To be competitive, modern banks require real-time sharing of customer information and products across multiple delivery channels. Most back-office systems in operation today were designed to automate specific bank products and accounting processes. They typically operate on isolated information islands, forcing bank IT departments to build point-to-point interfaces between them in order to share critical customer data and automate processes. These systems typically do not allow for Enterprise Customer Integration (ECI) and therefore expose banks to a number of disadvantages.
First, institutions are unable to fully comprehend their relationship with any given client. This makes it difficult to increase wallet share or to measure the actual costs of doing business with a customer. In order to assess customer needs and cross-sell additional services accurately, it is necessary to obtain a comprehensive understanding of the entire relationship. Furthermore, without an enterprise-wide view it becomes easier to lose track of the 20% of the bank’s customers that account for 80% of its profits. If institutions fail to recognise and reward their most valuable customers, they will sub-optimise their performance by prioritising less lucrative opportunities.
Risk of fraud
Second, the inability to access and share data across the enterprise makes it more difficult to measure risk and mitigate fraud, leaving the bank open to preventable losses that could have been prevented. Since institutions are unable to consolidate and analyse customer transactions in real time, fraud may continue undetected longer, increasing losses. In addition, it will be more difficult to comply with increasingly stringent regulatory obligations.
Finally, from a servicing perspective, the bank’s costs are higher than necessary since each activity with a customer must be repeated in each business silo. Some channels are not consistently available for all products, adding cost and confusion to the fulfilment processes. Manually intensive processes are inefficient and prone to errors, which degrades service quality and slows reaction time to customer needs and inquiries.
The solution to these problems lies in a new way to introduce new core functionality while allowing existing back-office systems to connect and work with each other and new banking applications. The proprietary interfaces that would typically connect these systems can be replaced with an industry standard technology that provides much more robust interconnectivity and information access.
Bank products and customers can be unlocked from their individual processing silos and shared across the enterprise. Perhaps most significantly, new service-oriented functional components can be introduced to address new requirements while the bank’s existing product processors can be redeployed as utilities that are presented as services to the business and servicing channels.
A services-based solution
This is accomplished by using Service Oriented Architecture (SOA), an architectural style that uses open, generic interfaces based on a set of standards that were originally developed to enable internet-based commerce. SOA-based technology allows a core system to reach out to any published ‘service’ and participate in seamless electronic message exchanges between applications across the enterprise, sharing information in real time.
By deploying an SOA-based solution, financial institutions can understand and grow their customer relationships, protect against fraud, strengthen their compliance programmes and manage their firms more profitably.
Unlike older software architectures, SOA allows automated systems to focus on the data in the transaction instead of the documents or processes that make up the workflow. This offers many opportunities for increasing efficiency in the enterprise. It also allows the bank to access services delivered by service-oriented solution providers, adding new functionality without the painful and expensive implementation path common today.
But banks that are dependent on an array of legacy systems are predictably unenthusiastic about throwing off those systems all at once in favour of new core-processing software. Fortunately, that is not required. As part of a strategic, phased migration for mission-critical core systems, bankers are deploying solutions like Fidelity’s Xpress EnterPrise Services to enable connections between legacy systems and new core processing components. Xpress utilises host adapters to connect legacy systems (using their existing interfaces) and new banking services to a modern services-oriented network, eliminating the need to create new point-to-point connections.
This type of integration hub is proving very attractive to firms that need to earn a return on existing infrastructure but do not want to be prevented from benefiting from new SOA-based services. These tools allow bankers to avoid the costs involved in making significant changes to legacy applications. They can add new services and develop new workflows as the need arises.
In effect, these systems are transformed by an SOA environment. It gives banks the power and flexibility of standards-based technology now. Not only does this give bankers the ability to introduce new services immediately while allowing some much-needed time to develop their overall conversion implementation strategy, but it also facilitates the eventual migration to a new real-time core system environment. With the least possible pain, institutions can operate with a more complete view of the enterprise and its customers today and be better prepared for the future as well.
Setting the standard
In order to work effectively, all the information passed between SOA-based core processing systems and published services must be standardised. Some vendors are already promoting SOA as a viable solution to banks and other financial institutions. However, by advancing proprietary data standards, they may be robbing banks of many of the real benefits these new architectures can provide.
The universe of participants is limited whenever you rely on a proprietary protocol, whether or not you choose to call it a standard. A better solution is for the marketplace to define a data standard that is open and available across all institutions.
Data standards are available in the banking industry now and ready for adoption. A number of open-source data standards already exist, such as Interactive Financial eXchange (IFX), that will facilitate a smooth transfer of financial data. If the banking industry chooses to standardise its data on such a freely available standard, it will increase the number of solution providers that can compete to provide services through the framework.
Increased competition can only help the industry. To choose a proprietary standard (regardless of the size or scope of the company that proposes it) will limit competition and, consequently, the potential quality of the banking products and services offered to banks.
But there’s even more to consider. Forward-thinking bankers are already looking beyond their own walls toward an industry-wide integration solution.
If banks work together to standardise their architectures on an SOA-based framework, they will be able to extend the benefits beyond their own institutions and out across the entire industry. A single set of core standards built around SOA will allow vendors all along the bank supply chain to provide products and services that are pre-mapped and pre-configured to the specific data requirements of the institution.
The resulting industry utility model for banking services would put financial services vendors in a position to make core banking systems and specific channel solutions available that will automatically work with other systems inside the institution. The financial and operational benefits of this are huge, and are already being enjoyed by other industries, such as automotive and manufacturing. Banking is moving toward this future now.
The drive to compete
Not only will vendors that serve banks be more competitive in a banking utility environment, but bankers will also be better equipped to compete. Under this model, money that institutions are forced to spend today to shore up ageing back-office systems can be spent on initiatives that will impact their customer relationships.
In its 2005 Global IT Spending Outlook: Revving growth engines with “under-the-hood” investments, analyst Tower Group estimated that overall IT spending in the global financial services industry will rise to $408.6bn by 2008, gaining 4.2% annually from the $360.9bn the company predicts will be spent this year.
Last November’s TowerGroup ViewPoint, Banking and Payments Perspective 2005: Changing the tires while driving the car, said much of the growth in IT spending would be compartmentalised. Specifically, TowerGroup expects banks to make investments in “application interoperability and consolidation, cost reduction, risk management and compliance”.
However, bank customers, assuming smooth-running initiatives, will probably not even notice a change in service. This means that these tremendous expenditures are not contributing to the bank’s ability to compete with other banks. That will change in the future.
The banking utility model allows a financial services organisation to focus its investment on integrating various services into packages that make sense to its customers. It allows the bank to differentiate itself through distribution, branding, pricing and the overall customer experience it provides. The bank has the option to have transaction processing and other commodity services done by an industry utility that can perform the work at a fraction of the cost.
By standardising on an SOA environment and industry banking utility model, bankers acquire the opportunity to compete at a higher level, introducing innovative new services and focusing on customer satisfaction, while maximising IT investments. This makes for a brighter banking future.
Frank Sanchez is president, leveraged product division, at Fidelity Information Services. E-mail: international.marketing@fnf.com www.fidelityinfoservices.com
