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www.fsteurope.com • Q2 2009

CHANGING MAN Nationwide’s Peter Stafford: an open approach to business transformation Page 34

THE BIG BOUNCE Javier Perez of Mastercard: why the downturn could be good for business Page 86

ELECTRIC DREAMS HSBC’s Marcus Treacher: can e-commerce fulfill its potential?

Page 40

SHOTGUN

WEDDING Is the honeymoon already over for the Government-backed marriage of Lloyds TSB and HBOS? Page 28

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We provide the fact-based information required to improve performance and crucially, the methods and systems by which to implement the changes needed.

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EDITORS NOTE:nov08 24/04/2009 13:33 Page 7

FROM THE EDITOR

7

An issue of trust All the bailouts in the world can’t replenish one vital commodity.

M

“Economies and markets are by nature cyclical, and if you set a prudent policy it gives you much better consistency and much less volatility. At some point I think there will be recognition that those kind of values are worth something.”

Lloyds Chief Executive Eric Daniels (page 28)

“Spending money is the easy bit. It’s more difficult to know why you’re spending it.”

Nationwide’s Peter Stafford (page 34)

ost of us will have had a friend whose main character trait is their complete lack of reliability. They fail to pay back debts, break promises and generally let you down at every opportunity. But you put up with the mixed messages and the uncertainty, because somewhere there remains a kernel of what made you friends in the first place. Unfortunately for the financial industry, this resilient wellspring of positive associations doesn’t usually exist in its relationship with the general public.

If you’ve been following the news you will have been deluged with reports and claims from financial institutions, regulatory bodies and government leaders.

Pronouncements that things are getting better are immediately countered with information to the contrary. We’re told that there are no more surprises round the corner, just before hearing about fresh bailouts, losses and bank failures. Even for those of us with a vested interest in the workings of the financial markets, maintaining a clear idea of exactly what is going on is a challenge. Imagine how difficult it must be for the huge swathes of population whose main source of financial news comes from often sensationalist stories in the mainstream media. With so much conflicting information, it is understandable that people don’t know who to trust.

By it’s very nature, the financial world is complex. Its elevation from the business section to front-page news has inevitably had repercussions as in-depth economic reports are boiled down to three-word, 50-point bold headlines. But this doesn’t absolve the industry from all of the responsibility. As we see in this issue’s cover story, top officials from Lloyds TSB and HBOS managed to sit in front of a government panel just a few days before announcing losses of £10 billion without feeling it necessary to mention their troubles. These revelations, and others like them, only serve to further tarnish the reputation of an industry that many reflexively distrust.

There are few businesses where consumer confidence has such massive potential to generate both positive and negative results. The boom years leading up to the crash were characterised by the impossibly buoyant assumption that the only way was up. We’re now experiencing the comedown from this sugar rush and every time a new piece of information contradicts what we thought we knew, our reserves of faith are depleted further. It’s now necessary for those with a stake in the financial industry to embrace transparency as never before. If there is bad news coming, just get it out rather than trying to delay the inevitable. A worrying revelation that turns out to be true will make it all the more likely that subsequent positive predictions will be taken at face value.

The story of the friend who keeps letting you down usually ends one of two ways. Either they realise their flaws and make an effort to change, or they are slowly edited out of your life. Our financial leaders need to start owning up if they are to ever regain public trust.

“In this climate, people start to be a bit more mindful and rather than using cash, we have seen more usage of plastic in order to keep money in the bank longer.”

MasterCard’s Javier Perez (page 86)

Huw Thomas Editor

CONTENTS FSTEU:jan09

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CONTENTS FEATURES

It takes a Nation of millions How do you achieve true business evolution in an economic downturn?

According to Nationwide’s Peter Stafford it’s all about picking your partners

40 Plugged in banking Can e-commerce be all things to all people? HSBC’s Marcus Treacher thinks so

34

28 Marry in haste, repent at leisure Lloyds TSB and HBOS: a match made in heaven or the marriage from hell?

FST editor Huw Thomas investigates

86 Mr Nice Guy MasterCard Europe’s Javier Perez on the importance of being nice and why the credit crunch could be good for business

CONTENTS FSTEU:jan09

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CONTENTS SECURITY, RISK, PAYMENTS & OUTSOURCING

44 Are friends electric?

FST asks Aviva’s Ian Baxter about the challenges that the digital world brings for financial institutions

54

50 A human fit David Lacey explains the importance of managing the human factor in information security

54 The conversation Now is the time to get out of the back office and talk business, says Seb Kacary

60 Phish tales David Jevans discusses the challenge of fighting the global war on phishing and crimeware

62 Landing on your feet The financial industry is tumbling. Mikael Krohn explains how to reduce the impact

66 Diagnosis merger Capgemini’s Sean Drewett outlines the risks and opportunities of an accelerating market

70 The compliance race Paul Thomas looks at how CIOs can comply with the changes to liquidity risk management

72 Labour of love For Michael Lardschneider, security is more than just a job, it’s a passion

74 The outer limits In an age of uncertainty, how should financial institutions approach the issue of outsourcing and how far should they go?

