We will remember 2004 as a year of consolidation and reactions to regulations in the financial services industry. Looking ahead to 2005, we see … more of the same, but with internationally flavored twists.
Thanks to initiatives like Check 21 (The Check Clearing Act of the 21st Century), financial institutions will have to collaborate to process the IRDs (image replacement documents) that will be exchanged in place of checks. While large banks are investing heavily in technology that will help clear checks faster, smaller banks are still figuring out what to do. We may see banks partner up to share expensive technology to maximize efficiency.
“Banks and insurers need to snap out of their paralysis and move their industries forward,” says Dominick Cavuoto, president of the global financial services practice at Unisys. “Business as usual doesnt cut it anymore. We see financial institutions breaking both physical and philosophical boundaries in how they do business. We see banks and insurers structuring businesses and using technology in new ways. The smart ones have technology as a strategic partner to achieve their vision to transform—to look at the world differently and respond faster to global trends.”
As real estate costs head higher, banks may consider sharing technology investments and retail costs to collaborate on branch locations. Unisys analysts suggest the possibility of several banks opening a joint branch together where a niche customer base requires a presence but maintaining a full-service branch would not be cost-effective. As technology improves and more customers move to self-service, collaborative efforts in ATMs and other retail models should continue to evolve.
Another issue that financial institutions will have to face with vigor this year is fraud, primarily characterized by phishing attacks but also growing to include the possibility of check image fraud as well. Coordinating fraud monitoring and detection across ATM, check, online, wire and other payment channels must be implemented to better protect customers and deter thieves. The European Union is mandating chip-and-pin technology in bank cards in 2005, so banks operating in those countries will face greater security pressures and fraud challenges.
Mergers and acquisitions have created large financial institutions with global operations. Cross-border transactions are common in the U.S., where the immigrant population growth has caused banks to improve ways to transfer funds between relatives all over the world. New regulations going into effect in the European Union will generate cooperation among banks in payment processing and insurance administration. Potential new markets include Central and Eastern European countries where economies, cultures and needs have matured for more sophisticated banking and insurance products.
Exchanges will be
Equity exchanges will be crossing international borders as well. Were seeing partnerships among exchanges overseas that will, most likely, extend to U.S. exchanges. The NASDAQ is doing its best to qualify for official status, primarily to be able to file an IPO and raise capital. Competition among U.S.-based exchanges will stay hot as the NYSE strives towards increased automation, in an effort to stop defections to the electronic exchanges.
Brokerages that operate online are going after the heavy traders—hedge fund operators and financial advisors as well as day traders. Were seeing tiered pricing to lure frequent traders, while less frequent traders and those with small accounts pay higher transaction charges along with maintenance fees. Smaller investors should make an effort in 2005 to pick one brokerage and consolidate their accounts to qualify for better service and lower fees.
Regulations will continue to drive IT spending in the financial sector. The wisest companies are finding ways to leverage regulatory compliance, turning it into information that can be used internally to gain an advantage in the market and externally to make shareholders happy.
As an example, lets look back to the Y2K era. If you were a CIO and you needed money for Y2K in 1999, you got whatever you wanted. The fear was that on Jan. 1, 2000, your accounting system, among other things, wouldnt function any more. None of the regulations out there right now have that same looming threat, though. Nothing says, “Your whole business shuts down if you dont get on the job by this date.” Theres shareholder risk if your firm is out of compliance, but no threat to shut down the business.
CIOs were able to request money to invest in compliance over the last couple of years, and that trend will continue. Corporations will keep working to comply with both the Patriot Act and with the provisions of Sarbanes-Oxley, since those have rolling deadlines rather than a firm cut-off date. If that work is being done well, there are byproducts that will help a firm analyze its sales efforts in detail: transaction-level data by customer, along with multidimensional profit analysis. To comply, a company has to build an effective data warehouse, which has multiple benefits beyond compliance.
Shannon Drost, vice president of the global banking practice at Kanbay International, says, “We have not heard the last of Sarbanes-Oxley or the Patriot Act. Those acts will continue to evolve over the next four years of this administration. If we change parties in the 2008 election, I guarantee that there will be drastic changes—changes could come at you that make you tear down everything youve done and make you start over.” Drost recommends installing systems that are flexible enough to handle the waves of modifications that will be necessary as regulations morph.
Beyond compliance, the challenges of 2005 will help financial firms as well as corporations that rely on financial technology to manage change, control costs and show results.