, the financial services industry needs to ensure that the business drives technology and that the right people, with the right skills are retained to ensure that governance and controls can be put in place. If this is progressed the technology can remain centre stage and continue to shape, benefit and enhance the financial services industry.

Technology can certainly deliver great benefits, without creating dependency, but with it the need for controls and governance grows ever more important. With power comes responsibility. And the financial services industry is now realising the responsibility that the use of technology entails.

Neville Howard is a partner in Deloitte’s consulting practice.

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