80 Risk/reward David Samuels on managing risk in a global financial meltdown

84 Lock down Bruce Schneier discusses current security issues

ASK THE EXPERT 52 Dr Richard Sykes, Steria 98 Dr Amit Sinha, Motorola

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CONTENTS ECM & COMMUNICATIONS

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104 ROUNDTABLE 76 Outsourcing, with Bjorn Reynolds of SafeGuardWorld and Jim Brown of BRAL/Fluency 104 eSignature solutions, with SOFTPRO’s Ralph Maute, Steadlands’ Peter Craik, Rolf Schröder of Wacom and xyzmo’s Gerald Cäsar 116 Document management, with Kofax’s Thomas S. Senger and Logica’s Fredrik Ring

EXECUTIVE INTERVIEW 48 William H. Pound, Absolute Software 58 Nigel Cox, BPC Banking Technologies 64 Maurizio Capuzzo, IPC Information Systems 124 Justin Bailey, eCopy 102 Sign of the times

92 Customer power

Do e-signatures really spell the end for paper and ink?

Keeping customers happy whilst growing your base is absolutely vital

113 Content on demand

96 Trust me, I’m a banker

Hanns Köhler-Krüner tells FST some home truths about ECM development

By Jens-Henrik Osmundsen

120 Over the hedge?

100 The future of CRM Why there is growing demand for CRM applications

The role Bernie Madoff’s arrest will play in putting back together the financial industry

IN THE BACK 136 Away on business 138 Backchat 140 In review 142 Face off 144 Final word

128 REGIONAL FOCUS 128 Fine China China’s economy was suffering long before the crunch went global 132 Iceland’s meltdown How can Iceland save itself from sinking?

CREDITS FSTEU:apr09 23/04/2009 14:21 Page 12

24-25 November 2009 Virginia, USA

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Editor HUW THOMAS Managing Editor BEN THOMPSON Associate Editor MATTHEW BUTTELL Deputy Editors NATALIE BRANDWEINER, REBECCA GOOZEE, DIANA MILNE, JULIAN ROGERS, MARIE SHIELDS

The Financial Services Technology Summit is a three-day critical information gathering of C-level technology executives from the financial services industry.

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“This event continues to be one of the most worthy of the time and expense expenditure for the development of networks and an overview of what is on the minds of other financial services companies.” Robert Kee, Bank of America “The organisation was excellent with easy transition from private meeting to workshops. Quality of participants was outstanding.” Thomas Butler, Anglo Romanian Bank

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FRONTLINE ANALYSIS

FOOTING THE BILL

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IN ITS APRIL GLOBAL FINANCIAL Stability Report, the International Monetary Fund (IMF) issued a stark assessment of the pain still to be expected as a result of the economic downturn. According to its calculations, the total costs of writedowns by banks, pension funds and other financial institutions could exceed four trillion US dollars in the coming years. It is so stagger-

ing a figure that it defies comample, would have to put a furprehension. As an illustration, ther US$250 billion into its every man, woman and banking system and may child in the world well have to nationBanks in would have to alise further banks Asia will write down cough up more before the crisis is than US$630 to over. The report pay the debt off. also indicated that Few countries the global financial came out of the resystem remains under port with their reputasevere stress in both adtions intact. The report vanced and emerging market suggested that the UK, for excountries.

US$336 billion

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FRONTLINE ANALYSIS

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NUMBER CRUNCHING

US$4 trillion Total cost of bank bailouts

Equivalent to

US$630 from every person in the world

European banks account for

39% of total Compared to

37% of the total, compared with 37 In addition, global banks percent for US banks. Banks in are expected to take an addithe United Kingdom and tional US$340 billion of Asia (comprised of writedowns on expoUK banks Japan, Australia, sure to emerging will write down New Zealand, market assets, Hong Kong SAR, bringing the total to and Singapore) $2.8 trillion. are estimated to Regionally, take roughly similarEuropean (excluding sized writedowns of UK) banks are expected to US$316 billion and US$336 bilsuffer the bulk of potential lion, respectively. writedowns, taking 39 percent

US$316 billion

This suggests that there remains some hardship to be felt in the coming months and years as the full scale of the losses is borne out on banks’balance sheets.

However, shortly after the report was published, the IMF was forced to withdraw its claims about the size of the UK’s bill. UK Government estimates put the figure closer to US$90 billion, though a good deal of uncertainty remains.

for US banks

UK estimates its costs at

US$90 billion www.fsteurope.com

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FRONTLINE

MONEY SPENT ON BAILOUTS Government financial sector bailouts as proportion of GDP (as of February 2009)

Public costs of banking failures (countries)

UK Norway Netherlands Sweden Greece Austria Ireland Belgium Spain Germany

19.8% 13.8% 6.2% 5.8% 5.4% 5.3% 5.3% 4.7% 4.6% 3.7%

Source: IMF report The State of Public Finances: Outlook and Medium-Term Policeies After the 2008 Crisis

TOUGH REPORTS ACCORDING TO THE EMPLOYERS’ GROUP, the CBI, the UK economy may well see economic growth in spring next year, but any such recovery will be ‘slow and fragile’. Details of the report predicted that the economy would shrink 3.9 percent this year, but grow 0.2 percent in the second quarter of 2010.

