Money is information: banking and information management are fast becoming the same thing. David Sharp of business and IT consultancy Charteris assesses what this means for the `hothouse’ world of financial services – Market Focus – Cover Story
THE FINANCIAL SECTOR is in something of a paradoxical situation today as far as communications and IT is concerned.
On the one hand, the sector is clearly suffering a severe economic downturn that has led to extensive redundancies and the downsizing of many departments, yet the core services which financial institutions such as retail banks, insurance companies, private banks and investment banks provide are still as important as ever they were. And the technology used to empower these services is developing more quickly than ever before.
Despite the downturn in the financial sector, the financial services industry continues to operate at the leading edge of what is happening in the communications industry. The general pattern in the industry is that technologies that are initially adopted inside an organisation for catalysing communication amongst employees are subsequently extended to give customers new ways of communicating with the organisation.
E-mail is a good example of this. Initially, introduced inside financial companies to give employees a new way to exchange and share information, it is gradually being extended as a means for communicating with customers.
As one might expect, e-mails that originate and terminate inside an organisation tend to be more secure than those that originate outside an organisation. The point is that while secure e-mail communication technology is still emerging: it will be some time before banks can trust e-mail instructions from customers sufficiently to act upon them.
An extremely useful way to understand current developments in communications technology is to categorise this technology into three areas: emerging; maturing and established.
* Emerging means that any institution deploying it is taking a risk because the technology is not yet tried and tested and it is not clear whether it will provide a substantial return. Emerging technologies are new to an industry sector and show potential for giving competitive advantage in the future.
* Maturing means that the technology is moving in the direction of widespread acceptance but is not everywhere yet. In other words, it is perfectly feasible for an institution which deploys this technology to gain a real–and potentially lasting–edge over its rivals.
* Established means that the technology in question is pretty well expected by the customer and that no real competitive edge can be gained from implementing it. A business without them may be at a competitive disadvantage.
The financial services industry sector tends to adopt new technologies earlier than most other sectors. This is because the potential returns from using advanced technology for administering and providing financial services are usually formidable, and in the race to win customers, technology has long been recognised as playing a crucial role in the winning of this battle.
Figure 1 illustrates a snapshot of some technologies and services being offered for retail banking, and their categorisation as emerging, maturing or established.
Multi-channel banking–controlling a bank account over the telephone, Internet, ATM or branch–still provides a means for one bank to differentiate its service from another. Internally the banks separate the interface to their banking systems (i.e. the access channel) technology from the banking function itself (e.g. they system that stores balances and debits/credits accounts). This enables, for example, a balance enquiry made over the phone to use the same underlying banking system and give the same answer as a balance enquiry made in a branch or through an ATM. Multichannel access is a maturing technology: not all banks offer this or deliver it effectively.
Only recently have leading banks offered real-time banking where an action over one channel (e.g. a deposit or transfer via an ATM) can immediately be checked through another (e.g. a balance enquiry by telephone).
Linking of new software to control legacy systems has enabled leading banks to innovate new products and services more rapidly than their competitors. This technology is still emerging but is enabling a few banks to offer special account features such as automatic alerts if you go overdrawn and automatic transfers of money from one account to another if a certain balance is reached. At the leading edge, banks, such as Woolwich, Barclays, Egg, Intelligent Finance and Virgin One, have introduced systems that allow a current or savings account credit balance to be subtracted from a mortgage or loan debit balance before interest is calculated. Such an “offset” arrangement can give significant customer benefit as it can save money, reduce tax and potentially shorten the time it takes to pay off a loan.
Not illustrated in Figure 1 are a host of additional technologies under consideration by the financial services sector for incorporation into their infrastructure. These include:
* Unified messaging
* Voice over Internet Protocol
* Electronic identity: a system where customers are given electronic identities, verified using a smartcard and secret number and/or biometric feature (e.g. fingerprint). E-mails (and other electronic communications) that have been digitally signed using the smartcard or biometric are treated as authentic and can be used to transfer money. This technology is still being made robust enough for widespread use.
The speed of deployment of these technologies will depend on the balance between customer benefit, business benefit, risk and potential return on investment.
The future is likely to hold even more technological change and at a faster pace. On the communications front, financial institutions are currently seeking to cut costs with one hand and to remain at the forefront of progress with communications technology with the other. No doubt they would like to put a moratorium on spending money on communications solutions until business picks up, but doing so carries a serious risk. Understanding why delaying making maximum use of communications is so risky is fundamental to understanding what is going on in the `financial sector communications business’ today.
Communications technology, like all technology, is deployed in the expectation that it will bring the organisation clear business benefits. There are no exceptions to this rule.
If the business benefits are kept firmly in mind, and made the main criteria for the deployment, there is not a great deal that can go wrong, at least with the initial planning.
