Erstwhile chairman of the Federal Reserve, Paul Volcker, said recently that the only financial innovation of this generation was the ATM. He was speaking in the context of the rampant fraud in Wall Street, which has spent millions on robot trading programs to rig markets, financial products with nothing to back them and fee structures that explode on purpose.
For the rest of the world, spending money on financial software is still essential. But what are the trends? Will cloud computing ride to the rescue? And how can true innovation take place in what is traditionally a very conservative environment?
Francois Beyleveld, performance management consultant at SAS Institute, says he's seen a lot of companies looking to build rather than going out to buy.
"That may be because they're not actually aware of what's out there. When we talk to potential customers, we do tell them what is available but they normally have already spent the same kind of money building something."
Rudi Leibbrandt, practice manager at Sybase, says international trends are prompting local institutions to look at newer solutions.
"There's still a lot of innovation in international markets, especially in new classes of technology to be able to cope with new regulations. People are storing a lot more data; some customers in Germany, for instance, have to comply with legislation that requires them to produce value-at-risk analysis on a real-time basis.
“But that is inspiring local banks to look at similar technologies: squeezing latency out of systems and using information to make decisions faster. And that does lend itself to the build rather than buy approach: construct something on top of a standard platform so that you can have flexibility."
Lee Child, MD of Qorus, has seen lots of money spent but doesn't think there will be much more.
"What we've found in our customer base is that the guys have spent a ton of money and they now have all the bits. Now they need to tie it together and get some genuine value out of it. It's about productivity and taking all those islands of structured and unstructured data and merging them into something that's usable in a business process. So there's a lot of interest in something that can leverage that.
“I don't think guys are keen to spend a whole lot more on financial solutions."
Paul Wilde, sales director for banking and integration at Software AG, agrees that productivity and integration are where the focus is.
"At Software AG, we deal a lot with the legacy environment because of our background and what we're seeing is clients taking a much closer view at what they have. The integration element is critically important, of course, but the value add is being driven more and more and also the ability to be productive in an environment.
“It's no longer a case of toss the mainframe and the legacy, but rather, 'How can we use this?' It's a balance of innovation versus regulation. Banks are hammered by regulation and are less willing to get out there and innovate. Banks do have islands of innovation internally but they're not important to the bank as a whole."
Leibbrandt also sees a gap between the saying and the doing.
"A lot of organisations are saying they're focusing on standardising and getting consolidated. That doesn't mean it's actually happening. You can talk to CIOs about rationalising and some of them actually have more systems than last year. There are pockets where it's happened and in some cases, there is some innovation coming out of them. But where a line of business is responsible for its own P&L, then it will do what's best for it.
“I agree that we need to find technologies or solutions that leverage data in other systems. But in a bank where there's lots of legacy, switching off a system is probably the most difficult thing to do."
Qorus' Child says there needs to be more attention paid to the user.
"We're coming up to a time where we need to start trusting people in the organisation again. We've spent all this money on investment systems and they're built by brilliant people who know the inner workings of finance but, typically, the people who have to operate and run them have not been empowered to do so.
“We should trust people and let them use data they way they want to. We all interact with data every day through social media. We should be bringing that skillset inside the working environment. I'm not saying we should mess with the underlying systems, but we should be presenting data in ways that people can use."
Dave Ives, IT director for business intelligence at IS Partners, says there's only limited innovation in integrating systems at the moment; it's just that everyone is getting much better at managing the latencies of selling integration systems.
"People are buying lots of software. Some of the software vendors are resetting their numbers to 2007 levels but not to 2002 levels. Is the integration problem going to go away? No. Software vendors are very good at selling into niche situations. There will always be another regulation or another Bill that allows them to sell some more software."
The guys have spent a ton of money. Now they need to tie all the bits together.
Joining fee
Ives says the biggest constraint is skills.
"Not just in IT but people with good business skills. So our job is to make their lives easier. We love our software, get excited and then, after delivery, we get low usage and penetration rates. So then we blame the dumb users.
“There's still an expectation gap out there. If you are a retailer in SA, what are you worried about? They're more worried about their cashback programmes than their IT spend because IT spend is a rounding error."
Cleaving to the cloud?
Will the cloud solve the financial innovation challenge? Paul Ruinaard, country manager for F5, says not.
"Innovation is always coupled with risk and lots of things are risky these days," he says. "There's more data, more Web access, more content available for people to download. While innovation is nice, people are running out of ways to deal with the complexity it brings. Cloud still has a lot of issues that need sorting out: who has access and where the data has to go."
Ashley Regenass, MD of Synergy Group, says there are two challenges with cloud that must be overcome.
"There are two problems in this cloud hype cycle," he notes. "One is that filling a room with tin guarantees employment for the CIO and, secondly, people are looking for the wrong things from the cloud. It's not about getting software but getting a complete solution. I can remove a certain requirement and hand it off to a specialist in the cloud and that will make me more competitive. You could do it yourself but then you won't have the breadth of transaction flow to get the benefit."
All of which changes the game completely, says Freda du Toit, director of Kgali Investment Holdings.
"When you talk about the cloud, it's not IT anymore but a service. Business won't care what you run in the back end. Maybe the CIOs of today will care what machines they are running, but in five years' time, it will be all about service levels, track record and experience. IT vendors will have to stop selling IT and rethink their businesses, their marketing and everything else around it.
“I think innovation will be driven out of the bank and the financial institution and it will happen outside. It's up to the vendors to bring it to the industry. You can see this already in the life insurance industry where we operate a lot, more and more guys are coming with great solutions on how to sell or service the business."
Rather embarrassingly for SA, Du Toit says she has seen tremendous innovation in the rest of Africa.
"They don't have our issues with legislation and rules. They don't care. We're currently in discussion with a number of companies in Ghana that want to outsource their entire micro-lending backend to the cloud. Can you think of anyone here who would even consider that?"
Traditional bank innovation has always been hamstrung by lack of skills and the prevalence of legacy systems that can't be touched lest they bring the entire organisation to a grinding halt. If you have no legacy systems, then it's a different story.
Comments Trevor Ndobela, MD of Quarphix: "If you look at Capitec Bank, it's one of the biggest stories in the financial services sector this year, simply because of the system they've put in place to ensure that there's no paper. It's almost a paperless environment. My grandmother uses Capitec and she gets responses within an hour. Those are the kind of systems that need to come in across the board."
Capitec's thinking is also a people thing, notes Software AG's Wilde.
"The people element is vitally important. What becomes important now is to empower people to do business innovation rather than IT innovation. The Capitec argument is a very strong one. Capitec saw the need for something that wasn't just another bank but something different. But that idea couldn't have been driven by tier-one banking people but rather non-bankers."
IT vendors will have to stop selling IT and rethink their businesses, their marketing and everything else around it.
Sea change
For bankers, it would be nice if there was anyone left to do the thinking. That's not the case, says SAS' Beyleveld.
"I worked in the financial services industry a long time ago and I went back on a project recently. What I found was there had been a massive brain drain from the banks and a lot of the processes we had put in had disappeared. The in-house skills were gone and so everyone was too afraid to touch their legacy systems. Their answer was to put SOA or an ESB on top of it all to service their retail customers.
“Also, a lot of IT skills have been outsourced. Now they've realised these problems and they're trying to get these skills back. The danger is that these legacy systems are a time-bomb waiting to explode. There's a lot of spaghetti out there. Yes, people are buying a lot of software because they think it will replace the skills lost."
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