Meanwhile, in a separate report from the Ernst & Young Item Club, predictions show that the economy will shrink by 3.5 percent this year and again shrink by 0.1 percent through the whole of 2010.

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www.fsteurope.com

For the CBI, the first quarter of this year had been ‘tougher than expected’, leading it to revise its outlook. Its prediction of a 3.9 percent contraction in the economy this year is significantly worse than the 3.3 percent it predicted back in February.

In response, Richard Lambert, director general of the CBI said: “There are a few tentative signs that the steepest phase of the recession is now behind us, and that the banking packages, aggressive monetary policy and fiscal support will steady the pace of decline from here on.”

RISE AND FALL EUROSTAT HAS ANNOUNCED that most EU countries’ budget deficits rose last year as spending increased and income fell.

According to their findings, the collective deficit of the 27 countries in the EU rose to 2.3 percent of GDP last year, up from 0.8 percent in 2007.

The deficit in the 16 countries that use the euro increased to 1.9 percent of GDP, against 0.6 percent from 2007. Ireland’s deficit was the highest, at 7.1 percent. In Spain, deficit fell at 3.8 percent, while France record-

ed a deficit of 3.4 percent, and other eurozone countries also breached the bloc’s three percent deficit ceiling.

These findings now mean that Poland, which plans to join the currency zone in 2012, no longer meets the key budget deficit criteria. What’s more, as European governments spent heavily last year on bank bailouts and fiscal stimulus, deficits look set to continue to rise. The commission has forecast that the eurozone’s deficit will reach four percent of GDP in 2009, the highest on record yet.

TOP 50 BANKS THE WORLD’S TOP BANKS – and the institutions that no longer exist. Ranked by The Banker magazine, based on latest assets figures.

Rank Assets

1 US$bn

Market value now and % change over 12 months

SPAIN

17 US$1344bn Santander Central Hispano US$60.2bn -51%

ITALY

13 US$1504bn UniCredit US$4.9bn -90%

33 US$739bn

BBV Argentaria US$32.1bn -53%

26 US$834bn

Intesa San Paolo US$34.7bn -53%

SWITZERLAND 8 US$2019bn UBS US$34.1bn -47%

19 US$1209bn Credit Suisse Group US$36.9bn -24%

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FRONTLINE

CASH IS KING

SWISS HEADS ROLL

massive 35 pence when a cusREPORTS OF THE DEMISE OF tomer uses a credit card.

CASH are greatly exaggerated, The BRC broadly supports new new reports claim. Despite the impayment technologies such as conpression created by some banks, tactless systems, which are init is the most popular means of payment and the most cost effec- creasingly being pushed as tive for retailers. New figures from alternatives to cash, but banks must reduce their charges to better the British Retail Consortium reflect the costs they actually incur (BRC) show cash is used for 56 percent of all transactions and 33 in processing these transactions. If charges for every payment method percent of all retail spending is were as low as they are done with cash. for cash, over £800 The BRC’s An average cash transaction million in cost savAnnual Cost of costs retailers ings would be Collection survey passed on to cusincludes results tomers through from 16,000 debit cards costs eight pence and 35 lower shop prices. shops, large and pence for credit At a time when small, multiples cards many retailers are being and independents, squeezed between falling dewith a combined sales mand, the need to discount and a turnover of £139 billion a year, range of rising costs, the size of over half of total UK retail sales.

With recession leaving many cus- these charges threatens the viabilitomers reluctant to spend, the re- ty of some. British Retail Consortium Director General port shows cash is in favour as a way of helping them monitor and Stephen Robertson said: “Banks are pushing new cards and paycontrol their spending. ment technologies hard, which is The BRC report also highnot surprising when they stand to lights the huge extra costs make so much more in charges. banks impose on retailers for Despite the recession, they are processing card transactions. looking to maximise their profits An average cash transaction and protect their own interests at costs retailers two pence; a the expense of customers who ultidebit card payment costs eight mately meet these costs.” pence, but they are charged a

two pence

IN SWITZERLAND, the country’s biggest bank, UBS, is to sell its Brazilian outlet – a financial services firm bought in 2006 – back to its original owners for €1.9bn. UBS say the move will reduce its risk profile, strengthen its balance sheet and sharpen its business focus.

But, as one of the biggest banks hit by exposure to the subprime loans crisis in the US and ensuing turmoil, the Swiss bank has a long way to go yet.

“There may be more transac-

tions like this to follow,” analyst Mathias Bueeler predicts. “Just this month, UBS said it would seek to cut costs by shedding 8700 jobs by 2010,” and that news came as the bank announced it had lost about €1.3bn Swiss francs in the first three months of 2009.

