Communications of the ACM
New architectures for financial services
Introduction
Technology has enabled the expansion of financial services by making it possible to integrate the complex variety of financial data and services, and by providing new delivery channels such as mobile and online banking and investment. Increasing deregulation of the telecommunications industry and consequent explosive growth of information and communication technologies and telecommunication networks is making it possible to expand and integrate the financial services business across industry and national boundaries.
These changes have created new business opportunities for both existing players in the financial services industry, as well as for the newer non-traditional entrants. For example, a variety of asset-rich insurance companies such as Aegon and Skandia have moved aggressively into retail banking, wealth management, and investment services. On the other hand, established banks such as ING Bank, Rabobank, and Deutche Bank are acquiring and creating international networks of retail, investment, and wholesale banking, and financial services businesses. For example, Rabobank expanded its traditional retail-banking business by acquiring Robeco Investments, Interpolis Insurance, and most recently Alex, a successful online investment broker.
At the same time, non-financial, service-based, and manufacturing organizations with extensive customer bases, large resources of money, or access to a strong technology base are now able to leverage their traditional assets (cash, technology, or customer base) to move into the financial services and banking industries. Thus, KBB department stores are joining forces with Achmea to sell mortgages, while Sony is creating its own Sony bank. Similarly, WitCapital, using money from its brewing base, has transformed the company from a brewer to a banker, while Ahold, the Dutch retailer and supermarket, has partnered with Aegon to create in-store banking services for Ahold to capitalize on its large customer base.
However, the industrial and developing worlds remain a mosaic of financial and banking practices, regulations, and technology infrastructures. At the most basic level, different countries require financial services to be provided in their native languages and currencies. Even within the relatively harmonized nations of the European Union, with both a customs union and a single currencythe Eurodifferent settlement institutes, both Euro and non-Euro zones, and different legal and reporting requirements remain. Moreover, trans-border banking transactions and clearings to a very large extent still rely on batch processing-based legacy computer systems, which creates technological obstacles to real-time integration and money flows. Within industrialized economies, standardization and integration of cross-bank transactions varies from excellent in Belgium and France, fair in The Netherlands, to poor in the U.K. and the U.S.1 Moreover, efforts against money laundering and cross-border money flows, which intensified considerably after the terrorist attacks of Sept. 11, 2001, are creating new barriers to money flows across international borders and new obstacles for cross-national and cross-industry convergence. Similarly, EU privacy legislation aimed at curbing cross-sector and cross-border transfer and use of customer data is also creating barriers to such convergence.
Meeting these opportunities and challenges requires technology infrastructures directed toward flexibility, openness, and interconnectivity. It simultaneously entails a degree of local autonomy and control on localized service provision, as well as the agility to connect to external parties as needed. On the other hand, existing legacy technical and organizational infrastructures for financial services are overwhelmingly closed, monolithic, and inward-directed. The legacy architectures make it difficult for these organizations to modify, develop, and integrate their existing applications to meet the opportunities and challenges arising from deregulation, globalization, and the changing demands of the market.
In response to these circumstances, new ICT-based or ICT-enabled architectures for technology and organization are beginning to emerge in the financial services industry. While some of these innovative ideas are already fully operational, others are in their early stages as proposed architectures and pilot prototype implementations. The articles in this section present a variety of technical and organizational proposals, experiments, and success stories. In those cases where full-fledged solutions are already in operation, emerging challenges and issues yet to be addressed are identified. The section is a collaborative effort between industry and academic authors located on three continents. Among the industry authors, both users of technology as well as providers of technical solutions are represented. Given the variety of ideas expressed, the articles are relatively brief, providing overviews of the concepts and experiences.
