Finance and IT: A match made with money

High finance and information technology are two industries that seem as though they are made for each other. Both have similar characteristics in terms of the type of person employed (highly intelligent and often believed to be the more intellectually gifted), both industries trade heavily on concepts and ideas, and both do well in good times, and can do well in bad times.

Other similarities include the constant changing of their respective business landscapes. Legislation is one area where the financial industry constantly tries to look for loopholes and the IT industry is almost impossible to regulate.

Furthermore, since both industries deal in abstract concepts, they are prone to the "virtual reality" syndrome where traditional business models are overtaken by new business paradigms.

A good illustration of the shifting business paradigm is the case of banking group Nedcor, which has wholeheartedly embraced the idea of using technology to expand its reach into the retail financial services sector. Nedcor prides itself on being a leader in using IT in the financial services sector, and its faith has been borne out by its 8% holding of Dimension Data and its early adoption of Microsoft`s Windows operating systems in the mid-1990s.

The heavy use of IT has allowed Nedcor to grow to probably the second largest banking group in SA, yet it doesn`t have the critical market penetration that it would like to have.

Financial sector analyst, ,

However, the IT investment has been a mixed blessing. While it has been of great use in getting Nedcor`s systems operating efficiently, it has not brought the necessary retail market penetration. This was one of the prime considerations that caused Nedcor to try and buy Standard Bank. Following that failure, it has been forced to extend its consumer operations through a number of joint ventures with furniture companies and vehicle-financing groups.

"Nedcor, as one of the smaller banks about 10 years ago, had to find a tool that would give it an advantage over its main competitors. The heavy use of IT has allowed it to grow to probably the second largest banking group in SA, yet it doesn`t have the critical market penetration that it would like to have," a financial sector analyst says.

In fact, the analyst says, Nedcor still feels very vulnerable in the wider world of high finance and that is why it is courting several foreign banks as possible partners in various joint ventures.

"The strange thing is that Nedcor has become almost an IT solutions provider rather than just a bank and this implies an interesting future," he says.

This moves the debate onto the next level: are any of the industries ready to go completely virtual?

With less than 10% of the entire population having access to computers, does it make sense for retail financial operations to depend on the Internet as a primary source of doing business?

The stock broking community`s flirtation with the Internet has not been a happy one. U-Trade, one of the first companies to call itself an Internet stockbroker, has disappeared from the scene. Another stockbroker, Tradek, has struggled long and hard to make a profit.

"It was not the technology that was the problem. In fact, it opened doors for us, but the local retail stock broking market is not geared for it to the same extent as the US is," says former U-Trade CEO Rob Lewis.

It was not the technology that was the problem. In fact, it opened doors for us, but the local retail stock broking market is not geared for it to the same extent as the US is.

Rob Lewis, CEO, U-Trade

SG Securities chief executive David Shapiro says: "The Internet is another form of delivery for us. The technology is there to help us interact with our clients just as much as the fax machine is able to, but it is not the end all of our business."

Shapiro says the implementation of Internet technology is not really a problem despite the shortage of skilled manpower in this country and points to a regulatory environment that has a more direct impact.

"The JSE still requires a qualified stockbroker to effect a trade and until that changes very little else will," he says.

The most profound impact regulation has had on a financial industry was the consolidation of the various laws governing the formerly three financial exchanges into one. This came about last year and makes the Financial Services Board the main watchdog of the financial services industry.

The new Stock Exchanges Act paved the way for the JSE to finally buy out the SA Futures Exchange with the deal having been consummated on 30 July.

The strange thing is that Nedcor has become almost an IT solutions provider rather than just a bank and this implies an interesting future.

Financial sector analyst, ,

The thinking behind the deal is that one securities exchange would be able to face up to world competition a whole lot better than three single exchanges. The sales pitch included the fact that only one trading system would have to be developed. However, things have not worked out that way.

With the JSE`s ever-closer links to the London Stock Exchange, it is now going to use the British Stock Exchange Trading System - unfortunately it is unable to trade derivative products.

"The Safex ATS (Automated Trading System) is quite efficient and simple to use, but no one has told us how the new JSE`s operating system will incorporate it," grumbled one derivatives trader.

He says the idea of combining Safex with the JSE is considered a sound plan within the market, but no one has given much thought, at least publicly, to how they are going to combine the trading systems.

Neither senior JSE nor Safex staff could give any idea as to how they plan to implement the various trading systems.