In addition, US authorities are also investigating the bank over alleged fraud and tax evasion involving US citizens, and the bank has officially announced that further job cuts are inevitable.

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NEWS IN NUM8ERS

Nationwide announced a €350 million business transformation project (p34) In 2008,

3

195 million

MasterCard cards have already been issued to date across Europe (p86)

Less than a month after their merger,

Lloyds announced that HBOS had lost £10 billion (p28) By the end of the second quarter of 2008, Iceland’s external debt was

€50 billion

(p132)

admits liabilities of approximately US$50 billion (p120) Fraudster Bernie Madoff

www.fsteurope.com

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FRONTLINE TOXIC LOSS

TOP 50 BANKS THE WORLD’S TOP BANKS – and the institutions that no longer exist. Ranked by The Banker magazine, based on latest assets figures.

1 US$bn

Rank Assets Market value now and % change over 12 months

FRANCE

3 US$2494bn

47 US$514bn Groupe Banques Populaires US$5.4bn -78%

38 US$638bn

BNP Paribas

Crédit Agricole Group

US$27.7bn -48%

US$42.7bn -44%

Groupe Caisse d’Epargne Co-op

11 US$1578bn

31 US$815bn

Société Générale

Crédit Mutuel

US$25.1bn -48%

Mutual

SWEDEN

NORWAY 30 US$816bn Nordea Bank Norge

6 US$2268bn

DENMARK 36 US$660bn Danske Bank

Nordea Group US$22.9bn -36%

DECEMBER SURPRISE

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www.fsteurope.com

lending activity and aggravating the country’s recession, are likely to be into placed individual lender-owned ‘bad banks’.

This alternative would be instead of placing the assets into a new single, governmentcontrolled bad bank, something Merkel has been apposed to for some time. Now, senior officials have agreed to finalise a draft law over the next few weeks, ready to go before the cabinet for approval by parliament in the summer.

44 US$573bn

US$6.2bn -71%

EARLY THIS MONTH, while New York-based Goldman Sachs was completing its US$5 billion offering to help with early repayments of TARP (Troubled Asset Relief Program) funding, analysts were busy reviewing the firm’s impressive first quarter earnings.

Now some analysts are suggesting that not all might be what it seems. Due to a change from fiscalyear reporting to year-end reporting (Goldman was recently adopted the more familiar reporting model since becoming a bank holding company), the firm effectively reported

SENIOR MINISTERS IN GERMANY have said that the country is moving ever closer to a solution for dealing with its banks’ toxic assets.

In fact, they say that firm plans are expected by the summer.

Chancellor Angela Merkel recently led a top-level meeting and is said to have made a ‘big step forward’ in recovery plans.

And now, according to reports, the billions of euros of toxic assets, which are hindering banks’

earnings for two periods (JanuaryMarch 2009 and December 2008). Subsequently, because all eyes fell on the fantastic results from Q1 2009, analysts have largely overlooked Goldman’s earnings from last December.

These results actually show a US$1.3 billion pretax loss for the month, which is actually quite a considerable figure, but by separating the two periods, Goldman has been able to blunt the impact of asset writedowns over the two timeframes, resulting in euphoria and analyst praise.

PROVIDING A PERFECT SOLUTION tions is integration with the busiOITUK LTD., a specialist in proness to ensure that information is viding C-Cube Electronic delivered on time and to the right Document, Content place. OITUK Ltd has provided inManagement and Workflow sotegrated solutions over the last 15 lutions, based on the C-Cube years using the following underlysoftware suite, now offer sysing technologies: document tems that scale from small management, workdepartmental appliflow, web portal cations to large OITUK Ltd and XML integraenterprise-wide has provided tion, electronic solutions. integrated solutions over the last forms processThese sysing, electronic tems include records managethe C-Cube ment and collaboraPortal, Electronic tion facilities.

Forms, Content Currently, OITUK works with Searching, and C-Cube companies and organisations Electronic Document & Records across the public and private secManagement System (EDRMS), tors. Its clients include hospitals, offering specialised solutions, local authorities, law enforcement including legal compliance, inagencies and the private sector, voice capture and authorisaand the common theme running tion, health records through all these customers is management, local authority their need for a robust, legislation applications, human resource compliant information managemanagement and information ment system, which acts as a hub web portals. for vital information.

The key to all OITUK solu-

15 years

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FRONTLINE INTERNATIONAL NEWS

A HEFTY STAKE

OVERSHADOWED BY DEBT CONCERNS ABOUT DEBT LEVELS All this comes despite net inat Bank of America have overcome soaring to US$4.2bn in the shadowed its better than first three months of 2009 expected profits for from US$1.2bn a year the first three earlier, beating anaAll this comes despite months of 2009. lysts expectanet income soaring to While the US’s tions. Bank of largest bank set America’s results aside were inflated by in the first three US$13.4bn to its purchases of months of 2009 cover its fourth Merrill Lynch, which quarter’s losses, its added US$3.7bn in net shares sank 24 percent and income, and Countrywide, the news dragged other banking which boosted the firm’s mortstocks lower. gage division.

