The financial services market has suffered many blows of late, but
modernisation and cost-saving requirements are driving IT
investment
The financial sector has long been regarded as a cash cow for the
IT industry. Competitive and demanding of its technology suppliers,
it is always ready to spend money on computer systems, from the Big
Bang of City deregulation in the 80s to e-business across the
board.
This particular gravy train hasn't hit the buffers - but it's
certainly slowed up considerably in light of blow after blow at the
heart of the financial services sector. The most recent blast
against the industry has come, ironically enough, from the chairman
of IT services company Computacenter. Ron Sandler has spent a year
looking into the UK's savings market and has concluded that
consumers are being charged too much and are getting poor value for
money. This follows the long-running saga of pensions mis-selling
and the revelation that up to 60 per cent of people with endowment
mortgages face shortfalls.
"The key thing is that financial companies are having to provide a
better deal to consumers and that is putting a restraint on their
margins," points out Brian Heale, global life marketing manager at
IT provider Sherwood. "There was a lot of fat in this sector, so
there has been lots of IT, but in the new order of things, products
will be generating much lower profits and we are at the point where
the cost basis has to change radically."
Compounding the problem, IT managers are trying to find ways to
provide systems that will support this need to cut costs and
increase the perceived value of financial products to buyers while
streamlining existing legacy systems.
New technologies hold out the promise of cheaper, more flexible
systems. It is particularly important in the present climate for
finance houses to be able to prove they are complying with new
legislation, such as the Financial Services Authority's N2
regulations, designed to prevent the mis-selling of financial
products to consumers. These regulations came into effect at the
end of June and compliance requires processes to ensure staff are
qualified to handle a changing range of customer interactions to a
recognised standard.
Many finance companies may struggle to comply with this new
legislation and find it hard to be as flexible in their response to
market conditions as they would like, mainly because they have
large existing legacy systems that cost a lot to maintain and which
fail to provide them with integrated information systems. Estimates
vary, but Heale says it is not uncommon for up to 80 per cent of an
insurer's IT budget to be spent on legacy systems.
"This doesn't mean all that previous investment was wasted. It's
just that these companies have lived to their means, the rules have
changed and they have got to find ways to tackle their cost
structures. They have to migrate into a new world, into
multi-distribution channels, and physically that journey is
difficult," he argues. Heale estimates it could take up to five
years for some financial companies to migrate their legacy systems
to more flexible ones.
Surviving the market
This, of course, is an opportunity
for the IT industry. Tools are needed to support consolidation and
migration, as well as the new systems themselves. But the backdrop
to these opportunities is a sector keeping a very tight rein on IT
spending, so there will be more emphasis than ever before on
proving real returns.
"It's a difficult market and it's getting worse," says Geoffrey
Strage, director of sales at Business Systems International, which
has been selling systems to financial companies for ten years.
"This market is traditionally tough on its suppliers and now times
are tight, everybody is feeling the squeeze, especially
resellers."
The only way to survive in such a market, claims Strage, is to keep
highly skilled staff on board and to focus on giving the best
possible service, because in this market, there are no second
chances. "If you screw up in any way, you don't get any more
business. It requires incredible attention to detail," he
says.
One area that's been thrown into sharp relief by the economic
downturn in the finance sector has been e-business, particularly
e-procurement. John Rees, UK manager of Commerce One, acknowledges
that initial enthusiasm for the potential of e-business has been
tempered. "There have been pluses and minuses. Barclays' B2B
division closed last month because of much lower levels of
e-procurement than expected. But having been part of the initial
hype and ridiculous claims for markets, we now see renewed interest
in how to use these tools to hook up with customers and reach out
more efficiently," he comments.
Rees believes the finance sector wants to do more than just cut
costs by implementing online systems. "We're seeing more interest
in strategic sourcing than e-procurement. In times of a sluggish
economy, companies are looking for speed, efficiency and
reliability," he reveals.
Nonetheless, cutting costs, while improving customer service and
supporting new products, is still top of most IT managers' list of
priorities in the financial sector. This is leading to greater
demand for demonstrable returns on any IT investment. Some
investment is unavoidable, such as software to provide
compliance with ever-changing banking and savings legislation.
Investment is also being made across the securities industry in
systems that will move financial companies closer to the goal of
straight-through processing (STP), which will cut their costs and
enable them to handle trades and transactions more efficiently. The
ultimate goal is to be able to settle a trade the day after it is
done. This 'T+1' target is not expected to be reached by many
financial companies until 2005 and will involve a good deal of
focus on enhancing existing systems.
A study by Meridien Research in November 2001 highlighted the ten
most important requirements that must be implemented across the
financial services industry if STP is to become a reality. These
include greater connectivity between financial firms and their
clients and much greater use of third party software and services,
rather than finance firms trying to develop their own systems
inhouse.
