Banks turn to IT suppliers to rebuild businesses

Investment banks are investing in their businesses again following the turmoil in the finance sector, but there are signs that they may be losing their appetite for in-house development.

Investment banks are investing in their businesses again following the turmoil in the finance sector, but there are signs that they may be losing their appetite for in-house development.

Why build what you can buy is the dilemma facing all IT leaders as the recovery accelerates.

Investment banks were the most obvious corporate victims of the credit crunch, epitomised by the collapse of 150-year-old Lehman Brothers in September 2008.

Before the banks were hit by the credit crunch, there was a tendency for them to develop their IT systems in-house. Today, as the sector recovers, a combination of tight budgets and supplier maturity is making IT buyers look at commercially available alternatives.

Rik Turner, senior analyst, financial services technology at Ovum, says he is not surprised investment banks are spending again. "They have been through a tough couple of years but now they are recovering in a stellar way."

Traditionally, investment banks "have had more of a DIY prejudice than other sectors" and would buy components of systems and develop them, says Turner.

Third-party products

But now there is a greater propensity towards third-party products among the big tier-one investment firms. This is partly because they have let a lot of their staff go. "The only in-house developments they want to do are for things they consider absolutely critical to competitive advantage," says Turner.

Suppliers have also upped their game, he says, and now offer complete solutions that the banks are willing to buy.

But some of the smaller investment banks will continue to develop in-house, and Getco and Citadel are good examples, says Turner.

"These guys are technology experts and will buy nothing but components because they consider technology as an in-house responsibility and they see it as providing their competitive advantage."

Mike Powell, global head of enterprise information at Thomson Reuters, which provides information services to the finance sector, has seen evidence that investment banks are investing in building up their own businesses again.

In-house systems

But they are less inclined to build systems in-house, he adds. "The appetite to build is less than before. People do want to differentiate themselves, but do not want to spend on core capabilities that are available through suppliers."

Powell says packaged software will help investment banks make up ground after a couple of years of reduced investment in systems. "Banks have put a lot of projects on hold during the slowdown and they will buy to make up for lost time."

This is in contrast to the days of the bull market, when confidence was high. "Pre-credit crunch, when people were making money, they would build systems themselves to differentiate," says Powell. "But having a large team of developers, like they had in the past, is not possible today."

He says the infrastructure and technology available from suppliers is good. This enables banks to buy the core systems and build on top of these capabilities to differentiate themselves.

Investing again

James Martin, analyst at Expand Consulting and former IT COO Europe at Lehman Brothers, says investment banks are "most definitely investing in IT again".

They will buy what they can from suppliers because it is important that their systems are standardised, he says. "Investment banks have to connect systems to each other, stock exchanges as well as other trading firms.

"They can buy commercially available products and then differentiate through the models they put in the systems and the speed of their networks."

According to Martin, meeting regulatory change is currently taking up much of the IT time at investment banks, which is diverting resources from development.

Suppliers likely to attract banking customers are those with a history of servicing the finance sector, he says.

BG Srinivas, UK head at Indian supplier Infosys, says retail banks are also beginning to turn to platform-based software from suppliers.

Infosys' core banking product, known as Finacle, has been taken up by tier-two banks in Europe, he says. Customers include Credit Suisse, Zurich Financial Services, ABN AMRO Bank, Co-Operative Financial Services and BBVA.

Off-the-shelf software

Mid-sized banks are already moving to off-the-shelf software but big banks, although keen, are holding back for now, says Srinivas. "While that will be the direction they go in the next two to three years, even for big banks they are still developing in-house to meet regulatory changes."

Post-credit crunch restructuring is taking up a lot of in-house resources, he adds. "Many of these large banks have recently been involved in mergers and demergers, so they are busy moving to common platforms. But the tier-two [mid-sized] banks are building platforms using commercially available software."

However, Srinivas says some big banks have been buying modules of software as a step to taking up a commercially available platform.

Investment banks could never have postponed IT spending for long because their businesses are so dependent on high-performance computing. But as they start to spend again, the pattern is changing, with commercial products bought off the shelf to preserve tighter budgets.

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