How should banks meet the challenge of growing competition from retailers for financial services? And where should their technology priorities lie? Bill Hartnett, financial services manager at Microsoft, gives Parveen Bansal some pointers.

Software giant Microsoft is well known not only in the consumer world, but it has also made serious inroads into the financial services sector, where it commands the majority market share in the server and desktop computer operating systems areas.

Bill Hartnett directs Microsoft’s perspective on the financial services industry. As general manager for the financial services sector, since 1997 he has led Microsoft’s financial services strategy group, helping the company to drive its expansion into this global industry. With his experience in insurance, business, politics and technology, Mr Hartnett offers a compelling vision of the challenges and opportunities of the financial services industry. While it may not be entirely new, his views on where the opportunities lie are interesting.

According to Mr Hartnett: “The (financial services) industry is stuck. There is a lack of understanding of their core business; they think they are in the business of transaction processing.” This, he says, is why banks focus on technology investments and their large IT departments. The banking business is all about “customer services – in the way the customers want it”, he adds.

He says that although technology is important to financial services, it is not where the business’s competitive advantage lies. There are two further problems. One is the traditional way that financial services institutions approach technology projects, which makes them “seem enormous because existing systems are restrictive, with too many point-to-point interfaces”. This is compounded by a lack of confidence in technology, he says: “No one wants to be the first to make a mistake, so everyone waits because it is easier to copy what others have done.”

The financial services industry is thus “disincentivised” to do anything creative, which is also why it has been slow in innovating, despite its dependence on technology – especially compared with the manufacturing and retail sectors. But, more notably, Mr Hartnett says, “there is a lack of appreciation of what new technology can offer”.

He notes there is current and continuing pressure to improve systems – but without the money to support this, “as most budget is consumed in keeping the shop open”, and observes: “It feels like crisis-level in the industry.”

Non-bank threat

This crisis is being fuelled by the threat from non-bank organisations. The personal emphasis on banking by insurance organisations such as StateFarm and Allstate in the US is threatening banks, he says. “The biggest threat is coming from companies such as Walmart and Tesco, who are using their retailing experience to shake the financial services market.”

Banks need to be able to deliver the personal level of service required of them by demanding customers, to deliver service over any channel – physical, online or mobile – and to counter any future competitive threats.

It seems a case of chicken and egg, with the crisis resulting in the demand for more agile systems, but more agile systems requiring more money – which can only be obtained through improved systems.

“There are some major opportunities for improvement in the market,” in Mr Hartnett’s words. He says development skills are not being used effectively, referring to the opportunity that the Microsoft.Net platform presents for enhancing developer productivity by enabling developers to continue to code in the programming language of their expertise while still being able to integrate applications seamlessly with old and new systems. “Re-using of developer skills can deliver some serious paybacks,” says Mr Hartnett. Early adopters such as Deutsche Bank, Bank of New York, Dresdner Kleinwort Wasserstein are already using the .Net platform to enhance interoperability, scalability and deployments within their organisations

Mr Hartnett admits: “It is not a trivial thing to get from where you are now to where you want to be in the future,” noting that while many executives recognise the need for business process redesign, few actually accomplish successful change because they lack an understanding of the various processes and how they are linked. “Often people within the organisation are married to the procedures,” he says.

Little innovation

Consequently, there has been little product innovation because systems can’t support it. In the same way, banks did not spend any money on customer facing systems for 15-20 years. “Instead, over the past 20 years, banks have tended to use technology to try and remove the costly personal interaction with the customers – first with ATMs and then with on-line banking. Some even charged a fee,” as Mr Hartnett points out.

Taking up challenge

Against this background of technological turmoil and with the looming threat from retailers, the challenge for banks is how to provide better customer service and offer competitive products. The threat from the supermarket retailers may have been predictable by observing their past strategies; for example, whereas once the oil companies supplied consumers from their own outlets, retailers eventually took advantage of their “convenience” factor and economies of scale to offer oil to customers directly. And history seems to be repeating itself, this time in the financial services sector.

Banks, therefore, have to become retailers like the supermarkets, and be more tuned to customers’ needs. For this, they must use the information they have more effectively and distribute and use it in the different service channels. Mr Hartnett says banks should be considering (if they are not already) how to convert the branch transactional environment to become more like a retail store, and how to empower the sales force by embracing new technologies such as mobility solutions.

However, he believes the financial services industry can turn its fortunes around with a little “out of the box thinking as well as keeping an open mind about what the banking business is”. He says: “Nobody imagined business models such as those of eBay, Amazon and the like before the internet.”

Web services technology offers similar opportunity to the financial services industry, and “business leaders are only limited by their imagination”, he says. Just as the music industry was rocked from its complacency by the introduction of online and digital music, the banking industry needs to look to technology for new innovation in business models, as in the case of online digital music provider Napster, he says.

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