IT and financial services could be seen as a case of perfect symbiosis. The financial services industry is extraordinarily dependent on technology and the technology industry is, conversely, extraordinarily dependent on financial services.
The exact size of the IT spend by Irish financial services firms is not publicly available but it could quite feasibly run to several hundred million euro a year between hardware, software and services. According to IDC’s most recent report on the sector, IT spending by financial services organisations is expected to grow by 6pc in 2007, on top of a 7pc increase in 2006.
The report says the growth of the IT market has two key drivers: increased competition among banks and pressure to meet sales targets. The biggest IT challenges facing banks, currently, are: standardising and integrating IT infrastructure, installing systems and migrating to new platforms, along with security.
Meanwhile vendors see several challenges in the market at present. Fujitsu Services has traditionally been strong in the public sector, particularly in Northern Ireland, but, according to David Menzies, client director for financial services, the banking and insurance sectors have grown rapidly in recent years and now account for 15-20pc of its total all-island revenues. Banking customers in the Republic include AIB, Bank of Ireland Life, Anglo Irish Bank and Irish Life & Permanent.
“Financial services is one of our market verticals and we’re seeing more and more activity in that area,” says Menzies. “We’re developing more business with existing customers and looking for new business as well.”
Menzies believes that competitive pressures are driving banks to invest heavily in IT solutions. “Banks are big-volume businesses but they’re operating at low-margin transactions. Given the competition that’s coming in from UK and Europe, the indigenous banks, while still producing very strong results, have to work harder to produce those results on a year-in, year-out basis. They have to be more efficient – do more with less – and they see technology as giving them the tools to allow them to do that.”
Menzies notes that IT investment has recently been concentrated in a number of areas, notably compliance.
Another big-budget item is multi-channel banking – the ability to deal with customers across a number of platforms, including branch, telephone, internet and mobile. These systems, whether they are built on Microsoft .Net or Java technology, have one aim: to extract the data residing in a bank’s legacy systems in a form that can be used by front-end customer relationship management (CRM) applications to enhance customer service.
“Getting the data out of legacy systems and putting it into web-based browser applications is what multi-channel banking is all about. That’s how people want to deal with banks these days; they don’t want to be going into a branch the whole time,” he says.
Banks have also been investing heavily in security in an effort to combat fraud such as internet scams, skimming of credit cards and ATM fraud. It is, according to Menzies, a hugely innovative area with new solutions emerging all the time. Out of Fujitsu’s R&D labs has recently come a new biometric system called palm-vein authentication. This identifies genuine customers by comparing the vein patterns on the palm of their hands against a previously recorded infrared colour image. This image can be stored, for example, on a chip embedded in a debit or credit card. The customer waves his or her hand over an infrared scanner at the ATM, allowing the software to make the match and verify the user’s identity.
Palm-vein authentication is being used by a number of large Japanese banks and could well be seen in this part of the world shortly. “It’s a technology that we’re bringing to Irish banks and they’re beginning to show an interest in it,” outlines Menzies.
Other innovations that Menzies believes we’ll be seeing a lot more of include cash recycling machines, which automatically count the money taken in by tellers and check it for counterfeiting, as well as ATM machines that can offer an advanced array of services rather than the three or four offered in the Irish market.
Paul Power, who is director of financial services at SAS Ireland, states things simply: “It’s innovate or die in this marketplace,” he says, referring to the challenge facing traditional banks as new players enter the market and ramp up the competitive pressure on the incumbents.
He believes banks have been cushioned against the chill of competition by the growth in immigration and the buoyant economy, but should an economic downturn occur or immigration slow down, they would need to innovate to stay ahead of the posse. This is where customer insight comes in. “There’s a tremendous opportunity for the banks to understand and retain their customers better; to segment the market better and to cross-sell more products to existing customers. But you need a structure and a strategy to do that and there’s where real customer insight in invaluable,” says Power.
In the past, customer insight might have come under the CRM umbrella but Power believes the CRM tag doesn’t accurately capture the role played by SAS’s technology. “Through our advanced analytics we can help organisations identify the customers that are likely to churn and the factors that are likely to affect customer retention; devise an up-sell or cross-sell strategy and help them manage their marketing campaigns.”
As one of the biggest players in the business intelligence area, SAS’s number-crunching analytical software has been used for many years by a number of large Irish financial organisations including Bank of Ireland, AIB, IIB and EBS. The company’s product set is based on its Enterprise Intelligence Platform, a business intelligence (BI) engine that integrates, stores, queries and analyses data. On this foundation, SAS has built products serving a number of vertical markets, including financial services.
An area that SAS has been traditionally strong in is credit risk analysis. According to Power, SAS software is the most widely used credit risk scoring tool in the UK and Irish markets today, underpinning some 70pc of all credit risk checks. “If you’re looking to take out a mortgage, chances are the bank’s decision whether or not to grant your request will have been made using SAS technology.”