The JSE`s strategy director, Leanne Parsons, was quoted as saying: "We have a year to work all of that out, but the ability to trade across systems will not be affected at all."

Market participants may well pass a jaundiced eye over such comforting statements after all the time they have spent trying to get to grips with the JSE`s dematerialisation of script exercise through Share Transactions Totally Electronic (Strate).

Doing away with physical share certificates has been the most profound change to the financial markets and such change leads to a lot of uncertainty and frustration. However, after several years of stops and starts, Strate is finally delivering what it promised.

US analysts Thomas Murray and Standard & Poors issued a promising assessment of Strate.

According to the assessment, Strate exhibits low liquidity, asset commitment and counterparty risk exposure based on the system`s design and the settlement guarantees offered by the JSE.

The JSE still requires a qualified stockbroker to effect a trade and until that changes very little else will.

David Shapiro, chief executive, SG Securities

"There is also limited financial and operational risk exposure on the depository at present. However, the degree to which this may change during the next year is dependent on the success of the dematerialisation programme, Strate`s ability to consequently handle higher volumes, and risk of future claims on its assets due to proposed regulatory responsibilities for its participants. These should not adversely affect Strate`s continued development given the full support of market participants," says the report.

The assessment was done in response to the enactment of Rule 17f-7 by the US Securities and Exchange Commission in 2000. The rule, which requires mutual funds to evaluate the custody risks of depositories, comes on top of market pressure for independent analysis on the management and risks of central securities depositories globally.

This is good news for sceptical shareholders who feel that the piece of paper carries more weight than an electronic pulse.

This brings us back into the retail arena as insurance companies and fund managers rely heavily on individual investors to boost their coffers and power within the financial markets.

Insurance companies have been in the forefront of bringing IT to the consumer. Liberty Group introduced its "Blueprint" program to its life insurance brokers three years ago as a means of marketing its products to clients. Almost all of its agents now have a laptop computer with the program installed.

"This is a remarkable paradigm shift in marketing in the insurance industry. In the past there was the `Man from the Pru` type of marketing. Now the emphasis is placed on technology and how it can help the broker and the client set the parameters for a portfolio," a business-marketing consultant says.

In the past there was the `Man from the Pru` type of marketing. Now the emphasis is placed on technology and how it can help the broker and the client set the parameters for a portfolio.

A business-marketing consultant, ,

This integration of technology with product in the retail environment has allowed what were once strictly information companies to develop new business avenues.

I-Net Bridge, the business-to-business arm of the Johnnic e-Ventures stable, recently set up a new division, I-Net Bridge Retail Financial Solutions (RFS), to focus on the retail financial services industry.

At the core of RFS is Markit Explorer, a trading and informational exchange for investment products. With Markit Explorer, consumers, financial advisors, stockbrokers, Internet personal finance portals, unit trust companies, asset managers, life assurers, banks, and other financial services companies can trade and communicate with each other in a secure e-commerce environment.

RFS MD, Brian May, says the trading platform allows financial advisors and product suppliers to embrace the e-commerce revolution, enabling them to run their businesses more efficiently with both seamless and paperless communication between them.

"Financial advisors are now able to reach any product supplier connected to the exchange - this is revolutionising the distribution of products both from a financial advisor`s as well as a product supplier`s perspective," says May.

Most of the communication between companies, particularly in the retail financial sector, still takes place by fax. RFS aims to replace this with its electronic trading exchange.

May says that given the dynamic nature of financial markets today, companies that are slow to improve the processes of inefficiencies will struggle to retain their client base.

This is a remarkable development for a company that started off as a data and financial news supplier to stockbrokers.

This paradigm shift can also be seen in the Absa banking group`s as remarkable transformation into an Internet service provider, after it introduced its free Internet access service.

Absa claims more than 100 000 users have signed up for the service since it was introduced earlier this year. Just how effective the service has been as a financial marketing tool is not yet clear, but it illustrates the cross-fertilisation between the IT and financial services industries more clearly.

Clicks will not replace bricks, but rather what our client needs will determine how we behave.

Richard Laubscher, chief executive, Nedcor

In fact, several Internet service providers have attempted to develop financial products in the past with little success. This was mainly because they are not deposit-taking institutions and they have had to form joint ventures with companies that are.

It is obvious then that the main factor separating the financial services industry from that of the IT industry will be legislation. But consumer needs will also play an important part.

"Clicks will not replace bricks, but rather what our client needs will determine how we behave," predicts Nedcor chief executive Richard Laubscher.