Financial technology, observes Roy Freedman of New York’s Polytechnic University in a book just published*, shares many characteristics with military technology. Both demand tactics and strategy, both can be used offensively and defensively and both employ codes and encryption to guard their secrets.
Prof Freedman, whose book wittily combines fiscal history with heavy-duty financial arithmetic agrees, however, that a marketplace is not a battlefield even if they share a common argot: “George made a killing in the stock market,” he quips.
The distinction may be lost on some chief information officers in financial services companies. They face demands for flexibility, resilience and value for money in a fiercely competitive and ever more heavily-regulated environment: “The CIO’s agenda is more demanding today than it has ever been,” says Michael Robinson, a partner in the financial services advisory group of consultancy KPMG. “The churn in the CIO community reflects what a demanding job it has become. It is not for the faint-hearted.”
Banks, insurance companies and other financial institutions were among the first organisations to invest heavily in computer technology (the military was another early adopter). Most, although by no means all, of their business processes, have now been automated.
But a consequence of this early start is that many financial institutions are burdened with inefficient monolithic systems written in old computer languages such as Cobol that are costly to maintain and modify.
It typically takes a big bank between 12 and 18 months to bring a new financial product to market because of problems with the underlying technology. One European bank was, in fact, forced to abandon plans to develop common account opening procedures for current accounts and savings products when it found 60 interfaces where the new system would have to link to its legacy systems. These interfaces, in turn, connected to other systems presenting the bank with an unacceptable risk of a big systems crash during implementation.
“You hear the word ‘complexity’ repeatedly,” says Tamim Saleh of IBM’s financial consultancy group. “It’s the level of duplication of applications, of databases, of infrastructure and business processes because large financial institutions frequently lack a central co-ordinating mechanism. Each business unit tends to duplicate its business process and to duplicate the underlying technology as well.”
Financial institutions are well aware of the need to simplify their business models. According to Sunny Banerjea of IBM’s Institute for Business Value, their position is: “I want a simple portfolio of products that will meet the needs of the majority of my customers so I can focus my time and my best resources on my most profitable customers.”
Simon Jenkins of the consultancy Accenture phrases it a little differently: “They are asking: how can I make my bank more sticky? How can I generate more revenue from my existing customers?”
Harvey Koeppel, CIO for Citigroup’s global consumer group describes it as a move from an emphasis on products to “customercentricity”, arguing that growth can be enhanced by “focusing on customers and the bank’s relationships with them”. “Deepening wallet share” is how he puts it.
So, for example, many institutions are questioning why they should support so many different ways to open an account or process a mortgage or loan. For a big organisation, this can run into double figures. The savings from simplification can be substantial. Maintenance costs (“maintenance” is IT jargon for extending or modifying software) can be cut by 50 per cent or more. New products can be launched in weeks rather than months.
Transformation, however, does not come cheap. Some banks, the US-based Wachovia Corporation, for example, never halted nor decreased their technology spend during the grim months following the dotcom collapse: “We took a disciplined approach,” says Martin Davis, its corporate CIO. “Over the past couple of years we distributed the technology spend to focus on new development of products and services to support our infrastructure, risk and regulatory issues, merger and acquisition activities and efficiency.”
But for others the purse strings are just beginning to loosen: “They are spending money on developments that will reduce their ongoing maintenance bills and operational costs,” says Dan Schutzer, executive director of the US-based Financial Services Technology Consortium, “but that said, I do believe they are thinking of how to reduce their IT budgets”.
A big question for these organisations is whether to bring systems up to date in one expensive “big bang” or to adopt a piecemeal approach. Most experts believe tight budgets rule out the former option: “The days of open-heart surgery are over,” says Mike Blum of US group Amdocs, which is applying lessons from telecommunications to customer retention in financial services.
Mergers and acquisitions can be the exception, points out Stuart Taylor of Accenture. Grupo Santander, the Spanish bank that bought the UK’s Abbey National two years ago, is investing heavily to update Abbey’s legacy systems and roll out Santander’s well-regarded IT platform across the UK group. “It remains to be seen how successful Santander is in the UK marketplace despite its strong track record in Spain and South America,” he notes.
The big new thing is a technology called “Service Oriented Architecture”, or SOA (see The building blocks of a simpler future are in place), a way of simplifying technology through the use of software components or building blocks that can be used and reused throughout the organisation and can communicate with each other. It means, for example, that data should never have to be entered more than once. Citigroup’s Koeppel says most of the bank’s big developments are based around SOA.
Wachovia’s Mr Davis is another enthusiast: “We leverage SOA in our investment bank and are looking for ways to leverage it across the enterprise.”
Jerry Norton, director of strategy for financial services at the consultancy Logica CMG, argues that SOA is one of several linked trends that are changing financial technology. These include an emphasis on standards, both technological and business, the emergence of integrated suites of software from one-stop shop single vendors and the ubiquitous use of internet protocol and the web for communication: “Web services are beginning to stick and yield benefits,” he says.
“The interaction between the bank or insurance company and its customers, both consumer and corporate, will increasingly use IP. I, as a customer, would be able to see all of my relationships with the institution through some kind of portal.”
Cutting costs, driving revenues … the third leg of the financial technology stool is stopping criminals making off with the money.
“What are my top three concerns?” smiles Citigroup’s Koeppel. “Information security, information security and information security. As our virtual world expands, it becomes more and more critical to know who is at the end of the wire.”
New communications technologies are making theft and fraud easier. Phishing, pharming and pherreting, neologisms describing ways of getting unsuspecting consumers to part with information, are creating new headaches.
Dominick Cavuoto, president of Unisys’ global financial services division, believes there has been a dramatic shift in roles over the past few years. Customers expect banks to protect their money and information not only when it is in the institution’s custody but when it is on their own personal computers: “Banks are struggling with this one,” he claims.
They will have to find solutions because the technology is not going to stand still. As Logica’s Norton argues: “In banking, IT is the business. The better you use IT, the better you can do your banking. The smart banks who harness technology properly will be the banks that win.”
*Introduction to Financial Technology, Roy S. Freedman, Academic Press $59.95/£39.99.