But Power has seen a change in the spending patterns on IT by Irish banks in recent years. “Around the turn of the century, the expenditure was on e-commerce, on Y2K compliance, euro conversion, ERP and CRM. The pattern today has shifted towards expenditure on regulatory compliance and core banking systems to enable a shared services approach to IT.”
He thinks that the shared services model will be extended to include BI, which, in common with HR, finance and other corporate functions, has the potential to be centralised for efficiency reasons. “I think BI historically has been guilty of siloism – understanding what your department needs but not having a holistic view across divisions, customer base or geographies.”
While all this spending sounds like a bonanza for IT providers, the spending has been neither reckless nor limitless. In fact, Irish financial services organisations, Power notes, have been on a crusade in recent years to get their IT spending in line with the international average – about 13pc of the cost base. Traditionally, he says, some Irish banks would have been a few percentage points higher than this.
In terms of other growth areas, Power sees strong demand for systems that can deliver timely management information in a user-friendly format that is tailored to a business rather than a technical audience. Management teams want “key numbers rather than 20-page reports”, he observes.
Looking to the future, Power sees a growing demand for predictive software – packages that help customers “look out the front windscreen”. Move over CRM: the term being used to describe this next technological great leap forward is ‘customer analytics’.
Like the others, Aidan Gregan, senior executive, financial services, at Accenture, agrees that compliance has been a key driver of IT investment but says that the savvier banks, rather than seeing the investment as ‘dead money’, are looking to extract value from it. “As a result of the compliance spend, what some of the high-performing companies are doing is leveraging that investment to provide cross-selling opportunities for the business and increased service benefit for customers.”
Another growth area for investment is management systems – tools that allow the bank to monitor its IT systems to check they are working properly and delivering what is expected. “Companies are looking for metrics and information about how IT is being delivered, both in terms of the success of project delivery and in terms of how IT itself has been able to serve the needs of the business around service management, systems availability, predictive monitoring of operations and so on,” says Gregan. To meet this demand, he explains how a number of technology providers have begun to focus on software and solutions that manage the IT investment lifecycle.
The IT investments made by any financial services organisation will be split between those that maintain existing systems and those that drive new business capability. According to recent research done by Accenture, the better-performing banks are those that concentrate on making their existing IT systems as efficient as possible in order to release the funds required for investment in new IT systems, which can drive new business opportunities.
Gregan affirms how banks that deploy software most successfully and efficiently tend to be those that can convert the usual activities around design, development, testing and rollout of new systems and applications into quasi-industrial processes. In other words, instead of being one-off and bespoke, software development becomes low cost, repeatable and reusable.
Software testing the open source way
Banks and other financial services organisations are huge consumers of software – both bought-in software and software developed in-house. The amount of time and resources being spent on software testing is rising all the time as demanding compliance legislation drives more releases, the cost of failure increases and software functionality expands.
While there are several proprietary testing tools on the market, one Dublin-based software house is seeing a growing market for open source test automation tools. Enovation Solutions, which specialises in open source software development, offers a range of open source testing tools that automate software testing. The company recently ran a half-day workshop on this topic, which was heavily oversubscribed.
Dean Horrigan, testing services manager with Enovation, says the move to open source is being driven by the high cost of software testing tools. “Commercial test tools are extremely expensive, costing on average over €5,000 per licence, therefore the investment is simply too high for most companies. In a typical small site with 10 licences the cost is already €50,000.”
Horrigan emphasises that automation will not work for every company or in every circumstance. “The question you should be asking before embarking on the automation route (commercial or open source) is whether your product, its technology and your development approach is suited to automation. There is no point automating a product that is:
> A one-off release
> Undefined and extremely configurable
> Extremely complex from a business perspective
> Dependent on aesthetic testing
The first question every site must answer is: ‘Will automation work for us?’
The good news is that, when the answer is in affirmative, there is a rich array of open source tools to choose from – tools such as Eclipse, PureTest and Selenium in the Standard Functional Regression area and OpenSTA and JMeter on the Performance Test side.
There was a time when financial services firms would have run a mile from open source, but not anymore. Horrigan feels that open source automation tools may soon be joining the brace of other open source technologies that now form a key part of the IT infrastructure in many large institutions.
“The success of open source technologies, such as Linux, Apache and FireFox, has shown the world that commercial tools are not always the only option,” says Horrigan. “This has changed mindsets and allowed open source into the mainstream business world. No longer are open source products thought of as back room enterprises with anorak engineers. They are now increasingly professional outfits, simply working a different business model.”
Fast facts: Top priorities for technology in financial services
> Standardising and integrating IT infrastructure
> Installing systems and migrating to new platforms
> Multi-channel banking
> Making legacy data available on the web
> Credit risk analysis
> IT management systems
By Brian Skelly
Pictured – Paul Power, director of financial services, SAS Ireland