Banks find savings in outsourcing technology

The banking world has changed – and the signs are it has changed for the better as banks reach out to IT partners, writes Stephen Pritchard

The financial crisis brought the banking sector new regulatory burdens, as well as the need to regain the trust of customers, many of whom blame the banks for the crash itself.

And it buffeted banks’ and financial firms’ balance sheets, forcing them to think again about costs.

“It was especially true of global and investment banks that they could afford the best of everything. They invested in IT as and when it was needed without too much worry about the business case,” says Neville Howard, a partner in financial services at Deloitte, the professional services firm.

Now, commercial and regulatory pressures on banks have brought a new focus on those costs. And financial firms are also investing in technology to meet regulatory and compliance requirements, from anti-money laundering to consumer compensation and the settlement of mis-selling claims.

Then there are the new demands being placed on financial systems by changing retail and consumer behaviour, and emerging technologies.

Consumers want to access bank accounts around the clock, to obtain multiple quotes for insurance policies and make instant cash transfers to friends.

Demand is also being driven by the growing importance of data, especially customer data, to banks, insurers and other firms. This is the so-called big data phenomenon. And the data has to be gathered, processed, secured and stored.

More banks are now looking externally for IT and technology resources

“Technology allows us to open new direct digital channels of communication to many more customers. With big data technology we can use the power of data to drive value for our customers and our organisation,” says Erik Hietkamp, IT director at Dutch insurer Aegon.

This is all forcing banks to update systems that are often three decades old – and it’s far from easy.

RBS, the banking group which recently suffered from a serious system failure on one of the busiest shopping days of the year, has conceded that under-investment in IT contributed to the problem. Tellingly, the admission came from the bank’s chief executive himself.

But even investing in technology can bring risks. “The track record of big bank sector [IT] jobs has not been a great one. Often projects run late and cost more than expected,” says Mr Howard.

Coupled with the growing demands on technology, this is prompting bank boards, with their chief technology and chief information officers, to think again about how they organise their technology. More banks are now looking externally for IT and technology resources. Some, including the large investment banks, are doing so for the first time.

“Increasingly technology is a critical dependency, but not a core competence,” says Daniel Meere, a financial services expert at PA Consulting Group. “Big data is transforming financial services because of requirements from regulators and the need to understand customers. But the call on IT is also much greater.”

Mr Meere cites consumer banking transactions, from providing mobile banking to using transfer services, such as Barclays’ Pingit, to multiple searches on price comparison sites, as developments that are increasing the stress on financial firms’ IT. Systems designed around green-screen terminals used by trained clerks in the back office were simply not designed for our always-on world.

To respond, financial firms are having to look beyond their own resources to find technology providers and partners that can help them to innovate and grow, but also to manage risks.

Some of these partners are banking or financial sector specialists, who can spread the cost of their technology investment across a range of financial firms.

Others are generalist IT providers, drawing experience from other sectors, especially retailing, but also areas such as communications, marketing or even logistics.

“Obviously we’ve gone through an unprecedented crisis and there is unprecedented pressure for change,” says Peter Leukert, head of the Capco Institute.

“Banks are taking a much more sophisticated view of the value chain and looking at what can be ‘industrialised’. Can we partner with technology providers? If the provider is doing work for several banks, it can be more cost effective. We are starting to see the industrialisation of the banking industry. It will become a normal industry, not doing everything in-house, but using suppliers – a true division of labour.”

Some IT suppliers will be providing standardised services, such as e-mail or IT infrastructure. But the more interesting projects go much further.

“Financial companies are reaching out to service providers to ‘co-innovate’ in new ways of doing things,” says Rahul Singh, president for financial services and business services at HCL Technologies.

“Firms have their own IT departments and relationships with existing service providers, but innovation is more likely to happen in uncontrolled environments. You can’t have a ‘boxed’ model of innovation. So we try to bring in external processes or talent to the issue.”

Aegon’s Mr Hietkamp adds: “Early in the process, we are very conscious of defining, together with our business lines, the business value the technology partner can deliver. And alignment with our business strategy is crucial.”

And, as PA Consulting’s Mr Meere points out, finance firms are increasingly holding innovation days or competitions, where technology partners meet to work through a business problem.

Technology provider SunGard recently held a “hackathon” in New York to develop ideas for financial firms. Chief technology officer Steve Silberstein recommends: “Make sure there is a good shared interest, a problem to solve and agreement as to the solution.”

And this is likely to be an ongoing relationship as financial firms draw on more external expertise to create new products and, down the line, greater profits.

“Technology that was a choice is now a must-have, such as more innovation inside the branch, more efficient customer service or new channels to market,” says Nic Merriman, UK chief technology officer at IT provider Avanade. “IT is not just a back-office operation but, increasingly, a partner of the bank.”