What developments can be expected in the coming year? Dan Barnes asks experts about the most important changes in banking technology that are forecast for 2005.

Outsourcing

The greatest change that will take place in outsourcing in 2005 is a further blurring of the boundaries between service providers and banks, with service providers becoming regulated bodies. In the next 12 months, more business processes and their associated technologies are expected to be outsourced as a package through more selective outsourcing deals. The reported demise of major outsourcing deals is premature, however.

The decline in the trend of the mega-deal is due to the level of change in the industry, according to Guillermo Kopp, director of financial services strategies and IT investments at TowerGroup. “We see less appetite for big deals,” he says. But he cites strong examples of major deals that are continuing, such as Bank of America and EDS, Deutsche Bank and IBM, ABN AMRO and EDS, Barclays with Accenture (see interview with Barclays CIO David Weymouth on page 86) and the Zurich insurance/CSC deal.

Mr Kopp believes that any decrease in the major deals and increase in more selective outsourcing is due to a desire for flexibility and concern over risk. “There’s less appetite for vendors and financial institutions to run the risk of seeing [circumstances] change and then having trouble adapting to that.” Overall, TowerGroup expects outsourcing to grow at an annual rate of 12% through 2005-2007, which compares with a growth rate of 4.5% for IT investment while internal IT development remains relatively flat.

One major concern for banks that want to outsource is the measurement of operational risk when operations or systems have been taken over by a third party. EDS, the outsourcing provider, has outlined a new strategy for 2005, creating a subsidiary that is regulated as a financial services company, thereby allowing it to accept operational liability for risk. The subsidiary EISIS is exclusively of benefit to financial services companies that are regulated by the UK’s Financial Services Authority (FSA).

Sam Kingston, managing director, UK and Ireland at EDS, explains the principle: “We are saying to the banks that, as EISIS, we will operate as if we were you, in the sense that we are going to operate exactly in accordance with the FSA requirements. Which means that we have to step up to the obligations of the FSA.”

The company intends to expand the facility internationally but believed it was valuable to prove the case in the UK under the watch of the FSA, which is noted for the rigour with which regulations are applied and enforced. “You could almost say that we are the template,” says Mr Kingston.

Relationship management skills

Banks need to develop a blend of technology, project management and business skills to manage growing numbers of third party and IT/business relationships this year. Richard Lowrie, director banking strategy, industry business unit financial services at business solutions provider SAP, says that the reduction of complexity is driving the use of more standardised systems: “Banks are having to adapt themselves to all sorts of changing environments and most of that is still being done in a piecemeal fashion. For 2005, what will be visible from an IT perspective will be an increasing implementation of standard, packaged software. Everything I hear from banks and analysts is that the move from in-house to standard environments is one way of trying to take this complexity out.”

For Jost Hopperman, vice-president research at Forrester, reducing the complexity is necessary to give banks strength and focus in their IT processes and governance. “Companies will have to align their business planning and IT planning to provide a much better foundation for ongoing projects than they had in the past,” he says. “Obviously, comprehensive, holistic, encompassing methodologies would be a way to avoid that. Most urgently within banks – certainly on the European level – there is a strong trend toward application renewal and renewal of the entire banking platform.”

Larry Tabb, CEO of advisory firm The Tabb Group, believes that technologists need to drive the banks’ ability to align IT and business. “What is important from a technologist standpoint is being able to upgrade your skills, from the ability to write code to really understanding how the technology works with the business. In these outsourcing areas, it is a case of understanding the business behind the technology.”

Mr Kopp notes that with third party involvement, there is a straightforward relationship between business and IT: if the provider does not succeed, it does not get paid. “That forces the alignment,” he says. “The problem is that you have to project manage better, you need to establish a relationship function to ensure the business areas are really owning the outsourcing deal.”

However, Mr Tabb says that passing this information from one organisation to the other can be tricky when the expertise on a process or a technology is limited. “If you look inside an organisation, there are often only a couple of people that fully understand any technology or business process.”

Where projects are run in-house, thus including that expertise, there is a greater difficulty in arranging successful communications, says Mr Kopp. “This is hard to make happen when you have insourcing arrangements because business people do not necessarily want to communicate with IT people, they do not speak the same language. The purpose of the relationship function is to bring more of the business language into IT interactions.