This looks like encouraging news for IT suppliers: US financial
services research firm TowerGroup has found that financial
institutions expect to spend at least $19bn in the next three years
to ready their organisations for STP and T+1. "We have seen the
first generation of STP initiatives over the past decade, which
focused primarily on automating tactical areas of the back office,"
comments Laurie Mascott, European vice president at integrator
webMethods. "Today, we are beginning to see the next generation of
STP, which is STP as a true strategic initiative, spanning the
front, middle and back office and the full trading lifecycle,
inside and outside the four walls of the enterprise."
As well as moving to more standardised internal systems, many
financial firms are also looking to standardise their networks on
IP connectivity, to provide them with greater flexibility as they
improve their connectivity with other firms
and their clients.
Financial security
Alongside all this, security
continues to be a key driver for IT investment right across the
finance sector. Neil Ledger, founder of equIP Technology, which
provides security software, says the channel has an important role
to fulfil in this part of the market. "Finance companies don't just
want security products. They need expert advice about the best
security technology to meet their needs and ongoing technical
support. Security is a specialist area and security products can be
complex to deploy. These customers may be well schooled in network
infrastructure, but often don't know enough about security to do
the job themselves," he notes.
Ian Tickle, UK channel manager at Tripwire, which provides data
security software, agrees. He says financial organisations are
under great pressure to maximise their system uptime and maintain
high-security systems. "They are becoming increasingly aware that
although perimeter security systems are vital, these can be only
one part of an overall system. With the increasing awareness of
change control from authorised staff, we are seeing strong demand
for systems that manage the integrity of firms' operational
environment," he states.
Markets are moving all the time and it is not just internal
security that has to be addressed by the finance sector. "Banks
worldwide are constantly engaged in investigating how biometrics
can be applied for risk management and as a way of delivering new
services to a growing electronic customer base," points out Gerry
Kelly, business development director at Trust5. He says banks are
keen to protect their existing remit to transact payments and
supply payment systems.
With expansion of payment via wireless devices, secure payment
systems will be needed. "This is an area of great opportunity for
banks, but will require new technologies and risk management,"
Kelly claims.
Main players
Finance has always been one of the
mainstay markets for the IT industry, targeted by vendors of all
sizes. But times are tough: according to Gartner Dataquest, 42 per
cent of financial services companies surveyed late last year
planned to reduce the number of IT vendors they worked with,
compared with 22 per cent in 2000.
At the top end of the server market, where the finance sector has
been a major buyer, sales fell in 2001 as finance and telecoms
companies clamped down on spending. Compaq is still the top server
supplier, with a 36 per cent share of the UK server market,
followed by Dell and IBM.
Total UK server sales in the third quarter of 2001 were 48,240 -
down 21 per cent on the same quarter in 2000.
How big is financial services?
- Worldwide IT spending for the financial services industry is
projected to total $350bn (£224bn) in 2002, a seven per cent
increase on 2001, according to Gartner Dataquest
- The sector will continue to experience single-digit growth
through 2005, when spending will surpass $474.4bn. Software and IT
services will be the fastest growing components of spending from
2000 to 2005, with a five-year compound annual growth rate of 13.3
per cent and 11 per cent respectively. Analysts say IT services
constitutes the largest single segment of IT spending by financial
services, according to Gartner
- Banks and securities houses spend more on IT than any other
sector of the economy, according to research from Credit Suisse
First Boston. Financial institutions in Europe spend more than
E160bn (£101bn) on IT - more than manufacturing and government put
together
- Output in the UK financial sector fell by 0.2 per cent in the
first quarter of 2002, as the number of financial transactions on
the stock exchange fell, according to government statistics
- UK financial institutions plan to spend £586m on
customer-facing computer systems, of which £471m will go on call
centre and branch computer systems. Spending on Internet-based
customer systems will be £69.8m, according to
www.cityit.co.uk
Top market drivers
The combined pressures of economic
recession, a re-evaluation of spending on CRM systems and concerns
about inadequate infrastructure put many IT investments within the
finance sector on hold last year, even before 11 September.
Since then, IT investment has mostly been driven by renewed desire
for security, consolidation of existing infrastructure and the need
to optimise existing investments in e-business and CRM.
Euro-enablement is another key driver.
Key areas of investment are:
- Cutting costs
- Improving customer service
- Supporting new products, such as smart cards
- Demonstrable returns on IT investment
- Higher visibility of management accounting
- Compliance with legislation
- More efficient real-time information sharing and the move to
straight-through processing
- Data management: data back-up and business continuity
- More efficient e-mail management
- Streamlining business processes and consolidating multi-channel
customer services, including e-services
- Consolidating complex IT systems
- Risk control and security
- More efficient storage systems
Useful URLs
www.commerceone.com/www.e-business.com/www.equiptech.co.uk/www.towerlimited.com/www.trust5.com/www.tripwire.com/