Banking on success

The banking and finance sector has become an area of growth for the IT industry as banks have invested heavily to address issues such as compliance and security

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By  Peter Branton Published  June 25, 2006

|~|Bankingbody.jpg|~|The banking sector in the region has benefited from heavily investment from international banks, which has led to local banks spending to keep up to speed with them.|~|The banking sector has always included some of the IT industry’s most voracious technology consumers. Banks will continue to spend billions of dollars over the next few years in an effort to beef up ageing core banking systems and guarantee compliance with new legislation. Worldwide, industry analysts predict IT spending in the financial services industry will rise to nearly US$410 billion by 2008. Banks in the Middle East are reflecting such spending behaviour, with the lion’s share of budgets going to compliance projects, security and improvement of business processes. “In the last five years, we have seen a trend in terms of improving a lot of internal IT processes. That includes better networks, better connectivity, better applications and changing the core applications,” says Abdul Karim Riyaz, regional director of CA’s storage and protection business in the EMEA Eastern markets. “In the last two to three years banks put a lot of their effort in to putting in new applications such as CRM. Many banks also put in many security-related articles, as well as storage, disaster recovery and backup,” he adds. For Muzaffar Jamil, business development manager at Avanza Solutions, the growth in IT spending signals that the market is maturing. “In this market, everything is growing. The banking industry is brand conscious. You have to come up with a good brand, a good solution and implementation. The money is there. There are no problems related to budgets. They are very much open to new technologies,” he claims. The entry of international banks in to the region is also forcing local banks to evaluate their existing set-ups and investing in areas that need improvement, points out Francois Grobler, senior consultant, PIC Solutions. “That has really happened. Most international banks have really invested in here. Some of them are now moving to Saudi Arabia. Local banks are getting up to speed with what the international banks are doing, not trying to copy them, but having their own way of doing things,” Grobler says. “And to be honest, some of them are giving them [international banks] a good run for their money. Some of the banks are really catching up by spending a lot of dollars, especially with all the money spent in this area. There is a lot of dollars that can be invested,” he continues. “They [local banks] are catching up quite quickly,” agrees Kamran Hussain, vice president, Tech Access. “Some banks, especially the larger banks here, they are very up to speed in technology because they only have recently invested in technology. Smaller banks have a little bit to catch up. I would say that all the banks are on the way of becoming on par to global standards,” he claims. One particular area of interest to banks is retail banking. This sector is big business in the region, and competition is fierce. Consequently, banks are allocating big chunks of their budgets to develop different products that suit different types of consumers and to come up with various programmes to build a ‘total relationship’ with customers to retain loyalty. “At the moment there is huge competition between the banks when it comes to retail banking. Even corporate and investment banks are now targeting the retail market. From an IT perspective, this means that they need new banking systems to be able to do their core business,” Grobler says. There is a lot of investment going on in the risk management area, according to Grobler, to address two major challenges. “If you don’t have the right technology in place you can’t do retail banking. So, there is investment going in the risk area. They are investing in technology that can help assess the risk factor of a customer,” he says. “What banks have realised is there are major challenges in the Middle East. One is the skipping of ex-pats, where non-nationals leave the country after two or three years. As a result, banks end up with major bad debt losses. The banks need systems that, first, can predict those skips, and secondly, can track the customer. At the moment, banks haven’t found the correct technologies to find those skips. That is a challenge that banks are combating and will become a bigger challenge in the future,” he explains. While banks seek to increase its customer base, they are, at the same time, looking to cut down operational costs. But these two objectives can sometimes contradict each other, as having more retail customers can have a negative impact on business. Banks often incur heavy servicing costs, in particular to manual channels, as retail customers contribute to long queues at branches, in addition to being heavy users of a bank’s call centres. To mitigate their operating expenses, banks have resorted to segmenting their customer base, with the aim of moving certain segments of that customer base to the internet. ||**||Online banking|~|Karim-Riyazbody.jpg|~|CA’s regional director of storage and protection, Abdul Karim Riyaz. |~|Online banking offers banks compelling attractions, such as dramatic cost savings and retaining customer loyalty. Today, a number of banks in the region have online banking facilities or are in the process of setting such facilities up. “In certain countries online banking has now become the norm whereas other countries are still picking up, especially in the Middle East where some customers still want to do personal banking,” says Hussain. “Online banking, I think, is going to be the next big thing for this region,” he adds. But, according to Yasser Zeineldin, EPG director, Microsoft Gulf, there are several challenges to adopting new banking channels. “One of the main issues for the banking industry for several years has been the development of new channels, and how they can integrate these into core banking systems,” Zeineldin says. “With the development of internet banking, phone banking, continuing roll out of ATM machines, and the growth in branch networks, bank customers can now deal with their bank in many different