“There are two examples of good practices, with both in-house and outsourcing governance. In an in-house environment, most of the chief information officers (CIOs) come from a non-technical background, meaning that they are conversant in business issues, and that is a very important factor. It stresses the importance of managing IT as part of the business. The other example is Wachovia and its outsourcing deal on electronic banking. One of the key features in a deal like that is that the CIO is a person from the outsourcing vendor. That forces the issue. The vendor CIO cannot be a techie, he has to communicate in business terms,” says Mr Kopp.

Electronic trading growth

Electronic trading volumes will increase this year, driven by the higher volume/lower yield trend that is dominant in the markets. Integration of trading systems for various asset classes will continue and it is likely that there will be convergence among some of the smaller independent software vendors.

Mr Tabb says: “We are seeing a more advanced shift toward electronic trading; right now it is becoming more popular in the US and it is going to move much more quickly abroad. That puts pressure on a lot of internal technology, both on the trading side and the market data side, as well as the integration on the trading desk. We see that [trend] continuing.”

The pressure on the technology and search for efficiency is leading along the path to automation where possible. Till Guldimann, vice-chairman at Sungard, says: “Everybody has more electronic information available. The question is no longer can you get access to information, but how quickly can you use it? How much automation can you apply to the analysis of information, in support of human decision making?”

A human cannot process the vast level of data being gathered as efficiently as a computer can. “Information comes at you far too fast to have humans sitting there and looking at blips on the screen,” says Mr Guldimann. “So what is happening is that information is fed into computers, and the computers analyse it and make trading decisions. The trading decisions are then fed directly back into the market and are executed. So the analysis, the decisions and the execution no longer involve any human being. That is decision automation.

“You can now market arbitrage simply by humans deciding what the algorithms should be rather than deciding what the point-to-point decisions are. Today, somewhere between 30% and 40% of all the transactions of equities in the US are linked to that phenomenon,” he says.

Throughout 2005 there will be a gradual move of the skilled human work into areas that are not so easily automated. “In the Western world, there are a lot of expensive white-collar people who do repetitive work. If you want to stay competitive against economies that have much lower labour costs, you had better find ways to free up these people and have them do intelligent or creative work,” says Mr Guldimann.

Mr Tabb notes that in 2005 there will be a degree of movement in reference data provision, too. “On the operational side, I think there is still a push for reference data. I think we will see more firms move in that direction. They have been looking at it for the past couple of years but they are just starting to move. I think we will see the moving camp become bigger. We are seeing Accenture and Capco, the larger firms, starting to get some traction.”

Straight-through processing

At SIBOS 2004, Heidi Miller, CEO, treasury and securities services at JP Morgan, said: “As an industry, we are a very long way from straight-through processing (STP).” Alastair McGill, marketing director at technology provider Smartstream, says he is inclined to agree, although change is in the air for 2005. He believes that the way in which STP is implemented will change significantly this year.

“We are seeing companies automate transactions across their life cycle rather than looking to automate a function,” says Mr McGill. “The customers are saying ‘we’ve got part of this transaction under control and we would like to follow it through its life cycle – automate the entire transaction’.

“To do that, we have to cut across multiple departments, multiple systems, integrate with legacy applications, maybe some home grown applications, and we may have to put in some new technology as well.”

Corporate actions will also be a key area of growth for STP automation, Mr McGill reckons. “In a large number of firms, it is still not an automated function. Where investments have been made, many people would agree that the process has not been fully automated. Today there are productised, out-of-the-box, pre-configured solutions – including workflow – that have not existed before. The ability to tackle STP within corporate actions is there,” he says.

He says that part of this rise will stem from the limited expertise that Mr Tabb says limits good governance. Mr McGill believes that through automating corporate actions “the best practice that may reside in the heads of a couple of individuals in an organisation is freed and made transparent”.

He adds: “With corporate actions, you have a couple of individuals who are highly trained and clever individuals. To try to take their knowledge and put that across into transparent business processes is a positive step.”

Alister Hoad, programme director financial services at Cable & Wireless, believes that the flow of information available via Real Time Nostro will drive STP during the coming year. “We have got a number of banks looking at the streaming feed, meaning we will be putting that information straight into their back office, which is going to increase STP.

“Barclays was one of the first to start doing that. When you’re looking at exceptions and investigations, the requirement to [manually process them] reduces dramatically when you have a lot of that information,” he says.

The increase in standards, such as international bank account numbers will facilitate STP in 2005, he reckons. “There are a lot of areas that have not been standardised before and once standards are introduced in those areas, STP rates are going to keep increasing.”

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