Investing In Infrastructure For Financial
Institutions
World Bank Conference
December 4 – 6, 2002, Washington, D.C.
Gabriel S David
Managing Director, Global Financial Industry Group
Global Financial Industry Trends..
Globalization
Technology
•
Increasing inter-dependence of major
economies due to greater integration
•
•
Increasing exposure and focus towards
new emerging economies
Increasing / critical impact of IT on
operations and performance of financial
institutions
•
Increasing rationalization and
optimization of IT investments
•
Increasing interest in Managed
Services / Outsourcing
•
Increasing cooperation in Industrywide initiatives and emergence of
standards
Demographics
•
Changing demographics in developed
and emerging economies
Regulations
•
Harmonization of country
regulations towards “Industry Best
Practices” and emergence of “Global
Standards”
•
Increasing regulatory pressures
•
Increasing focus on use and
integration of risk management
activities
Consolidation
•
Increasing importance of economies of
scale
•
Increasing and rapid consolidation in
the financial services industry
Where Are The Major Investments Required?
• Credit analysis / risk management systems
• Shared services (such as credit bureaus for SMEs)
• Asset Securitization infrastructure and systems
• Payments infrastructure
– Cash handling
– Non-cash (such as POS, credit cards, ACH)
• Internal bank systems
– Core banking, lending, CRM
– Fraud and money laundering
• National infrastructures for information exchange and
sharing
Potential Sources of Investments
• Internal funds from the bank
• Government sponsored and funded common
infrastructure components
• Third party service providers who can invest and
charge on a transaction basis
• Industry cooperatives
• Venture capitalists
Major Challenges
• Cooperation between local institutions
• Governance models
• Government control and regulation
• Fragmented / inadequate regulatory frameworks
• Competitive pressures from international
institutions
• Other requirements for capital
SME Information Infrastructure – Major Issues
• Global financial institutions entering the emerging markets
typically have better application systems and IT
infrastructures
• Common shared services infrastructure is lacking for many
areas such as
– Credit rating / credit checks
– Fraud and money laundering
– Industry specific statistical data for analysis
• Common standards for sharing credit data between financial
institutions does not exist in many countries
– Many look at data they have as proprietary
•
Core banking systems are not compatible and still focused on
accounting
– More information is required to manage the SME credit and clients
…and their significant impact on financial
institutions ability to service SMEs
•
Delivery channels usage and leverage (particularly the
“e” channels) are sub-optimal
•
Core banking application systems need to be replaced
Core Banking
Applications
•
Focus on the branch contacts and networks for client
acquisition / servicing and retention rather that more
effective use of IT
Standards
•
Shared Services
Infrastructure
Increasing consolidation amongst financial service
institutions – reluctance to share credit / fraud
information
•
Risk Management
Basel II
New emerging requirements such as the The New
Basel Accord will also require additional IT
investments
•
New competitors better capitalized and financed
IT Infrastructure
Capital Availability
– Leveraging existing investments in IT and
operations,
– Focusing on risk adjusted ROI and impact on
financial performance
Given the pressures in the context of today’s
environment………
Battle for
Market Share
IT Infrastructure
Commoditization
Of Products
Declining Margins
& Volumes
Uncertainty in
Major Economies
Pressures on Revenue
Growth & Profitability
• Enterprise wide risk management
• Cross-border management of risks
• Regulatory issues, Basel II and WTO
• Transformation of operations
• Rationalization of global scale and operations
• New products and market segments
Each issue poses a unique set of challenges to the IT and
back office operations management areas……….
New Products and Market Segments….
Increasingly IT and Back Office
Processing Areas Are Called Upon To:
IT and Back Office Processing Areas
Have Responded By:
•
Assist in product development, packaging
and management efforts
•
Incorporating IT and BPO involvement
and expertise into front office activities
•
•
Develop new settlement & reconciliation
processes to support the introduction of new
products and services
•
Provide information / value-added services
to support the delivery of customer
•
relationship management activities –
including money laundering and fraud
•
prevention
Developing and harmonizing common
business processes to support varied
products
•
•
Provide up-to-date / real-time information
necessary to track risk and business
performance
Enabling direct access to back office
data repositories
Increasing integration with front office
applications and systems
Increasing interfaces with customers
IT and infrastructure
•
Undertaking straight through
processing initiatives
•
Requiring subject matter experience
and expertise from outsourcers and
suppliers
Cross-Border Management of Business & Risks
Increasingly IT and Back Office
Processing areas are called upon to:
IT and Back Office Processing Areas
have responded by:
•
Creating centralized support centers or
shared servcei centers to support
shifting markets
•
Conducting fundamental reviews and redelineation / re-alignment of roles and
responsibilities
Continuously re-assemble / readjust the
complete supply chain based on least cost,
least risk, best quality
•
Developing and rolling out new
processes , procedures and systems to
support centralization initiatives
•
Integrate their operations with those of
merged and acquired businesses
•
•
Increasing controls, continuous
improvement (particularly Six Sigma) and
undertaking more reporting activities
Undertaking painful “ right sizing” to
reduce duplication and increase
optimization of resources
•
Outsourcing of IT and back office
processing areas where it makes sense
and where the supplier has the financial
strength, subject matter expertise, tools,
methods, processes and metrics that
are “best in class”
•
Shifting of businesses in targeted markets
and economies
•
Shift of traditional country specific activities
towards regional / global management
models
•
IT Infrastructure
Increasingly IT and Back Office
Processing Areas Are Called Upon To:
IT and Back Office Processing Areas
Have Responded By:
•
