Where the money is

The financial services market has suffered many blows of late, but modernisation and cost-saving requirements are driving IT...

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

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