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Financial Sector Returns to Life

New systems and apps drive growth

BY PEGGY ALBRIGHT

The financial services industry is slowly emerging from its devastating period of turmoil. Although new opportunities are in the pipeline, ambitious IT specialists will have to keep their ears to the ground to advance and thrive in the new business environment. Financial services companies are lining up to respond to the business-critical need for new IT systems and applications, regardless of location or type of market served. Companies in Africa, China, India, the Middle East, and Latin America, in particular, are investing in new core systems and applications to serve rapidly growing customer bases. 

Hot Sectors

In many regions, citizens formerly reliant on cash are turning to banks. And in areas enjoying economic growth, those with additional income are flocking to new kinds of banking services. New government policies, meanwhile, are making it possible for the industry to innovate and rapidly serve the new customers.

India has become well-known for its rapidly growing and innovative financial services economy. Because the Indian populace has more cell-phone subscriptions than bank accounts, the country has recognized that mobile networks often represent the citizens' only access tool to banking services.

Financial services companies have helped advance a mobile banking system that is revolutionizing its citizens' means of transferring and accessing money. The scenario is playing out in other countries, as well, and is helping propel a larger interest in mobile banking globally.

In mature markets, IT changes in the financial services industry are stimulated by a different set of needs. In regions like North America and Europe, where legacy IT systems have been in place for decades, new business conditions and policies resulting from the economic collapse are prompting companies to prepare for substantial IT system upgrades. Some of these changes have been driven by the recent wave of consolidation among international institutions, while other changes are forced by a need to increase competitiveness and operate more efficiently.

Core services and SOA

One of the most fundamental expressions of this new business environment will be a shift to new, key core services and service-oriented-architectures that allow companies to apply traditional business rules and capabilities in new ways. These circumstances are prompting leading U.S. institutions to replace core systems now sitting on mainframes.

“What we’ve seen happen, especially in 2010, has been a significant move in the U.S. by a number of institutions to replace those cores,” said Rodney Nelsestuen, senior research director for financial strategies and IT investments at the TowerGroup, a research and advisory services firm specializing in the global financial services industry.

Nelsestuen said the infrastructure change has been needed for years but was never expected to materialize, given the complications of the undertaking and the risks involved. While in general the mainframe will continue to be used as the main server, the technology upgrade is happening now, he said, because the companies “need to be ready to deliver key core services.”

Financial institutions in the US are just beginning this upgrade process. Asian companies, which typically maintain a more aggressive system upgrade pace, will move faster than the US, while European companies will lag behind.

While these shifts will be groundbreaking, they won’t happen overnight. IT spending, which had dropped by roughly 4 percent in each of the last couple of years, will increase gradually in the next few years. TowerGroup expects a 2 percent rise in IT investments this year, followed by a 3.5 percent increase in 2011 and a 5 percent gain in 2012.

Nelsestuen said that most new IT spending will be driven by companies’ needs to catch up on maintenance delayed in the recent downturn, as well as the need to introduce new technologies to facilitate mobile banking and mobile financial services. Another driver will be the need for companies to integrate services across different channels so customers can access their accounts from alternative mobile, online or in-person approaches.

Battling complexity

Whether a company serves growing or mature financial markets, IBM’s leading expert on the financial services sector believes they will be subject to fundamental forces rippling through the sector in the next few years.

Shanker Ramamurthy, general manager of global banking and financial markets at IBM, believes that companies in mature markets will need to control the complexities associated with IT-based services.

Financial services companies in markets that are undergoing consolidation or battling with an assembly of legacy systems will need to find ways to make infrastructure, services, and operations less complex in order to better serve customers and strengthen company financial performance.

Companies in growth markets won’t have those legacy issues to deal with, but they’ll need to manage growth, scale well, and bring in new channels without adding unnecessary complexity to operations and services.

“Computing has a powerful role to play” in managing the complexity that will be introduced with new operating systems, servers, data centers, and the distributed computing environments that will be required, he said. The number of data centers that IBM and other companies are building for cloud computing represents a huge opportunity for computing professionals to participate in this process, he said, as will the need for new applications and application environments associated with the new infrastructure.

Assuring quality, minimizing risk

The need to engineer applications to assure quality and minimize or control risk will affect companies in all markets and create the need for more computing experts, he said. Market and operational risks, fraud management, and a realm of regulatory compliance issues are among available application development opportunities.

In all markets, regardless of geography, companies must rebuild customers’ broken trust. To turn this around, companies will need new and better customer relationship management tools as well as new customer analytics.

Ramamurthy also said companies will need new analytical and business modeling tools that can be used to understand the implications of application-generated data in real time on company operations and customer-facing services. In the increasingly connected and global financial services industry, where data sets can yield new insights about a business, and where business events in different regions can affect one another, this capability will become not only more important but more challenging than in the past.

“That’s a huge area that is front and center that we’re dealing with and the IEEE readership will be dealing with for the foreseeable future,” he said.

Regulatory uncertainty

The landmark US financial services industry regulations passed into law in July 2010 will lead to new investments in IT infrastructure to address network capabilities, storage requirements, and services, systems and standardized rules that companies will need for handling and manipulating data.

Any mandated changes resulting from this law won’t likely impact IT organizations in financial services companies for another couple years, Nelsestuen said, because it will take regulators that long to establish new rules governing the industry and allow companies time to comply. Don’t expect any significant changes until the end of 2012.

Continued outsourcing

During the economic crisis, the financial services industry had widespread layoffs. Nelsestuen expects some rehiring as the industry moves forward, but cautions that some of the jobs won’t return. Automation and other new technologies have reduced staffing needs and, in the U.S., firms have embraced outsourcing. They will continue this staffing strategy despite its unpopularity.

IBM has a similar expectation. A recent study of business and IT professionals in Wall Street firms, conducted by IBM and the Securities Industry and Financial Markets Association, found that 90 percent of companies expect to outsource one or more of their processes in the coming year, especially compliance reporting and analytics for risk. CW (20 September, 2010)

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