The overriding point on which all this planning needs to rest is that in the financial sector banking and information management are increasingly the same thing.
All of the history of banking up to about 1970 was essentially–like every other financial sector activity–a matter of safeguarding and controlling the availability of money in its physical form.
Today, everything is different. Even the very nature of money is a matter for philosophical debate. It is true that money held in bank accounts can be converted into cash at will, but only the most naive would assume today that only cash is money. The fact is that by far the greater proportion of money today is simply information held in a computer system. It is only a short step away from making this observation to extending the idea further and to realising that money is itself basically information. Managing this information is really what the job of the communications specialist working in the financial sector is all about. In essence, in today’s financial sector, communication plus information might be said to equal a financial institution.
What is the main consequence of this observation? It is that the business processes used by financial institutions and the IT systems that are also used by that institution are becoming intimately integrated. If the IT is not performing to the right level, the support for the business processes is likely to be profoundly unsatisfactory. And what is true of IT in general is especially true of communications technology, simply because this technology is the `front office’ of the liaison between the institution and its customer.
But to understand what is happening today in communications for the financial sector we need to do more than consider conceptual points relating to how money is becoming information and how adding communication to that information basically involves creating a financial institution. There is also the other side of the coin–the customers, and ultimately their needs are the principal driver of what is going on.
The ubiquity of mobile phones, personal digital assistants, palmtops, internet access and the ever-improving memory and processor speeds of the chips in PCs, are transforming our world almost at a rate too rapid for us to monitor it. Communications technology is therefore both hidden–typically in leased and proprietary lines operated by institutions and related switching systems–and also visible in the different access tools customers use to network to these communications systems.
WHAT LESSONS CAN BE LEARNED?
The key is to identify which technologies are going to provide most benefit for the customer and competitive advantage for a business’s operations. What lessons can be learned beyond the finance sector?
Firstly, the categorisation of established, maturing and emerging technology still applies, but it must be adapted to the industry sector of interest. For example, a technology that is well established in the financial services sector may only be emerging in, for example, retailing. Generally, the financial sector can be used as a guide for what technologies are likely to become available to other sectors to gain competitive advantage.
Secondly, the general technology trends that are affecting financial services infrastructure are just as relevant beyond it. For example, technologies that link legacy systems, bringing in new software to add additional functionality have wide applicability beyond financial services. In mobile telecoms, for example, the established infrastructure is being upgraded to offer higher speed data services and services based on a mobile phone’s location.
Thirdly, introduction of new technologies always has some potential business benefit associated with it and also some risk associated with its introduction. In financial services, active risk management is essential, as money and information are converging: increasingly the amount of money an individual or corporation has is represented solely by the information stored in a computer system. A bank’s worst nightmare is if this information becomes corrupted as a result of introducing a new technology. To reduce this risk banks use internal and external resources to identify risks and decide how to actively manage them. They set up trials and use extensive testing of the robustness of new services before they are released to customers. They set up internal work programmes carefully planned to ensure that business benefits are delivered in a way that keeps risks down to an acceptable, low, level.
Among the crucial strategic questions relating to implementation that are relevant to all deployments of technology in any vertical market, but are especially important in the hothouse environment of deploying technology to maximum competitive effect in the financial services sector include:
* does your IT adequately support your business processes?
* are you finding that your IT is helping you or hindering you in your bid for competitive expansions?
* are your new customer-facing systems properly integrated with your traditional databases and legacy systems?
* are your business strategy and IT strategy in alignment?
* is your IT architecture right for your needs? Will it support the changes that are needed in the future?
* have you wound up with any wasteful duplication of resources?
These are all areas where a communications technology specialist engaged to provide general guidance can often provide enormous cost-savings and avoidance of repeating mistakes made by others.
Yet no matter to what category a particular application of communications technology belongs, no implementation is likely to be a success unless the financial services organisation in question has orientated its mindset very thoroughly around meeting customer needs. Charteris plc. Tel. 020 7600 9199. Fax. 020 7600 9212 www.charteris.com
Figure 1: Emerging, maturing and established technologies and
services being offered for retail banking.
Established Maturing Emerging
banking using –offsetting of
Customer 24 hour access branch, ATM, savings and
benefit to cash Internet, borrowings
telephone, and –automatic alerts
mobile phone and transfers of
Business more locations Ability to add Ability to
Benefit without the new channels innovate new
overheads of products more
a branch rapidly
Automatic separate the
Technology teller machines banking Linking of new
plus magnetic function (e.g. software to
stripe cards debit/credit) control legacy
from the systems
(e.g. branch /
Potential for competitive differentiation
Low [right arrow] High
COPYRIGHT 2002 DMG World Media Ltd.
COPYRIGHT 2002 Gale Group