Parveen Bansal talks to Oracle’s Andrew Derrer about the new astrology that will lead to change in IT in the financial services industry. Banks that square up to these challenges will have positive horoscopes, he predicts.

In keeping with the name of the organisation, Andrew Derrer,

vice-president Oracle financial services, EMEA, predicts imminent

changes in the financial services industry. “The key difference in the

environment today is that there is a unique inflexion point in the

history of banking – an aligning of planets,” he says. “The individual

issues have been well known but never before has the industry been

forced to resolve these issues simultaneously.”

The five planets of which he speaks are the factors that are driving

change in the industry – what Mr Derrer calls “catalysts driving the

revision of IT in banks”.

Customer demand

The first catalyst is “demanding customers”. “Customers want more. The

internet changed everything,” says Mr Derrer fervently. “That is not to

say that internet banks are the future but rather that the internet has

driven a culture of instant access to information in a simple way,

anytime, any place, anywhere, which has given rise to what can be

described as Martini-banking,” he says, referring to a catchphrase used

in a Martini advertisement. “And consumers have come to expect that

same level of access to information, availability and simplicity from

the way they do business with the bank – real-time simplicity.”

In trying to meet these customer demands, banks have “put lipstick on

the pig”, he says, layering new internet-enabled multi-channel systems

on to the core systems but “these are not real-time and don’t work that

well”.

Mr Derrer says that bank customers’ increased sophistication is not

just related to consumer uptake of the internet, but also to product

sophistication. For example, whereas previously netting was a service

only available to wealthy clients of private banking, today the

mass-affluent segment of consumers have come to expect the same

service. Thus they are demanding more of the information systems that

support such services in banks.

High IT costs

The second catalyst for change is the high cost of IT. “Eighty percent

of all new IT projects in an organisation are integration efforts to

try to make the new system or application become a part of the

spaghetti,” says Mr Derrer. Multi-channel banking and the trend toward

customer-centricity is pushing up integration costs without any real

benefit passed on to the customers. “The technology is obsolete and

built using old architecture, therefore development lead times are

longer and it costs more to maintain.”

The ability to virtualise software across multiple resources, as in

grid computing, is very relevant and useful for banks because it allows

better use of computing resource available to a bank today, says Mr

Derrer. It does this by balancing out peaks and troughs of activity,

which are typical for banks – for example, end-of-day closing.

Low-cost hardware

This introduces the closely related third planet or catalyst: the

availability of low cost IT hardware, which has signalled change in the

IT landscape of the banking industry. “The key message is that banking

systems no longer require high cost platforms,” says Mr Derrer. That

is, banks can use commodity hardware to run Unix and Linux, as

near-super computing power is now available at a low cost.

The shift in hardware’s role in reliability is especially significant,

according to Mr Derrer. “Reliability and scalability now no longer

depend on hardware, which is costly, but on less expensive software.

This again, is due to the capabilities offered by Grid computing. The

banking platform is now more software and less the computer. So

organisations have the opportunity to reduce hardware resource costs as

well as costs associated with systems maintenance and support.”

Organisations can attain near-100% reliability using distributed

systems and commodity hardware. “This is the key to driving out cost at

one level,” says Mr Derrer. Fundamental to this is an operational

customer database to store information, which can virtualise and be

split up to run various activities across multiple hardware resources..

Regulatory changes

Of the five catalysts of change, Mr Derrer identifies Basel II and

other regulatory changes as having the most profound effect on the

banking industry at the moment. However, he stresses that Basel II is

more than just a compliance issue. “At least in the EU, where CAD III

will become law and will apply to a broader range of financial

institutions (that is, all credit institutions), there will be a need

for change,” says Mr Derrer. “And when you consider what Basel II is

getting at, then going beyond compliance can lead to competitive

advantage.”

The European banking industry is relatively efficient because it

benefits from being highly deregulated. The individual countries are

free to regulate internally as they please within a set of guidelines

(for example, combine banking, insurance and credit institutions).

“Because of the relatively low level of risk associated with consumer

credit, as compared to other more complicated financial instruments,

retail banks will be better able to take advantage of the Basel II

Accord by potentially reducing their capital requirements and this

offers them the opportunity to improve shareholder value,” says Mr

Derrer. However, at the root of this, banks have to collect virtually

all data around customer activity and have them available centrally to

give a single picture.

To truly benefit, though, banks also need to have an infrastructure

that allows real-time monitoring and management of risk-adjusted

performance, says Mr Derrer. This will enable them to integrate the

risk line of the business, which is concerned with avoiding loss, and

the finance line of business, which is focused on how to outperform

risk, he says.

Packaged solutions

The fifth catalyst for change that Mr Derrer identifies is the

availability of packaged core banking solutions. “Transaction systems

have to be more organised, most ‘home made’ ones don’t have a customer

view,” he says. The practice of extracting consumer data from different

sources to put into a centralised customer information file is “a

diluting process because information is collected in at a summary level

and therefore is out-of date and incomplete almost immediately”. He

says: “Core banking solution vendors are providing new functionality

and business advantages. For example, the new T24 solution from Temenos

is designed so that it eliminates the need for end-of-day batch

processing.”

As smaller banks are already benefiting from the implementation of such

solutions, large banks are beginning to consider them. “There is no

question about whether banks can replace their legacy systems because

the answer is that they have to do it – the faster the better,” says Mr

Derrer. There is no competitive advantage in the existing core systems,

he says. “Competitive advantage is to be able to deliver higher levels

of customer satisfaction at a cost that is lower than your competitors.”

“The question is: what will be the key catalyst to drive major core

banking system change in a particular bank?” He suggests Basel II is

one of the key drivers. Estimates suggest that 30 of the world’s top

100 banks will replace their core banking systems within 10 years. Mr

Derrer cites the cases of Citigroup and ING, which are implementing

packaged core banking solutions in their corporate banking functions

with a view to rolling out the solution across the banks, once tested.

With around 230 packaged core banking solutions delivered in 2002 (of

which roughly 150 are based on Oracle), there is ample evidence of the

market for these solutions. “Banks should be banks and not IT

companies,” says Mr Derrer, referring to the fact that Citigroup and

Deutsche Bank have more IT developers than Oracle and SAP.

Revolution on the way

A banking revolution is under way and banks are under pressure to

focus. According to Mr Derrer: “The five catalysts are, in turn,

inextricably linked to three key technology issues that have to be

solved: first, the development of a single operational (not just

analytical) customer environment; second, the development of a

functional and real-time channel integration using STP

[straight-through processing] principles for all process automation;

and, last but not least, the need for risk-adjusted performance

measurement and management – squaring the circle between risk and

profit.”

The aligning of the five planets – demanding customers, the high cost

of legacy IT, low-cost hardware platforms, Basel II and packaged core

banking solutions – signals inevitable change, he says. When it comes

to reading the stars, banks that deal with these issues will be more

likely to have a positive horoscope.

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