Changing banking at the core
Across the banking industry, cost efficiency and flexibility are the key features demanded of new technology. Nigel Woodward, Sun Microsystems, looks at the question facing many banks: is investing in technology worth the risk?
The banking industry is undergoing an important transitional phase, driven by advances in technology and the manner in which they affect customer behaviour. The paradigm shift in the delivery of retail banking services touches on every facet of a bank’s business, and the next few years will see many important changes at the customer-facing level and at the core.
Sun Microsystems is one of the technology companies at the heart of the development of banking technology. From this viewpoint, its development agenda has been informed by changes in the industry and in the needs of its banking customers, and it perceives flexibility and agility as the over-riding needs among banks.
‘The issues facing retail banks are the same as those facing banking as a whole,’ says Pieter Heyn, Global Industry Strategy Manager for Banking at Sun Microsystems. ‘There is increasing emphasis on controlling cost and operational risk. Security of identity, authentication, delivering services over networks and the acceleration of multi-channel integration are all major trends.’
In a multi-channel environment, retail banks need to develop a consistent approach to customers, no matter how they access services. This requires what Sun describes as service-orientated architecture (SOA).
‘We work with Sun on providing a service-orientated architecture, which is now part of many banks’ core strategy,’ says Dharmesh Mistry, CTO of edgeIPK. ‘Sun has lots of experience in getting flexibility and agility into an organisation – it knows what works in practice. You can’t dabble and get it wrong. Different issues hit you when you do large-scale implementations, so you need partners with experience.’
edgeIPK focuses on the development of front-end applications, having identified the need for a technology champion at the presentation layer. It offers a system that can easily be developed into a bespoke front-end to match a customer’s specific needs.
Recognising its innovation in bridging the gap between business needs and technology capability, Sun has been working with edgeIPK as part of its comprehensive approach to the needs of the banking industry. ‘The big issue is the move toward people who can bridge both business and technology issues, and make technology business-led,’ says Mistry. ‘Banks don’t know how the market will change, so they need flexibility in their platforms so they can adapt to change. Business defines the need and technology provides solutions.’
Changes at branch level
A good example of the changes going on within banks can be seen at branch level. The role of the branch is changing, largely due to the growing automation of many core financial transactions and the development of new access channels like online banking. It is, therefore, one of the areas that banks need to rapidly reconfigure.
‘We see massive changes,’ says Mistry. ‘There is a revolution in the branch.’ This revolution is likely to be seen acutely in Spain, which not only has high internet penetration, but also has the highest number of bank branches per capita in Europe. The branch network, which is an expensive channel for banks to operate, is growing in Spain, especially with the popularity of savings banks.
This places a different balance on the multi-channel strategy of banks in Spain, where the implementation of a new branch strategy is likely to be ahead of the curve. However, across Europe the goal is the same – to lower the net operating cost of branches by making them more profitable.
‘The problem with branches is that they cost a lot to maintain,’ says Julia Bernal, formerly business development manager and now global account manager for Sun Microsystems. ‘So, banks are looking for new services for branches to increase revenue. They are looking to sell more products beyond core banking services, which are being automated. Personnel are more sales orientated.’
Branch solutions
The goal is to find a balance between the cost of new technology and the development of new services. In the branch, IT architecture can save money in transactions or management.
‘Branch staff need to know everything about a customer, through any channel,’ says Bernal. ‘Branches need a thin-client architecture that integrates all channels. Java desktop systems have the functionality a desktop needs and has the standards to manage all the financial peripherals in the branch.’
Sun’s experience in Java applications means it has been able to develop a number of powerful solutions for the branch that enable a single customer view. Java eXtensions for Financial Services (J-XFS), for instance, is a set of standard Java interfaces that support the unique input and output peripheral devices used in the finance industry.
As a standard for a banking device subsystem that features real platform and hardware independence, J-XFS enables access to banking peripherals for new Java banking applications and provides a migration path for current financial I/O subsystems. Banks’ investments in banking device infrastructure are protected.
The Java Branch Controller is another key application that underpins the single customer view. It boosts the compatibility of stateless client with legacy and teller applications, as well as networked devices. It manages the thin-client desktops in the branch, making it easy to administrate the network and to distribute new applications.
Changes at the core
The delivery of new services does not only impact the branch. It demands change on a much deeper level, and it is here that the future competitive position of many banks is likely to be carved out.
A story that illustrates the banks’ need for greater flexibility in its core banking systems is eBay’s search for an industrial strength payment system to support its scaled up operations. Banks promised only high cost and long implementation times for a core banking service of transferring funds. eBay chose PayPal as its partner, with great success. ‘This is a real danger for banks,’ says Heyn. ‘This was just for a simple, core banking activity.’
The solution seems to be core systems replacement. This is currently quite popular among some smaller banks, but among large banks there is reticence.
‘There is a lot of hoopla at the moment about core systems replacement,’ says Heyn. ‘The larger banks see it as too risky and are more focused on core systems re-engineering. This means surrounding core systems, which may be mainframes, with a component-based architecture and then prioritising the parts of the system that need to be updated to service current and future needs.’
This requires investment by forward-thinking banks, and Sun has some of these as its clients, including Swedbank. ‘There is a clear differential between banks that are prepared to invest to get competitive advantage over the next couple of years and those who are less risk averse and try to chip away at cost,’ says Heyn. ‘Progressive technology users are mandating that redesign of basic IT services, using SOA with building blocks like Java and J2EE. A more systematic, standards-based approach, using component-based architecture, is the Bible now.’
Sun’s overall strategy for the banking sector derives from an understanding of the industry’s challenges, and it expects the next few years to see further radical changes in the branch and the back-office, with the banks willing to take a greater risk on systems ultimately delivering better services more efficiently.
Further information
Sun Microsystems
Tel: +44 207 337 9200
Fax: +44 207 337 9217
Email: nigel.woodward@sun.com
Website: www.sun.com
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