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IT powers Asia's financial dominance

Beverley Head, Information Age

15/12/2006 14:21:57

So, while technology makes possible online interaction between customer and bank 24/7 it simultaneously forces banks to invest in high-level computer security systems to protect customer information and identities and comply with ever more prescriptive legislation and regulation.

Finance today is not about bricks, mortar and banknotes - it's about international computer and communications networks. There are strong signals that the sector is embarking on yet another wave of major technology investments as it gears up for competition of all flavours - domestic, foreign and from non-traditional new entrants to the market.

At the same time financial institutions are constantly challenged to ensure their computer systems comply with a growing raft of regulatory and legislative requirements.

Basel II for example comes into effect in 2008, and requires banks to implement compliant systems to reduce risk associated with capital adequacy which PricewaterhouseCoopers believes will eventually cost Australia's banks more than $500 million in systems changes.

Meanwhile, Australia's anticipated Anti Money Laundering legislation will likely require an IT overhaul by many financial institutions.

The financial sector is one of the biggest spenders on IT in Australia today and employs significant numbers of computer staff. The four biggest banks - ANZ, Commonwealth, NAB and Westpac - manage more than a quarter of a million computer screens and employ more than 6000 IT staff.

Finance and insurance make up the third largest sector in Australia's economy, generating $60 billion of gross domestic product. Excluding Japan, our stock market is the largest and most liquid in Asia Pacific with a market capitalisation of around $150 billion. At the same time the rapidly growing pool of superannuation funds makes Australia an important investment market for many international financial organisations.

For some organisations scale, and its promised economies, are seen as prerequisites for success in such a competitive market. Suncorp for example hopes to merge with Promina to form a $20 billion diversified financial services business. It expects to spend $395 million on the integration, with much of that invested in information systems.

The challenge for Suncorp's 900 IT staff and the Promina IT team over the next two years (if the regulators give the merger a green light) will be to work out how to integrate the systems and deliver the $225 million a year savings that Suncorp CEO John Mulcahy has flagged.

Competition won't come just from newly merged local giants however. One of the most profound changes facing all financial services businesses is the economic power shift toward Asia and away from the OECD nations. Delegates at the annual international banking conference Sibos, which was this year held in Sydney, learned that by 2011 more than half of the world's leading financial companies will be Asian.

As John McFarlane, CEO of ANZ, said: "We are witnessing one of the most fundamental shifts in economic power," with Asia replacing the OECD countries as the powerhouse of growth.

And unlike many Western competitors which have developed significant amounts of legacy technology infrastructure these emerging Asian giants will be able to catapult generations of technology to push them straight to the leading edge.

Information technology was a key focus of Sibos which attracted more than 6000 of the world's leading bankers. Of key interest were the technologies which strip friction out of the payments process to allow straight through processing, making banking cheaper and faster.

Westpac CEO David Morgan said that the banks needed urgently to pay greater attention to investing in their payments systems or risk losing market share to nimbler competitors. While managing payments was "banking heartland" Morgan acknowledged that: "The banks have been slow to see it. They let it slip too far down their organisations and now have to pull it back up before they lose it to non-bank corporates that are branching out into banking, or to technologically savvy start-ups."

Morgan said that payments revenues typically account for 25-35 per cent of total bank revenues, although few actually track this as a line of business. Technology could optimise that business and Morgan pointed to studies which showed that if payments above $20 were shifted to low-cost electronic methods there were potential savings of $2 billion a year for Australian banks.

Besides looking to lower the cost of payments, banks also needed to look to technology in order to compete with emerging new players in financial services. Morgan offered the example of UK grocery chain Tesco which offers 21 financial services which generate $201m - or 18 per cent of its total income.

At the same time the internet is fostering alternative payment systems such as Paypal supplying new levels of competition in what has been banks' traditional stronghold. Already large organisations which are moving to open account trading are using alternative payments mechanisms such as Paypal to pay their smaller suppliers rather than rely on banks or use cumbersome manual systems such as cheques. Morgan's message at Sibos was that this gradual erosion of small payments business would impact the big banks over time.

The banks don't like losing business, so expect a new wave of technological investments by the world's largest financial institutions to allow them to keep up. ANZ for example is updating systems for cash management, trade and custody systems while nabCapital, the recently rebranded institutional markets and services group of NAB, is working with Misys Banking Systems to create a new internal payments engine which will eventually replace all its remaining manual processing systems with straight-through processing.

The ANZ has also signed up as one of 18 international early adopters of the trade services utility from SWIFT (the international financial messaging standards consortium) which will allow banks to develop new classes of services for their corporate customers engaged in international trade, by allowing them to manage the financial portion of international supply chains.

As banks seek to reduce their technology overheads there will also be continued interest in outsourcing elements of the information systems where there are clear economic and strategic benefits. To this end, the Commonwealth Bank will shortly complete the transfer of its trading system to financial services company Wachovia Corporation, with the bank expecting to be able to switch off its internal trading systems by the end of the year.

Saving costs is one thing, protecting the brand is another. Protecting customers from identity theft, and avoiding being unwitting agents of money launderers has financial institutions looking for smart technologies to protect them.

An Australian prototype of a biometric voice authentication system demonstrated at Sibos is just one example of the technologies being developed to meet this need. The result of a partnership between Unisys and Dr Clive Summerfield, chief executive of Australian consulting firm 3SH and deputy director of the National Centre for Biometric Studies at the University of Canberra, the system is predicted to reduce the incidence of identity fraud and guard against money laundering.

Access to systems would only be provided when an account holder spoke his or her name, pin and password adding a biometric tag to every transaction, and guarding against unauthorised access.

Although the banks understand that they must make significant technological change in order to survive and prosper, they are not necessarily comfortable in the role of technophile. As Dr Morgan pointed out at Sibos: "To be fair to ourselves we are not by nature pioneers in technology . . . our customers neither like, nor expect us to be the engineers of change."

But he warned that there was no alternative: "This is no reason to leave the payments industry to corporations that have outgrown their traditional concerns and ventured into banking."

Banks had no choice but to embark on programs of continuous improvement and continuous innovation.

For the IT sector it points to a new banking bonanza.