Ensuring competitiveness is always a key consideration for any business. In today’s economic climate, however, financial organisations are finding that they must go beyond tried and tested methods if they are to reduce customer churn and encourage growth. Technology usually affords an effective means of creating competitive advantage. Today, however, soaring integration costs are severely limiting the ability of banks to replace legacy IT systems, effectively removing this as a channel for delivering competitive advantage.
Many banks today find themselves caught between a rock and a hard place. On one hand they want to be able to offer truly innovative products to their customers that enhances the account holder’s experience and rewards loyalty. On the other, they are required to increase flexibility and reduce costs, which often mean that banks are left with IT systems that lack the interoperability needed to improve the end customer experience.
The problem stems from how banks invest their limited IT budgets. Gartner has revised downward its outlook for 2012 global IT spending to 3.7% (or US$3.8 trillion) from its previous forecast of 4.6% growth, providing just one indication of the restraints likely to be placed on IT budgets in the next year. Many banks are facing the same challenging situation. Faced with an IT upgrade project many are finding themselves stuck with obsolete software, high integration costs and complex IT systems.
For large financial organisations, the costs associated with IT integration often make or break the business case for the deployment of new applications and purchased packages required to improve customer propositions and increase back-office effectiveness. The cost level is determined by the degree of standardisation of interfaces from a technical and a definition point of view.
Typically, chief technology officers (CTOs) and chief information officer (CIOs) – who must manage squeezed IT budgets against an increasingly complex IT and business environment – view interoperability as the critical building block to greater efficiency, agility and cost reduction.
Interoperability is King
The vital role interoperability plays is never more obvious than when banks are required to upgrade or replace legacy systems. Many banks are hesitant to go down the proprietary route, with less than a handful of banks today building their own software. The most common approach is to purchase a commercially available point solution, with a specific piece of functionality that will support a particular business function or challenge. But, often the integration costs are prohibitive or make building a business case particularly challenging.
One approach banks take is to try and avoid the issue by buying a front-to-back solution from a single supplier. In this scenario, the supplier usually takes on the headache of integration as a part of the overall project. While this may be easier for the bank, it is costly and time-consuming and few financial organisations can justify the cost in the current economic environment – integration costs are often triple the purchase cost of the original software. As a result, many are opting to replace specific parts of their existing IT, which have either become obsolete or are difficult to maintain, with off-the-shelf software.
Yet, banks adopting this approach frequently want a best-of-breed solution which allows them to cherry-pick the most superior solution for each business functionality requirement. The end result is a multi-vendor environment which may also include some in-house applications. However, the integration costs are so high that it can be hard to draw up a positive business case for replacing old functionality with new. On average, the financial services industry spends 58% of IT budgets on running the business and only 21% on growing and transforming the business. As a consequence, the CIO may opt for a lower quality or sub-optimum solution in order to meet budget constraints.
But what if integration costs were not an issue? While it is increasingly clear that service-oriented architecture (SOA) is the best technology for internal and external interfaces, standards need to be agreed upon at industry-level in order to reach this nirvana where integration costs are a thing of the past. BIAN is currently striving to achieve this environment by establishing a flexible architectural model with consistent service definitions, levels of detail and boundaries.
Driving Efficiency Through Interoperability
The average bank has between 800-1,200 applications and so a standard reference model is required to provide banks with a starting point and guidance in shaping their own landscape. In order to achieve true efficiency, it is also important that banks start striving towards business and IT ‘fusion’ – alignment is not enough. Enterprise architects need to achieve a business view of the IT landscape so that the technology is actually supporting the business’ needs. However, for business and IT to seamlessly work together towards the same goal, a common language and understanding of what the bank should look like needs to be agreed. This is where standardisation has another important role to play in closing the communications gap.
Driving Innovation Through Interoperability
Standardisation is also the key for driving innovation. Imagine a bank has built a product engine that is aligned with the core back-office systems and provides a standard framework for designing products. Connecting the product engine with the core banking system represents a huge opportunity for product managers who can slice and dice existing elements to present new, innovative products. Such a flexible engine also reduces the time to take a new product to market.
It is possible that this type of functionality could ultimately be offered directly to the consumer. It is not hard to imagine today’s Generation Y, who have grown up with smart phones and have integrated technology into their daily lives, assembling their own banking products on the internet in the future. This could work in a similar way to today’s mobile phone contracts where customers can choose the number of text messages and minutes that go into a tailored package. Indeed, Dell offers a similar service to customers looking to configure their own PC.
Consumers are not currently demanding this type of service but financial institutions should be ready to deliver such services in the next three to five years. Those institutions with a standardised internal IT architecture, and a product engine connected to their core banking solution achieved by adopting open services standards such as BIAN, will be prepared to deliver these types of innovations and enhanced customer service to the market as first movers.
Making the Change
The banking industry has yet to recover from the biggest financial crisis in generations. Due to this, the onus is on the IT community to change. Long past are the days when IT budgets were seemingly bottomless and businesses in all sectors are demanding more value for what they spend. The future is no longer in banks’ own system development but in integrating off-the-shelf products into the existing legacy environment.
When integration costs are derailing IT upgrades, however, this is not an easy matter. It seems clear that the IT community needs to reduce integration costs to the bare minimum and focus any additional IT spend on value-added services which enhance the customer experience.
The adoption of standards for banking services will go a long way towards improving the current situation. Through lower integration costs, banks will be able to enjoy greater efficiencies and better align their IT with their business objectives while at the same time increasing responsiveness to customer demands. It will be easier to seamlessly integrate package solutions into banks’ existing landscape and therefore innovation can be more easily delivered to the market. But no bank or vendor can do this on its own: cross-industry standardisation and collaboration is the only way forward.
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