Money and the net effect


27 Nov 2003

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Most of us outside of the financial services sector probably assume that its pampered denizens enjoy the very best of smart and snazzy systems. The reality is a bit like the legends of lingering lunches and vintage port – some truth, mostly myth, a lot of it historical and a very mixed picture today. Take mainframe computing. In its day, this was a miracle of technology and engineering, and the first form of automated transaction processing. Since banks and utilities had the greatest volumes of transactions – and the budgets/profits, it can also be pointed out – that was where business computing gained its first firm foothold.

There has been slippage ever since. That may sound unfair to the world of global financial institutions, but you have to remember their priorities. Truly vast volumes of transaction processing, at high speeds and very often in real time, are essential and the numbers are mind-boggling. But it is no part of a bank or insurance company’s mission to be at the leading edge of technology – the very thought would send shivers down the collective spines of their boardrooms. Many financial institutions also have an overwhelming concern with security, which has clearly become ever more difficult in a world where my $29.95 to Amazon.com or a treasury dealer’s €29.5m to Tokyo are all just bits and bytes passing through the ether.

Of the customer-facing systems, online banking is the most obvious front line. It is actually only a few years old on the internet, but the systems are now mature enough to be deployed by non-clearing banks and even credit unions as well as the majors. Those of us who use online banking may occasionally wonder how we ever managed before and phoning the bank to check (probably at a cost) your current balance already seems a thing of the past. Yet online banking was slow coming to the Irish market (the first live service was by Wells Fargo Bank in the US in 1995) and is still fairly constrained in its capabilities.

You can transfer money between accounts, make payments to pre-set destination accounts. But what we really have is ‘access’ to accounts, not the full power to operate them as we might like. You certainly cannot write the ad hoc equivalent of an online cheque to a retailer or supplier even if you know all the bank codes, etc. It will be argued that the credit card system takes care of that sort of thing internationally. So it does, to a certain extent, but only if the payee has merchant status. But that would not suit a small company in a business-to-business market.

It is significant that parallel financial services are emerging to do things the banking system either cannot or is reluctant to undertake. Billpay.ie is the An Post division that is successfully managing payments for consumers, although once again on the basis of pre-set accounts. Such payment consolidators exist in other markets, in fact in Scandinavia there are some very sophisticated services. Worldwide, a number of very easy-to-use services now allow private individuals to pay each other internationally by email. The basis is the credit card system, for which services such as PayPal or Moneybookers act as intermediaries. But having registered my credit card details I can now make a payment to any email account with the recipient (also pre-registered) obtaining the codes to accept that payment and have it credited to his/her email payment company account or, for a small fee, to a bank account. Key points are that the payee does not need to be a credit card holder and the person paying never sees even the account number of the payee.

The most advanced payments consolidator on these islands is the An Post subsidiary www.billpay.ie. It currently boasts 35,000 registered users although Eddie Manning, marketing manager of Transactions Services, concedes that a proportion registered initially but never got into the habit of using it consistently. “We spent a lot of effort on phase one, getting the site as user-friendly as possible and underpinning it with rock-solid back-office systems. We were also anxious to build up the portfolio of registered payees to which our customers could make payments. There are now over 80 and growing, including all of the utilities since the ESB came on board last year as well as most of the local authorities around the country.”

Billpay.ie is currently in negotiation with some of the credit card companies and expects to be able to offer the facility to transfer money to those accounts in the very near future. In the meantime, Billpay.ie is the only online service to offer, as an alternative to direct debit, the ability for the customer to choose when and how much to pay off a particular account, for example, breaking the two-month Eircom bill into whatever amounts suit. In addition, many utilities offer a ‘view and pay’ service through Billpay.ie whereby the consumer’s bill is sent by email and then a statement of bills and payments can be viewed through the Billpay.ie account. “We also feel that Billpay.ie could offer the same useful money management facility to owner/proprietors of small businesses, because it is easy to register multiple bank accounts and nominate which one will pay what.”

Back in the inner recesses of the financial world, we all know about money, securities, commodities and other dealings live over the wires 24/7/365 – assisted by some rather notorious failures in the supervision or management of these multimillion euro activities plus the reputation for high-pressure, high-earning, high-living glamour of the dealers’ lives. Behind the hype and the movies, there are some very sophisticated and very secure systems working away settling inter-bank money transfers.

Another area where the financial services industry is a leader is in customer information and business intelligence, arguably ahead even of the more publicised smart systems in the supermarket sector with its highly competitive loyalty card systems. Financial institutions, after all, by definition know more about their customers in the first place. But they also have to carefully observe the data protection legislation that protects customer privacy although cross-selling is a key route to enhanced profitability in financial services.

A huge driver across all financial services is the appetite of consumers and businesses for a self-service model in as much of their banking and related services as possible, says Michael Baume, chief information officer of the AIB Group. “The anytime, anywhere aspect is clearly a huge convenience factor. Look at the travel industry – Ryanair takes over 94pc of its bookings online, Aer Lingus is past the 60pc mark and the travel agency business is re-inventing itself to add value, in part by using the internet itself. The financial services industry is effectively doing exactly the same thing.”

He is firm about the fact that online banking has been developing steadily, adding functionality and simplifying the process for users as much as possible. “Ad hoc payments are certainly in the planning pipeline, but it has to be remembered that banks have to safeguard the reputation, integrity and validity of the banking system to which they belong. So our fussiness, if you like, in extending internet-based services comes from the duty to protect the customer.” Baume points out in relation to intermediary services that banks and credit card companies actually guarantee transactions: “It’s not just a digit transfer.” As for security issues, electronic money is clearly an irresistible target. Globalisation of the financial services industry is its strength going forward and the essential infrastructure of e-commerce. But it has also brought a new array of threats into being.

“We are the only country that is imposing taxes on the tools of e-commerce at a time when our Government also preaches encouragement of the information society,” says Baume in direct criticism of the annual charges on credit and debit cards and the new elements in last year’s budget. “It does not make sense, since for the foreseeable future these are the only consumer payment methods for online purchases. We should be encouraging the movement to e-business in every way, not introducing disincentives.”

Responding on the topic of outsourcing, he is positive that selectivity is the key in the banking industry and in others. “The movement to outsourcing has now got as far as offshore, for example India has established a reputation and South Africa is coming along rapidly. That offshore option does not really apply in Irish financial services – or at least not yet – but some companies went into outsourcing deals initially for a straightforward, vanilla solution to cost savings. Like airports, if you increase the landings and take-offs then the economics improve automatically. But if you wanted to set up some special new service, you still have to invest. Now that outsourcing has matured, contracts are having to be re-negotiated and in a sense the clients may have lost the balance of negotiation advantage because the skills and experienced people in question are no longer theirs. So it can kick back at you,” he argues. Baume also agrees that conceptually it is quite possible that a new wave of automation in technology might in the future make most of the currently convincing arguments for outsourcing irrelevant.

By Gordon Smith