Alignment of ‘planets’ signals an IT revolution in banking
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.