ways. This is a great opportunity for them to deal with the customer in a manner of the customer’s choosing, but it also poses a challenge, because many banks invest in different systems from different vendors for each element of their system.” “This leaves them with a situation where, if they want to introduce a new service or upgrade an existing service, they either have to replace incompatible systems and migrate data, which is costly, time consuming and a waste of the existing investment, or else spend time and money on a potentially expensive integration of new and old systems,” he adds. To address this issue, banks are turning to middleware technologies to integrate disparate systems. “Microsoft is helping banking customers to address this, with our BizTalk Server Middleware. We have a number of banking customers in the region who have been able to use BizTalk to quickly and cost-effectively integrate systems, to allow them to reduce the cost of deploying new systems and to maintain their IT investment,” Zeineldin says. According to Zeineldin, middleware can also address integration issues banks face with customer service and customer relationship management. “Banks are looking to be able to tie all of a customer’s accounts together — in this region we find that many people have several account for different purposes, such as savings, credit card, auto loan and so on, and yet the banking systems are unable to see the relationship between each account,” says Zeineldin. “This can cause problems when, for example, a customer with a large amount of money in one account, wants to go overdrawn on another account. If the bank cannot immediately see that the customer has funds to cover the overdraft, they might refuse the facility, creating an unhappy customer,” he continues. “With a powerful middleware solution, the relationships between accounts can be defined, and banks can also deploy complete CRM interfaces that are integrated with banking functions, so that a customer care operative or branch worker has all of the information on a given customer available when they deal with them,” he adds. However, Avanza’s Jamil feels that online banking in the region is not for everyone. “Internet banking, mobile banking, they are like a showcase. The problem is the region is more of a showcase type of market. You don’t talk about the benefits they will be getting. It is more about if somebody is launching internet banking, then I have to launch internet banking,” Jamil reasons. There are certain business models that do not require internet banking. Jamil shares one such scenario. “I have been to a customer that is into investment banking. They only have 100 to 200 customers, but they want to launch internet banking. They are not into retail banking or a bank that has 20,000 to 30,0000 customers. If you have only investment customers who will never use the internet, who will never talk to you, who do not have any ATM accounts, then why would you want to set up internet banking?” he asks. “That is what’s negative in this market. I don’t see banks coming up with a business plan when they are implementing a system. The only thing they have is a technical plan. Where is the business plan? Where are the numbers?” Jamil says. In line with their pursuit to capture a bigger share of the retail market, banks have also resorted to the use of call centres. Call centres have emerged to help banks handle such services as help desk, customer support, lead generation, emergency response, telephone answering service, inbound response and outbound telemarketing . Collecting customer data as quickly as possible has obligated banks to review their existing networking infrastructure and customer relationship tools. “In the networking sector, the banks are going towards conversion in quite a speedy way because they are trying to get more information from customers from a single point, the call centre agent, the cashier on the front, or even through their ATMs,” describes Nidal Abou Ltaif, managing director, Avaya Middle East and North Africa. “They like to get as much information as possible to serve their customers. Therefore, they are moving towards conversion quicker than expected. They are putting voice, data into the same network or into the same endpoint that face customers. That is the trend happening in the banks,” he continues. “They are investing on IP telephony and contact centres. Of course, on the back of that, they are investing on CRM, intelligent databases that are able to provide contact centre agents, as well as any customer-facing tools,” he adds. Compared to the US and Europe, where most call centre services are being offshored to countries like India and the Philippines, Middle East banks tend to deploy the service internally, Abou Ltaif says. “The outsource trend in the Middle East has not picked up as in the rest of the world. Most financial sectors have the financial strength, the people to set their own call centres.,” he continues. “I think what will encourage banks or any financial institutions to go into outsourcing is the establishment of regulations and laws that will protect them as well as protect the providers. Our part of the world lacks these type of laws and regulations, so outsourcing cannot pick up as in the rest of the world,” he says. ||**||The shift to SOA|~|banking3body.jpg|~|Banks in the region are making sure that they are in line with global and Western standards in areas such as security.