US$4.2bn

IN THE US, lenders that are owed billions of dollars by troubled carmaker Chrysler are prepared to swap this debt for a stake in the company, new reports suggest. The banks and investors, owed US$7bn have offered to write off all almost all of that debt in exchange for more than a third of the company.

Such an offer has been

criticised, however, by US government officials for offering ‘an unjustified return’ to the lenders. They say that Chrysler needs to find new funds quickly to secure its future and the carmaker, which already received US$4bn in government aid, now only has until 30 April to come up with a viable plan for its future if it wants to gain further state funding.

INDIAN TAKE AWAY IN ATTEMPTS TO BOOSTTHE ECONOMY, the Indian central bank has cut a key interest rate as it aims to boost the economy.

The repo rate, which allows the Reserve Bank of India (RBI) to inject shortterm money into the banking system, has now been cut to 4.75 percent.

The move came as the central bank said it expected economic growth to slow to six percent in the current financial year. In a statement, the RBI said, “Any upturn in the growth momentum is unlikely in view of the projected contraction in global demand during 2009, particularly the decline in trade.”

This new cut now means that the RBI has now cut the repo rate six times since last October.

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FRONTLINE INTERNATIONAL NEWS

NAMIBIA HIT HARD

A NEW MEXICO?

THE IMF SAID THAT GDP tained further efforts were GROWTH in the South West needed to address the high unAfrican state of Namibia employment and has been hit particuHIV/AIDS challenges larly hard by the in the country.

GDP dropped to about economic slowHowever, the down. In fact, IMF said that GDP dropped to pegging its exlast year compared about three perchange rate to to 4.1 percent in cent last year from the South African 2007 4.1 percent in 2007. rand had served The IMF has also called on Namibia well, but added the country to expand growth in that such a move had left it connon-mineral sectors, to help strained when it came to potenease poverty and has said sustial interest rate cuts.

THE INTERNATIONAL MONETARY FUND (IMF) has formally approved a US$47bn line of credit for Mexico. It is the first country to get the credit under a new fast track scheme designed to help developing nations cope with the global economic crisis.

Mexico has said it does not intend to use the money, but applied for it as a precaution in the event of further deterioration in global markets. The country, which sells 80 percent of its exports to the US, has been hit hard by the global recession.

Industrial output last month

3 percent

GOING DOWN UNDER THE AUSTRALIAN ECONOMY shrank by 0.5 percent in the last three months of 2008, and this decline, it has now been revealed, was the first time the economy had seen a quarterly contraction in eight years. Now, the head of the country’s central bank has predicted that the Australian economy is likely to be in recession.

Pre-empting the official economic data for the first quarter of 2009, Reserve Bank governor Glenn Stevens said this had to be the ‘reasonable’ conclusion. The comments came as Prime Minister Kevin Rudd said the government would include additional economic stimulus measures in next month’s budget.

If data shows that the economy has again shrank between January and March, then Australia will be in recession according to the usual definition of two consecutive quarters of falling output.

21

fell by over 13 percent, the sharpest decline in 14 years.

Further to this, the Mexican peso has also been on a generally downward path, falling around 20 percent against the dollar during the last year.

Applying for an IMF loan was once seen as a sign of desperation for developing countries but the Mexican government and the IMF are keen to stress that that there is no stigma attached to this particular type of loan, which is designed to support countries seen as strong economic performers during the global credit crisis.

A HELPING HAND

JAPANESE PRIME MINISTER Taro the eve of a donor conference hosted by the World Bank and Aso has pledged up to US$1 bilJapan, which it is hoped will raise lion in aid to Pakistan, after talks US$6bn in loans and with President Asif Ali grant aid. Almost 30 Zardari in Tokyo. donor countries Aso said Almost are to meet to Pakistan’s stapledge funds for bility was imthe next two portant for the countries are to pledge funds for the years, where delregion and that next two years egates will want to of the internahear Pakistan’s comtional community. mitment to economic reZardari thanked Japan for forms and progress in its fight supporting Pakistan’s ‘fight against an increasingly formidaagainst terrorism’. ble Islamist insurgency.

The pair were speaking on

30 donor

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FRONTLINE IN MY VIEW

JAMES BEESON Chief Information Security Officer at GE Commercial Finance explains his take on risk management and tells us how GE’s global set-up can provide real ROI

To view this entire interview please visit www.meettheboss.com

I would argue that our job is to enable the business to take a risk.

That requires us to bring new ideas in to the business and to say to management, ‘Here’s a way that you could take a bigger risk’, and that’s a massive part of our job to do that. The way we go about it is through various methods. We certainly look within the financial services arena for best practice, but of course, being GE, we’re part of this huge conglomerate with stuff in aerospace and healthcare and we have a very diverse set of product lines that we can look into as best practices that we may not otherwise have thought of using in the information security space.