As is appropriate from a balanced business and technology perspective, the first article begins with the fundamental idea that unless the underlying business model is economically sound, new technology is unlikely to deliver on its promise. Based on a study of start-up banking organizations, Dandapani reports that while the use of online banking by households nearly doubled between 2000 and 2003, 97% of the virtual banks or Web-based start-ups failed to survive. His analysis suggests these start-ups did not fail because the underlying technology did not workit didbut because the underlying business and revenue models were flawed. The remaining articles in the section can be grouped into three general subthemes: emerging architectures and technologies; innovative organizational structures; and security in the financial services realm.
New ICT-based or ICT-enabled architectures for technology and organization are beginning to emerge in the financial services industry. While some of these innovative ideas are already fully operational, others are in their early stages as proposed architectures and pilot prototype implementations.
Architectures and Technologies
Homann, Rill, and Wimmer describe a service-oriented architecture as a basis for designing flexible structures in banking and finance. They suggest traditional integrated banks, which exclusively distribute self-developed products via proprietary channels and fulfill all transaction and support services in-house, are no longer adequate for the changing demands of the environment. Instead they suggest that banks, to achieve flexibility, should increasingly focus on their core capabilities while disaggregating their value chain by exploring different sourcing options for non-core capabilitiesWeb services are likely to be the enabling technology for such a transformation.
Pan and Viña focus on the issue of data integration in financial services, identifying diverse situations where the integration of financial information is required as they outline a mediated data integration architecture for enterprisewide and cross-enterprise data integration utilizing Web services and Enterprise Information Integration.
Mobile transactions and micropayments, which are revolutionizing the modes of payment and service delivery channels in the financial services industry, are examined by Mallet and coauthors, who investigate two types of emerging mobile financial applications: mobile payments and mobile banking services. They show how the new financial services can be deployed in mobile networks, identify the main players in the emerging mobile finances value chain, and explore the players' particular strengths and weaknesses in providing the services.
Organizational Innovation
A shift in theme from technology innovation to organizational innovation is represented by the two short articles on business process outsourcinga topic receiving a great deal of attention in a wide variety of forums recently. Introducing innovative technology architectures requires technical manpower. Moreover, while these innovations are being introduced, financial institutions must keep their legacy systems up and running. That too requires manpower. Chandra and Ensing describe the concept of a Global Development Center as an answer to this need, with GDCs being an effective example of an organizational innovation through modularization and outsourcing of work. They outline the logic behind creating GDCs and explain how the client-GDC relationship must be effectively managed.
A bank robber once infamously remarked, when asked why he robs banks: "Because that is where the money is!" In the modern era, money has become bits of data stored on computers and moves around the world as bytes of information on data communication networks.
Banks and financial institutions are also manpower-intensive in processes other than IT development and maintenance activities. In the financial services industry, call centers exemplify the low end of the spectrum; financial analysis activities represent the high end. The outsourcing of these processes is ICT-enabled with communication technologies providing the capability to efficiently move work and the products of work around the globe, as discussed in the contribution by Tas and Sunder.
Security
A bank robber once infamously remarked, when asked why he robs banks: "Because that is where the money is!" In the modern era, money has become bits of data stored on computers and moves around the world as bytes of information on data communication networks. ICT makes it possible to both move money around the globe with minimal effort and to monitor suspicious money transfers. The article by Zdanowicz examines financial transaction security from a national perspective, describing a data mining-based system to detect and prevent suspected money laundering and money transfers for terrorist financing.
Slewe and Hogenboom conclude the section with their article on security in digital services by examining the trends in threats to security and describing a combination of organizational and technical measures to address these threats.
As we mentioned previously, this section represents a collaborative effort between visionary industry professionals, executives, and academics. As you read through the contributions, it is clear the financial services industry is in the early phases of a major transformation. The combined forces of deregulation, globalization, and ICT usage are key components of this transformation. As the change-leaders experiment with new technologies and innovative organizational structures we are likely to encounter intriguing business, organizational, and technical challenges. How we address and resolve these challenges will determine the future direction of the financial services industry.
Footnotes
1Netherlands in the Large Dynamics of Electronic Payment Systems. 2001 (In Dutch). Ministry of Economics Affairs of The Netherlands; www.ez.nl.
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