|~|The need to improve services has also given rise to the adoption of a new IT concept. IT Infrastructure Library (ITIL) is a framework outlining worldwide accepted best practices for IT service management. The concepts within ITIL support in the planning of consistent documented and repeatable processes that improve service delivery to the business. CA’s Riyaz says that by following ITIL guidelines, banks can tremendously improve their service management, including that of helpdesk management. “One of the biggest challenges is the gap between business requirements and the very clear articulation of these requirements and converting that into IT processes. We have seen IT dictating business how it should move ahead. I think it should be the other way around. Business needs to dictate what kind of technology it needs to support it,” says Riyaz. “ITIL is typically for service management and IT management. Most banks have put in place a helpdesk solution. Some of them started off without any ITIL planning. They just came off as a simple IT help desk solution but over a period time they found out that their IT department grew, the number of assets they had to manage grew, and the number of users grew.” The good thing, Riyaz claims, is that by having a helpdesk in place most people have done the first step. All they have to do now is to look at the ITIL principles and go back to the helpdesk and change the way they have deployed it into a full service management solution. Riyaz says ITIL also offers great benefits when it comes to asset management, an issue that IT departments across financial organisations have to deal with every day. “If you look at the asset point of view, the assets that banks have has grown dramatically. It not only grew in numbers, it also morphed into different types of assets. Initially, banks were just looking at networking assets, servers and desktops. Today, their assets include many different types, such as PDAs and other moving assets. It became a huge headache for organisations to do proper asset management. If you look at the ITIL perspective, one of the first steps in ITIL is to do an asset classification. This is one of the reasons why banks and other organisations have started adopting ITIL. And they have started getting quick return on investment (ROI) from ITIL because they could fix those issues in a very immediate way. Another external trend that is influencing the banks’ IT deployments revolves around compliance. Certain policies, such as Basel II and the EMV smart card mandate, have put pressure on banks to review their existing IT resources. “Compliance, obviously, in this region is quite apparent. Due diligence of customers, the know-your-customer situation, the Sarbanes-Oxley, the policies and procedures that they need to be following, that kind of stuff is quite important here,” says Hussain. “Among the major issues banks in the region face is the increasing burden of compliance with local and international banking regulations and corporate governance. Regulatory authorities in the region are starting to introduce higher standards of transparency and accountability for banks while, at the same time, banks are looking to expand into overseas markets that are also introducing more regulations,” notes Zeineldin. Since data lies in the heart of most compliance projects, storage technologies have become hot commodities in the region. “Storage is quite hot, at the moment, I’ll be honest with you,” reveals Hussain. “The projects our channel has been looking at, definitely, a lot are storage projects. Banks obviously are taking storage very seriously, making sure data protection and data integrity are very apparent or at the forefront of what they need. They are looking at things like data protection software, storage hardware, tape drives, network-attached storage, SAN, e-mail archiving and storage solutions that maintains and archives customer records. It’s basically anything to do with compliance,” he explains. “Banks are making sure that they are in line with the global and Western standards, especially on the compliance side, so therefore that is why, I suppose, storage and archiving are very hot,” he reasons. Banks, which were known to have housed their core banking systems in massive mainframe computers, have now aggressively upgraded their legacy systems. In general, about 50% of banks have already fully replaced their legacy systems, says Jamil. “A lot of banks are trying to replace their old systems with the next-generation systems, which are available now. But the cycle is long. For example, if you are talking about selling a solution in the UAE, it will take between six to eight months to sell,” he says. “The changing process is not very simple. It takes careful planning to change your core banking systems. It takes about one to two years in changing it. There are a lot of things involved, but every bank is looking for change in their legacy systems,” Jamil notes. The need for banks to constantly refresh their existing IT systems has given rise to the adoption of service-oriented architecture (SOA). SOA aims to consolidate a bank’s assorted pool of IT assets and design a whole infrastructure that would be flexible enough to accommodate chan- ges and integrate new systems. “There is a lot of pressure on IT to speed time-to-market. You need to have an infrastructure that can deliver solutions quicker and can align differences in IT much faster. It also puts pressure to reduce project costs. You need to have one architecture, one infrastructure, that you can keep using and re-using, so delivery of projects and solutions are done quicker and cheaper. The IT infrastructure also needs to be very flexible to accommodate changes. This flexibility has to look at the future and start providing solutions that can help them be more competitive,” says Bashar Kilani, software group manager, IBM Middle East, Egypt and Pakistan. “What the banks are looking for is a service-oriented architecture. This architecture enables them to integrate the solutions that they have based on standards so that they can quickly integrate and reduce the risk of integrating these components together and deliver solutions faster, quicker, cheaper, more agility and help them meet the requirements that they are under pressure of delivering,” Kilani continues. According to Kilani, SOA is particularly useful when it comes to Basel II compliance because it helps banks look at different components within its operations and package these components into services that can be integrated with existing business processes. “By packing these components as services and integrating them to business processes, banks can monitor transactions and data flows. Based on that, they can put them into play for Basel II compliance and be able to generate the data they need for these compliance reports, processes and techniques,” he explains. “Today the SOA is very much about utilising what you have already invested in. It looks at business processes and allows you to integrate the technology that you have into an open architecture. It helps them utilise the investments that they have already made, maximise returns on particular investments,” Kilani says. “The whole idea of SOA allows people to use new technology with their existing technology,” he concludes.||**||

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