Capital networks

With the Dubai International Financial Exchange (DIFX) opening on September 26, the challenges facing the region’s financial industry have been brought into sharp relief. Compliance, security and efficiency issues are at the forefront of thinking in the business and none of these can be correctly addressed without a rock-solid and well thought out network.

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By  Simon Duddy Published  September 17, 2005

|~|John-Bentley--HDSppp_m.jpg|~|“In Basel II, regulators were considering that a second data centre had to be 500km away from the original site. This didn’t happen due to protests but it shows how stringent the regulatory push is.” - John Bentley, sales director for Hitachi Data Systems Middle East.|~|The Dubai International Financial Exchange (DIFX) will bring an exciting new dimension to the Middle East and could become a beacon for investment to support growth in the region. As the Middle East grows as a global financial player, this puts great onus on the industry in the region to up its game in terms of efficiency, and IT departments are at the vanguard of this drive. This will be no easy task as the Middle East financial industry is undergoing major changes. The DIFX initiative is indicative of great ambition and growth in the market, which presents its own challenges and makes it more important that the region integrates effectively with the rest of the world. Traditionally, the Middle East banking field has been rather insular and this mindset must change if the region is to punch its weight in a freer market. “Short term focus is high on the priority list for Middle East banking CEOs and more diligence should be placed in long term planning when the economic situation worsens,” says Azzam Al Dari, financial service industry (FSI) manager for Qatar, Bahrain and Egypt at HP. “The favourable economic climate hides real risk. Banking assets are under-leveraged, with Middle East banks having an average return on capital of between 15-20%, while the worldwide the figure is 25-30%,” he explains. There are also arguably too many local banks in the region compared to the population they serve. While markets are isolated they can be sustained, but as the region enters cut-throat global competition, consolidation is probable. Al Dari says five banks in the Middle East are looking for acquisition partners and observes that the region possesses the most fragmented banking sector in the world. Plus, lots of international financial brands are knocking on the door and want a presence in the region. This puts pressure on local banks to adapt fast and many will have to build relationships with partners or create competencies from scratch to compete. This opens a door for technology firms to provide services to the industry. “Margins will shrink in an environment of increased competition in the financial sector, so banks need to focus on core business and utilise technology well,” says Ahmad Abdulkarim Julfar, general manager of outsourcing specialist eCompany. Gartner says that banks in the Middle East and in the wider EMEA region currently under-utilise outsourcing, and tend to use it inefficiently when it is deployed. “Most financial service providers (FSPs) in EMEA currently use outsourcing tactically to augment staff for faster project turnaround or to reduce operational costs, rather than for strategic value,” says Kimberly Harris-Ferrante, research vice president at Gartner. “FSPs should now begin outsourcing strategic projects in order to gain larger-scale, enterprise-wide value,” she adds. Increased exposure to the norms of world banking also brings thorny issues such as regulatory compliance. Simply put, if regional banks want to eat at the big table, they must play by big boys’ rules. The minefield of regulations is something that the regional industry must get to grips with quickly and the IT team must play a central role in this. Regulations such as Sarbanes Oxley make it harder for banks to conceal inefficiencies, for example, revenue can’t be liquidated assets classed as revenue, it must come from customers. This will create a general tightening of belts and means that the IT department will be under more pressure to justify its expenditure. Regulations will also impact on business continuity, with banks obliged to report the impact of any potential failure of an IT device, as well as make data and customer information available for a significant period of time, which boosts the importance of data storage and archiving. “In Basel II, regulators were considering that a second data centre had to be 500km away from the original site. This didn’t happen due to protests but it shows how stringent the regulatory push is towards robust business continuity in the financial industry,” stresses John Bentley, sales director for Hitachi Data Systems Middle East. Gartner says it will cost banks 20-30 cents to the dollar to comply with all of the new standards including Basel II, Sarbanes Oxley and anti money laundering legislation. AMR Research predicts US$80 billion will be spent on these issues worldwide in the next five years. The market analysis firm warns that companies should not consider compliance expense as a sunk cost, as it will put profit margins under pressure. Rather it advises that firms should use the requirements to change business practices and enhance enterprise performance management (EPM) activities. Further changes include the increased prevalence of Islamic banking, with most banks contemplating subsidiaries, or a full move to Islamic banking. Another issue is how the rise of online activity will impact banking in the security area and also in terms of how frequently people visit branches. “Branches will not disappear,” says Fadi Cheyayeb, chief information officer (CIO) of the National Bank of Kuwait (NBK). “When internet banking first arrived everyone thought it would be the end of branches but it didn’t happen. The reality is people like the physical touch and now the key is collaboration across all channels, with services tailored to individual customers depending on how much time they want to spend online or in the branch,” he explains. The dynamic nature of the industry makes it a difficult time for IT