You have to deal with both symptoms and causes. We ‘patch’our systems, but we don’t patch them based on what’s actually being taken advantage of but based on vulnerabilities. Just because there’s a vulnerability doesn’t mean somebody’s exploiting it, and I think that’s what’s driven us into this area of treating the symptom instead of the cause. We need to figure out how to shift that and become more fo-

cused. That doesn’t mean we can ignore vulnerabilities all together, but we do need to get more focused on where the threats are coming from.

tion really is how do you find the right balance between those things and typically it’s about flexibility.You want them to be able to be more agile and more quickly respond to a business We have to get smarter at using the need and, again, there’s no simple tools and the information that’s out formula for what’s the right balance. there. There’s a huge amount of inforYou have to understand what those mation today that compabusiness processes look like nies are getting from out at the front edge of “Just because different sources the business and underthere’s a vulnerability and we don’t necstand what your busidoesn’t mean somebody’s essarily take adness model is. exploiting it, and I think that’s what’s driven us vantage of pulling into this area of treating that information toFrom a security perthe symptom instead of gether and putting spective there’s also the cause” things against that to two sides to the puzzle: allow us to correlate the inThe more you share and virtuformation and help us predict what’s alise, the more risk you have as you going to happen. The other way is put all your eggs in a single basket, that we have to collaborate more with on the other hand, the more autonoeach other as well as with the informy you give people, the more they’re mation that is out there. The public, likely to bring in extra threats that private and even the academic side of you’re not aware of. You just have to the equation need to pull together find the right balance. The key lies in and collaborate more. We don’t do sitting down with the business partenough of that today. ners and understanding how, operaWe have obviously a lot of divisions or subdivisions within the commercial finance business and I tend to frame it up in my mind as a target.The ques-

tionally, the business is run and not just having your ‘IT blinders’on. You have to take these off and look at the business processes and understand them from a universal perspective.

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ISLAMIC FINANCE FOR FRANCE FRANCE HAS NOW OVERHAULED some of its domestic tax law in a move that will secure the country’s place as one of the world’s centres for Islamic finance. The French government has made good on a pledge made last summer and has brought in a series of detailed tax changes that will allow the rules of Islamic finance to be followed without attracting tax penalties, in comparison with other transactions.

The term ‘Islamic finance’ is used to describe the ways that business and personal financial matters are handled while respecting Shariah law. Shariah forbids gambling and interest and many of the transactions which are regarded as ‘normal’ to conventional financial institutions – ranging from mortgages, to interest bearing savings accounts, to insurance – have to be structured differently and can, in the process, attract a tax penalty.

Now France has made a large number of specific changes so that Islamic finance vehicles are viewed by the tax authorities in the same way as their western counterparts. One of the first companies to benefit from this radical overhaul is Islamic Finance Advisory and Assurance Services (IFAAS). IFAAS is a UK-based consultancy specialising in providing advisory & training services to financial institutions in Shariah compliance and the business was incorporated in 2007 with the vision of supporting the development and growth of Islamic financial industry in the UK and Europe.

According to IFAAS, the company’s first mainland European office in Paris is considered as a significant development for the French Islamic Finance industry, and this is because of huge interest from local and international financial organisations wishing to explore the opportunities Islamic Finance offers them in France – a clear sign that the industry is set for growth.

SPEND, SPEND, SPEND more likely than women to be ‘spread betters’ WHILE NEW RESEARCH from marking specialin terms of savings risk and opportunity, with ists EuroDirect shows that a third of UK citi24 percent of men owning multiple accounts zens do not have a savings account, 29 percent of those asked claim they spend every- compared to just 18 percent of women.

However, 14 percent of respondents, said they thing they earn each month, with an extra four were not happy with their current provider, percent saying they would rather keep their but were too worried or concerned about the cash under the mattress than entrust it to a hassle involved to change provider. bank or savings provider.

Leanne Davidson, head of However, this figure differs Research product management and significantly according to age, shows that marketing at EuroDirect, with 59 percent of 25-34 year comments: olds admitting to being ei“The financial situation ther a spender or a stasher, of UK citizens do not have a savings is really hitting consumers compared to only 19 percent account hard and it’s not surprising that of older people, aged 65-74. people are thinking seriously The survey, of 1000 represenabout where they should be keeping tative UK consumers, is certainly food for their money.

