Financial services CIOs reveal investment priorities

One-fifth of this year's CIO50 list is represented by the financial services sector. With the industry still dominated by pressure to keep costs down and with little growth in tech budgets forecast for the next three years, Andy McCue talks to two financial services CIOs about current investment priorities and future trends...

Financial services has traditionally been, and still very much is, the industry that spends the most on technology, both pound for pound overall and in terms of the percentage of company revenues set aside for the IT budget.

The current figures are truly eye-watering. In UK retail banking alone - just one segment of the massive financial services vertical - IT spend is tipped to reach almost £10bn this year, according to analyst Gartner's latest forecasts. In securities that figure is £6.6bn while in insurance the total is £5bn.

But despite the huge headline figures the underlying trend is still one of caution when it comes to IT investment. Gartner is only predicting compound annual growth of around five per cent in financial services IT budgets through to 2010.

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Peter Redshaw, research director at Gartner, explained: "Spending on IT budgets is up a little but it's small. The only place we are seeing much growth are the large investment banks, stock exchanges and asset managers."

He said that growth is then virtually cancelled out completely by inflation and regulatory compliance costs.

He said: "There is very little real growth and that is going to constrain innovation. Most is going to be spent on running the bank - 60 to 70 per cent of the budget."

That means a continued move away from in-house development to more standard off-the-shelf packages, more outsourcing and greater use of lower cost offshore resources, according to Redshaw.

Citigroup is a prime example of that trend. Earlier this year the company announced plans to save billions of dollars through an IT overhaul that includes closing half of its 42 data centres by the end of 2009, standardising applications and using fewer vendors.

One of the brighter areas for tech spend in financial services is investment banking and Graham Yellowley, director of technology services at Mitsubishi UFJ Securities International, says the focus over the last 18 months or so has been away from cost management to growth.

He said: "Everyone is going for bust because it is there to be got but then you have got a new set of scalability issues. There is competition for resources and competition for vendors."

Take one area Yellowley is focusing on. His team is replacing some of the bank's existing systems with what are known in the industry as 'straight through processing' (STP) systems that enable the entire process for capital markets and payment transactions to be automated electronically.

He said: "They are scalable and give us the ability to do some complex products, such as exotic equity and hybrid derivatives trading in one system."

Over in the retail banking and insurance sectors the challenges are based around new consumer trends and changes in the way people find, choose and buy financial services products - largely due to consumer technology trends such as more PCs in the home and the widespread use of high-speed broadband.

Mark Foulsham, head of IT at online insurance company eSure, says that financial services companies are starting to catch up with innovation coming out of the media- and consumer-led markets.

He said: "Companies are really trying to capitalise on web 2.0 developments, although there is still a lot of caution from the dot-com boom times. But you are now seeing organisations thinking a little more out of the box and starting to appreciate things like YouTube are making money and the lessons to be learned from integrating and communicating with customers in a more contemporary style."

Online price aggregators are one development that has had an impact on the financial services industry, by eroding margins further and increasing customer churn and competition.

That's no truer than in insurance and eSure's Foulsham says companies need to use technology to help position their brand and offerings in better ways through the price aggregation sites.

He explained: "What the aggregators don't do very well is the quality behind those products - it's just on price. At the moment add-ons like legal protection or linked products are hidden from those aggregator tools. We are building back-end data structures to plug into aggregators better."

In terms of technology investment this translates into a more flexible and agile service-oriented architecture (SOA).

Foulsham said: "Our roadmap is very much an SOA roadmap. We have 12 web services-oriented systems. A lot of that is oriented around the way we improve customer service."

Of course no analysis of financial services IT would be complete without the discussion on regulatory compliance. Red tape and the associated IT changes needed to be compliant with it have always been high on financial services companies' IT priorities and that is currently around the Markets in Financial Instruments Directive (MiFID), which comes into force in November of this year.

The directive, which mainly impacts investment banks, market data companies, trading platforms and exchanges, will allow companies to provide services across borders and establish branches in other European countries but analysts predict IT compliance will cost the industry around £1bn.

Gartner's Redshaw said: "MiFID readiness isn't tremendous but I don't think it is a huge problem. Overall it will be a good thing. It will reduce market friction."

Mitsubishi UFJ International's Yellowley said one of the key things about MiFID is having to revamp the company's entire 'know your customer' process - the due diligence financial services institutions must do to verify the identity of customers in order to prevent fraud or money laundering.

He explained: "You have to go into different categorisation of your customers. Customer relationship management (CRM) and static data reference systems all have to change to accommodate that. You have to have stronger anti-money laundering processes and then you have to think about transaction reporting where some of the requirements are more onerous than before. There is an awful lot of change and the timescale is tight."

Redshaw argues that successful financial services institutions will need to make better use of customer information through technology because of the increasingly consumer-driven nature of the industry.

He said: "Banks have to admit CRM was a one-way push model but I don't think that is enough anymore. It was a one-size fits all model. There needs to be a lot of technical integration behind the scenes."

Security also remains a high priority for any financial services institution because of the potential damage to brand and reputation from any public data breach. In recent months this has seen many of the high street retail banks, including Barclays and the Royal Bank of Scotland, introduce home chip and PIN readers for their online customers in an attempt to combat rising levels of fraud through this channel.

However, Redshaw warns that while this improves security it also makes things more complicated for the average customer.

He said: "It's very easy to improve security but in fact the more authentication and tokens the more difficult the customer experience becomes. It is difficult for customers to have their cake and eat it."