departments, but also a challenging environment. “All of these changes have major implications on IT, banks with strong IT teams will find it easier to go through these changes, as no bank will be able to move faster than its IT organisation can move,” says Ayman Abouseif, managing director, Oracle Gulf States. Cheyayeb is not daunted by the challenges and indeed sees an opportunity for Middle East banks to use cutting-edge technology to leapfrog western countries, although he acknowledges that personnel is a challenge with the regional business reliant on imported skills. He also challenges the assumption that the financial industry is necessarily conservative when buying and implementing new technology. He believes that a fresh start with newer technology can create greater efficiencies than persisting with technology that is underperforming. Nevertheless, he is understandably cautious on some installations. “Some implementations, such as installing VoIP, are relatively clean, but some involve data and logic, so banks tend be slow and cautious. At the same time, banks want a competitive edge so they would like to deploy solutions as quickly as possible. There are two forces, one pushing forward and the other holding back,” he concludes. Cheyayeb’s safety-first approach is illustrated by the NBK’s ‘not one but not many’ motto for ICT partners, which is typical of the financial industry. This caution can make financial businesses more prone to lock-in than other verticals, however. “The biggest problem in the financial industry is that once you have selected a core switch, you are locked in to a proprietary technology and there’s no way back,” says Gijs Zantvoort, EMEA solutions manager for HP ProCurve. “You’re toast! You have to pay the price tag the supplier asks for. It’s better to go for robust solutions on open platforms,” he adds. The good news is that regional IT departments can learn from the experience of pioneering regions and avoid their mistakes. It also means that a lot of the solutions, for example in information lifecycle management (ILM) and business continuity, that are available now are third or fourth generation and have ironed out a lot of the kinks that were apparent in the earlier iterations. “Unlike in the west, the Middle East hasn’t had to go along with the costly and piecemeal process of business continuity,” says Bentley. “The west is now leading the way because of this pain, but the opportunity for Middle East banks is that they can take advantage of that pain without having to go through it. We are taking Middle East banks to Europe so they can see what’s happening there,” he adds. Security has always been a priority in the business, but the recent spate of phishing attacks on Middle East banks show the situation is deteriorating. “Banks do their business in a highly visible way and are a very tempting target for the burgeoning hacker community. You only need to look at the increase in identity theft and phishing of financial sites to understand this,” says Dr Anton Grashion, security strategist for Juniper Networks EMEA. Grashion believes the challenge is to provide highly secure and reliable communications without impeding authorised access or data throughput. While investing in technology is undoubtedly important, it is also imperative that banks look deeply at their processes in order to ensure that security is maintained at the maximum level. This is particularly important when considering that most security breaches at banks are ‘inside jobs’. “Business processes must have security awareness built in from the start. It’s not just about technology, it’s about building a culture of security, which we don’t have in the Middle East,” says Cheyayeb. The finance industry is also typically composed of widely distributed branches and offices, which brings challenges when attempting to carry out centralising IT projects and also ensuring a similar standard of service across all locations. Another challenge that retail banking faces is its multiple go-to-market channels. These include call centres, personalised banking services, and online facilities. Customers are demanding a similar experience irrespective of the channel. “When centralising across a local, regional, or even global enterprise, IT must deliver applications and data uniformly and in the most cost-effective way, while ensuring that regulations are applied to every locality,” says Ian Cochrane, marketing manager for Citrix Middle East. The IT manager in the banking business has to become a lot smarter and has a lot of work ahead in the coming years. More results-focused banks will lead to more results-focused IT departments. The key to success for IT personnel will be to add business strings to their bows. This should not necessarily happen at the expense of technical skills, but certainly IT managers need to be more business savvy and be able to talk to senior management in ‘their language’. “If the IT manager is going to deliver ICT proposals he has to put himself in the mind of the CEO and CFO,” says Al Dari. “ICT is important but only indirectly. IT managers have to prove how IT solutions make business sense,” he explains. IT personnel will also find themselves under pressure to justify their pay packets, as the sophistication of system and database administration tools increases, bringing more automatic re-configuration. This will put the onus on administrators to develop higher skills to increase their personal value. Al Dari urges IT managers to ask; “Is your personal value is to be a guru of a particular technology that may become obsolete in a few years or is it to be an infrastructure planner?” The personal market value of IT managers will increase if they not only care about technology but the effect technology has on the bottom line. An IT manager should be a broker of sorts, asking the board what they want and then delivering it as effectively as possible using either internal or external solutions. “The biggest challenge for IT professionals is to provide impact on the bottom line as they will be held accountable for the role they played in tackling business challenges,” concludes Wayne Hull, Cisco sales manager for the Gulf and Pakistan.||**||

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