Shift towards on-line banking and decision
making information systems
Creating centralized support centers or
shared service centers to support
shifting markets
•
Continuously reduce IT infrastructure
budgets and operating costs
Conducting fundamental reviews and redelineation / re-alignment of roles and
responsibilities
•
Developing and rolling out new
processes, procedures and systems to
support centralization initiatives
•
Undertaking painful “ right sizing” to
reduce duplication and increase
optimization of resources
•
Outsourcing of IT infrastructure and
processing areas where it makes sense
and where the supplier has the financial
strength, subject matter expertise, tools,
methods, processes and metrics that
are “best in class”
•
Provide more accurate and timely data,
near real-time
•
•
•
Integrate their infrastructure with those of
merged and acquired businesses
•
Increasing controls, continuous
improvement (particularly Six Sigma) and
undertaking more reporting activities
Core Banking Applications
Increasingly IT and Back Office
Processing Areas Are Called Upon To:
•
Provide more accurate and timely data
•
Shift towards decision making information
systems:
•
Implementing new core banking application
systems that have the data required for
–
Client relationship management
–
Client focused information systems
–
Client behavior scoring / monitoring
–
Client behavior scoring / monitoring systems
in the credit and payments areas
–
Early warning capabilities (alerts/alarms)
–
•
IT and Back Office Processing Areas
Have Responded By:
•
Re-engineering the supply chain of back office
operations to be compatible with the new
systems
•
Focusing on minimum customization,
increased standardization across the
enterprise
•
Undertaking painful “ right sizing” and realigning of application systems architectures
•
Leveraging third party suppliers where it
makes sense on a ”partnership” basis
Money laundering / fraud prevention systems
Provide seam less information access and in
many cases integration across all banking
distribution/delivery channels
•
Continuously reduce budgets and operating costs
•
Integrate external data with internal operating data
•
Increasing controls, continuous improvement
(particularly Six Sigma) and undertaking more
reporting activities
Risk Management Initiatives…..
Increasingly IT and Back Office
Processing Areas Are Called Upon To:
•
Placing a greater emphasis on
supporting risk management / middle
office / compliance activities
•
Developing and retaining more board
based operating experience and subject
matter resources
•
Provide up-to-date real time information
necessary to support risk management
activities
Redesigning core processing systems to
incorporate the new data / reporting
requirements for risk management
•
Increasing controls, continuous
improvement (particularly Six Sigma) and
undertaking more reporting activities
Increasing integration with middle office
/ risk management applications and
systems
•
Undertaking straight through processing
initiatives
•
Requiring subject matter experience and
expertise from outsourcers and
suppliers
•
Incorporate new compliance and control
procedures as a part of new risk
management initiatives, particularly Basel II
•
Subject their IT and operations to greater
oversight by internal / external Auditors and
regulatory agencies (increasingly from
multiple jurisdictions)
•
•
IT and Back Office Processing Areas
Have Responded By:
Estimated Costs of Implementing The New Basel Accord
• The estimated costs for those banks that have not
focused on this will be high:
– Global banks: 4.5% - 6.5% of global IT and business
operations budget for 3 – 4 years
– Regional banks: 6% - 8% of IT and business operations
budget for 3 – 5 years
– Small banks / local banks: 7% to 10% of IT and business
operations budget for 4 – 6 years
– In developing markets: 7.5% - 11% of IT and operations
budget for 4 – 6 years
– In Japan: >11% of IT and business operations budget for
5 – 7 years
• On-going maintenance and support costs: increase of 3% 5% of total IT and business operations budget
Source: BIS – Updated September 6, 2002; EDS Analysis
In many financial institutions There is a significant economic
disconnect between front office and back office which destroys
value……
Front Office
IT and Back Office
•
Silo focus
•
Internal focus
•
Sales growth driven
•
Product centric
•
Rapid product extension
•
Production oriented
•
Planning disconnect with back
office operations
•
Stress due to:
–
Inconsistency in volume
–
Product expansion causing manual work
around
–
Stretch in skills
•
Price discounting / Repackaging
•
Re-skilling (banking versus selling)
•
Increased stress (bank officer to
sales officer / culture)
• Focus on process not value
Disgruntled front line
• Check and control focus
•
• Lack of technology
The result: C/I ratios = Increase continuously
R/ Return on Equity = Decline continuously
Economic Disconnect
• Lack of subject matter skills in
outsourcers
Value Destruction
This is all about the focus on “best practice” and the industrialization of
banking….
Highly
Customized
Efficient
Customization
Automated
Production
Lines
Manufacturing
Examples
Financial Services /
Banking Applicability
• Rolls Royce
• Mercedes AMG
• Dell
• Structured Finance
• Project Finance
• Private Banking
• Risk Management
• BMW
• Lexus
• Harley Davidson
• Corporate Finance
• Capital Markets
• Asset Management
• Wealth Management
• Sony
• McDonalds
• Pizza Hut
• SME Services
• Payments
• Credit Cards
• Trade Finance
• Consumer Finance
• Global custody / custody
• Safekeeping
• Deposits
• Retail lending
The Transformation of IT and Back Office Processing
Areas is Paved With Difficulties…
• Demands of the front office / client facing business units and
unwillingness to relinquish control
• Workforce transition issues / organization culture issues
• Restrictions in centralizing operations due to foreign exchange
regulations, local market and exchange rules…
• Local industry practices and governance models that re inadequate
• Difficulty in pricing / costing managed services / outsourcing contracts
• Writing off the investments in current technology as you re-tool
• Developing necessary critical mass (volume and subject matter
expertise / skills) to support shared services / utility initiatives
• Upfront investment costs required
Our Vision
EDS … the recognized global leader in ensuring
clients achieve superior value in the Digital Economy
• By delivering the right strategies, solutions and services
• Through superior execution on a sustained basis