No sector has been so radically transformed by IT as financial services. Boris Sedacca looks at how the industry is meeting spiralling demand for faster and safer transactions.
The IT-driven transformation in the financial services industry has been one of the sector's biggest success stories in the past 40 years. It has covered back-office and front-office automation, and enabled customers to exercise comprehensive control over their accounts through online banking. Along the way, people and paperwork have been displaced by machines and software in myriad ways.
Banks have also started integrating many more processes to give themselves a full customer relationship management capability.
Banks are now technologically driven businesses. Most products and services, from loans to credit cards, are marketed through computers and telephones, instead of traditional branch distribution.
According to a recent Gartner research note, customers do not buy channels, and there is no such thing as a "web customer" or a "branch customer". Because customers use multiple channels, banks can no longer afford to approach front-office management as a series of separate strategies and solutions for each channel.
The trend is to serve customers in an integrated manner across all channels - web, phone, branch, automatic teller machines or the correspondent network, including out-of-premises or in-store branches. No single technology will enable banks to achieve that objective.
But Graham Taylor, vice-president for Gartner's banking team, says a new trend is developing. "Interestingly, what we have seen since the mid-90s is the banks persuading customers to serve themselves, and this has been so frighteningly successful that nobody talks to their bank any more.
"The banks are starting to get worried that they cannot talk to their customers, and so cannot persuade them to buy products. They are changing their way of thinking now.
"It is hard for them to sell credit cards and loans online. Customers buy them online, but not necessarily from their bank. If you buy online, you will probably go to a comparison site.
"The banks are now trying to pre-empt that and get chatting to you instead of trying to get you off the phone as in the past."
Taylor has identified customer data integration as a major mission in recent years. Data on clients has improved at the larger banks, and although many UK banks are not there yet, they have data integration programmes in place.
"Worldwide, the trend is to try to reward customers in a way that encourages them to place more products with the bank," says Taylor.
"A number of US banks now have loyalty schemes, like Citibank's Thank You programme and Wells Fargo's Keep The Change programme. The next phase is to make personalised offers to clients that are better than those offered by the comparison sites.
"That is very difficult to do from an IT point of view because historically, pricing was part of the application that ran each product. The terms and conditions of a mortgage were set by the mortgage software, the conditions of shares by wealth management software, and none of the systems talked to each other."
The rise of online banking has led many banks to introduce two-factor authentication by adding another level of security for system access. Two-factor authentication usually uses something a user knows, such as a password or Pin, plus something they have, such as a security token, making impersonation more difficult.
IBM is developing software that could let IT directors deploy biometric user authentication systems based on voice-recognition technology. With "conversational biometrics", the acoustics of a user's voice can be analysed without the system needing to recognise spoken words.
Unlike other biometrics, such as fingerprints, which require specialised sensors, conversational biometrics require no additional client hardware - only a suitable microphone, such as a PC mic, telephone or mobile phone.
Central to the systems of all banks and financial institutions is Voca, formerly Bankers Automated Clearing System (Bacs). Voca is the largest processor of direct debit and direct credit transactions in Europe. In 2005 it processed more than five billion financial transactions, including over 90% of UK salaries and 70% of household bills.
Voca used BEA System's Weblogic to implement its new payment platform, part of the UK's critical national infrastructure. The Voca platform was developed to assist banks in Europe as they migrate to the Single Euro Payments Area (Sepa), an initiative that will introduce a truly single market for payments services by January 2008.
The hardware is based on Sun Fire S2500 servers with an Oracle database. With 12% year-on-year growth, the previous Voca platform was reaching the end of its life.
The Voca platform underpins the UK economy, processing 5.5 billion transactions a year, totalling £3tn in 2005.
Chris Dunne, head of IT and operations business management at Voca, says, "Essentially there are two ways of moving money around in the UK between bank accounts. One is the Clearing House Automated Payment System, which is a real-time settlement system, typically for high-value transactions such as buying or selling houses. It is relatively expensive, but it gets there the same day.
"The other is Bacs, used for the vast majority of financial flows between banks in the UK, such as direct debits, direct credits or standing orders."
Dunne explained that volume peaks occurred at certain times, such as before bank holidays. "On a peak day a few years ago, we were processing 35 million items a day. We are now processing well over 70 million items a day, and next year we anticipate peaks of 100 million items a day.
"Now that we are a commercial company, we have to build a system that can not only do the bread-and-butter processing of the three-day payment service, but can also process payments in Europe or other types of transactions.
"We had to make sure that what we built was not a one-trick pony. At the moment, you have about 26 different clearing houses in Europe, all doing their own national payment processing. In some cases there is more than one clearing house processing payments in a country.
"With Sepa, all of that changes because it should be as cheap for me to make a payment to you across Europe as it is for me to make a payment within the country I am in at the moment."
Voca has about 100,000 corporations connected to its system, including all the FTSE 100. Dunne says connecting them all by "bits of string" (circuit switching on telephone or leased line) is expensive and unreliable. The web is the obvious way, but it has to be secure, so Voca built in encryption using public key infrastructure (PKI).
"With PKI, the transaction comes with a certificate that is valid only for the person who sends it," says Dunne. "The different banks provide different trust schemes, so they have slightly different flavours of PKI. We had to develop a way of knitting them all together, with an interoperable PKI that could cope with different trust schemes.
"When we built it as part of our Bacstel-IP service, it took us two years to get people off it because they loved the old Bacstel, but we migrated everybody by the end of 2005."
Case study: LSE in real time
The London Stock Exchange has more than 3,000 listed companies, 335 member firms and its real-time financial data reaches more than 100,000 screens worldwide.
The stock exchange provides four main services - equity markets where businesses can raise capital, trading services, market information and derivatives.
In 2003 the London Stock Exchange launched a four-year technology roadmap programme designed to deliver greater agility, capability, scalability and improved performance.
One of the most significant steps in the roadmap was the implementation of a new ticker called Infolect, a system for disseminating real-time market prices. Infolect was designed to support the anticipated 100% growth on the Sets market - the stock exchange's electronic trading service for UK blue-chip securities - by the 2008 financial year.
The London Stock Exchange deployed Cisco's Services Oriented Network Architecture to speed up data transfer for the distribution of real-time market data to client premises.
It has deployed a Cisco IP infrastructure for its own internal network and a separate Cisco-based network to provide connectivity between more than 100 servers that make up the Infolect system.
Ian Bond, datacentre consultant at Cisco, says, "The exchange wanted to move to a new architecture in order to send out real-time trading information to 100,000 or more trading desks.
With the old infrastructure, the delivery of information was about 30 milliseconds, but that has been reduced to about two milliseconds.
"In terms of resilience and business continuity, the stock exchange runs what is known as an active-active model, where you have more than one server or set of servers running applications in parallel at other datacentres.
"Typically you have datacentres separated by up to 15 miles, because although you want them to be physically separate, if you are running active-active, you cannot have them too far apart because of the need for synchronisation between sites without loss of performance."
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