It’s concerning that so many thought for savings providers, showing that people do not have savings, not only in consumers are keeping their options open in terms of their future, but also as it indicates terms of where they keep their savings. 41 pera lack of trust in the savings products that cent of respondents said they were happy UK institutions have to offer. enough with their savings providers and would “According to the research, even those be keeping their money where it is in 2009. who do have savings are likely to keep multiMeanwhile, 21 percent of participants reple accounts, which is another stark warning vealed that they had multiple savings accounts, to the financial community that they need to again an indicator that people are opting to do more to keep their customers satisfied spread their money and their options in a bid to and loyal.” keep it safe. Interestingly, men were found to be

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FRONTLINE

ZONING OUT

FROM THE VAULT

IT IS ALREADY A HEAVILY POLITICAL Eastern European central bank TIME for those in the financial serrates are also relatively higher than vices sector, but for Eastern Europe, European Central Bank (ECB) rates – the relationship between politics and in some cases, dramatically so. But the crisis is even more potent. cutting rates risks currency depreciaEastern Europe’s exchange rate tion, which in turn raises borrowing regimes and currency volatilicosts: in other words, the ty are already a root exact opposite of a cencause of the region’s Polish eurotral bank’s objective denominated mortage, liquidity and credit in cutting rates. payments are now crisis, but with all of This paradox Eastern Europe poses a difficult sitlegally bound to join than they were six uation. But there is months ago the eurozone, there is a way out. Joining the a path out of the crisis. eurozone, as all of the This is because a significountries that have acceded cant proportion of bank lending to to the EU since 2004 eventually are business and households in Eastern obliged to do, will eradicate currency Europe is denominated in foreign currisk. It will mean the ECB’s interest rency. Since September 2008, the rate policy will apply to Eastern Hungarian forint, the Romanian leu Europe as well. Given current interand the Polish zloty, are off 20 percent, est rates, this implies a significant re22 percent and 40 percent respective- duction in central bank interest rates ly against the euro. For Polish homein Eastern Europe. owners with a euro-denominated Of course, joining the eurozone mortgage, payments are now 40 peris not a magic bullet, but it will help cent higher than they were six months mitigate vulnerabilities and restore ago. In addition, businesses are seeliquidity. In this, the crisis is unique; ing their margins ground away by bor- it is a European crisis, not an emergrowing costs. ing-market crisis.

40% higher

RESTORING CONFIDENCE

Back in Q3 2007, FST spoke to KEN HARVEY, then-CIO at HSBC, about being at the cutting edge of technology innovation in financial services. “When you put a new product out that makes a difference to a consumer, the sales organisations really feel compelled to make a difference,” he told us at the time. Today, Harvey is positioned as HSBC’s Group Managing Director and Chief Technology and Services Officer, and our exclusive interview provides a snapshot of the building blocks to his journey there.

To read the interview in full, access an entire archive of past issues, and subscribe to the magazine, please visit www.fsteurope.com

cost-effective and successful compliance now.

AS SHARES IN UK HIGH STREETBANKS continue to Access to a single customer view, which proplummet, the need to restore consumer confidence in vides details of all deposits a customer has withthe banking system intensifies. Banks are being enin each FSA registered bank, is central to couraged to prioritise the reform of the the new reform. It is this that will enFinancial Services Compensation The reform able compensation to be paid Scheme (FSCS), especially for of FSCS aims to quickly and accurately. those that have recently merged.

Historically, banks have operatIntroduced by the Financial ed in silos, meaning that multiServices Authority (FSA), the recompensation payouts, enabling customers ple customer databases exist form of FSCS aims to simplify and to get their money within one financial institution speed up compensation payouts, back within seven with no clear view of data ownership enabling customers to get back their days or how many deposit accounts one cusmoney within seven days, should a bank tomer may have.

These challenges must be fail. Potential technology changes will be signifiquickly overcome, as review and verification will cant and complex, especially for large and/or rebecome a ‘business as usual’activity for the FSA, cently merged institutions, but financial and banks will be tested to provide this data. institutions are being urged to begin planning for

speed up

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CUSTOMER KNOWS BEST ACCORDING TO INFLUENTIAL CONSUMER WATCHDOG, Which?, some of Britain’s biggest banks, especially those that have been bailed out by the taxpayer, give some of the worst customer service. Halifax, Northern Rock, Bank of Scotland, Lloyds TSB and NatWest, all of which have accepted money from the government, fail to make it into the top ten banks chosen by 5400 readers of Which? Money. Only Royal Bank of Scotland, another recipient of emergency taxpayer money, scraped in at number 10 out of the 20 of those that were surveyed.

Instead, the top ten is dominated by internet and telephone banks, alongside building societies.

1 2 3 4 5 6 7 8 9 10 26

Smile

87%

First Direct

83%

SUING FOR SEVERANCE

Co-operative Bank

81%

Nationwide Building Society

76%

Yorkshire Building Society

74%

Intelligent Finance

69%

Sainsbury’s Bank

66%

Britannia Building Society

66%

Coventry Building Society

65%

Royal Bank of Scotland 62%

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were awarded independently of his unit’s GLOBAL NEWS AGENCY BLOOMBERG has 2008 performance. reported that Jens-Peter Neumann, the forThere are now fears that Neumann’s mer head of Dresdner Kleinwort’s capital lawsuit will result in a long legal battle. “It markets unit, has sued the firm over his seems that the only people who have done lacking severance package, despite bagwell out of the investment bank in recent ging a US$3.9 million bonus in 2008. years are the unit’s senior executives,” Neumann was in receipt of such one former Dresdner Kleinwort a hefty bonus regardless of the employee told Bloomberg. fact that the unit he was Jens-Peter Neumann has suing “Dresdner Bank’s shareholdheading up was responsiDresdner Kleinwort, ers clearly suffered, and sevble for US$7.3 billion of despite bagging a eral hundred of the Dresdner’s record investment bank’s staff are US$8.1 billion loss. But in the process of losing their reports show that the bonus in 2008 jobs. Under these circumbank withheld Neumann’s stances, many current and former severance money (he left folemployees will be disgusted that lowing Commerzbank’s takeover of Neumann has decided to seek legal redress Dresdner in January) after he refused to to recover what, to him, must surely be a return any of his 2008 bonus. rather insignificant amount of money.”

Bloomberg quotes Wolfgang Gerke, Elsewhere, Dresdner Bank CEO Herbert president of the Bavarian Centre of Finance Walter and investment banking unit boss in Munich, who said: “It’s not justifiable to Stefan Jentzsch both voluntarily gave up sue for a bonus or severance pay after their 2008 bonuses (although both are unsuch a bad performance. Dresdner Bank derstood to have retained their severance executives caused huge losses, and depay). Neumann’s case is set to be heard in serve a penalty, not a bonus.” The banker’s a German court in August. lawyer, however, insists that the payouts

US$3.9million

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FRONTLINE ENCOURAGING SIGNS

TOP 50 BANKS THE WORLD’S TOP BANKS – and the institutions that no longer exist. Ranked by The Banker magazine, based on latest assets figures.

Rank Assets

1 US$bn BELGIUM 21 US$1129bn

Market value now and % change over 12 months

25 US$890bn

Fortis Bank

Dexia

US$4.9bn -90%

US$6.1bn -86%

Institutions that no longer exist

46 US$523bn

UK

KBC Group

49 US$422bn

US$6.3bn -84%

GERMANY

WestLB Stateowned

41 US$589bn

2 US$2974bn

Hypo Real Estate Holdings US$0.6bn -93%

Commerzbank US$4.5bn -82%

US$26.4bn -56%

Bayerische Landesbank State-owned

23 US$908bn

Deutsche Bank

40 US$612bn

35 US$736bn

Dresdner Bank 39 Now owned by 37 US$635bn US$653bn Commerzbank DZ Bank Co-op

27

Landesbank BadenWürttemberg US$14.6bn -86%

35 US$708bn

1 US$3808bn

4 US$2459bn

Royal Bank of Scotland

Barclays

Lloyds

US$14.6bn -86%

US$14.8bn -71%

US$20.4bn -91% 18 US$1336bn HBOS Now owned by Lloyds

5 US$2354bn

Ukraine’s economic progress.

HSBC

US$104.2bn -41%

LONDON CALLING

COMPANY INDEX Q2 2009 Companies in this issue are indexed to the first page of the article in which each is mentioned.

Absolute Software Adobe AIIM APWG Aviva Banco Bilbao Vizcaya Argentaria Banco Santander Banque Safdie Basware BBS/ Starcom Bellis-Jones Hill Bernard L Madoff Investment Securities Bloor Research BNP Paribas BPC Banking Technologies BRAL/Fluency CA Capgemini Citadel Investment Group Credit Suisse Dow Jones eCopy EDB Business Partner Fortis Frost & Sullivan GFT Gulf International Bank HP

48, 49 101 113 60 44 120 120 120 24, 25 33, OBC 4 120 52 120 58, 59 76, 77 92 66 120 120 69 124, 125 62 120 100 70 54 96

THE IMF HAS SAID that staff would recommend the release of €2.1bn in loans for the Ukraine and that the board would consider it by May. The announcement comes after months of wrangling, with the IMF demanding Ukraine reduce its budget deficit.

Back in November, Ukraine received the first €3.4bn of a €12.9bn IMF loan to help weather the economic crisis. If the board gives its new approval, the further money will be subject to Ukraine’s progress on adopting an economic programme recommended by the IMF, following another review of

HSBC IBA Group IND Group IPC Information Systems Kofax LogiCRM Logica MasterCard Europe Motorola Munich Re Nationwide Building Society New York Times OITUK Ltd Oracle Pitney Bowes RIM SafeGuardWorld International SAP SEC Softpro Sony Ericsson Standard & Poor’s Steadlands Steria Wacom Wall Street Journal xyzmo

40 83, IBC 2 64, 65 6, 116, 119 126 10, 116, 117 86 13, 98, 99 72 34 120 18, 19 40 91 IFC 76, 79 40 120 104, 112 39 80 104, 106 52, 53 104, 110 120 104, 108

ACCORDING TO A NEW REPORT published by Greater London Authority Economics, London’s Gross Value Added growth rate should fall 2.7 percent in 2009, and will probably stay negative in 2010, before rising 1.7 percent in 2011.

The report, which says that London’s exposure to financial services poses risk should the downturn prove prolonged, suggest that the capital is likely to see contractions in employment in 2009, 2010 and 2011, with up to 290,000 jobs being lost through 2011. Conversely the Centre for Economics & Business Research (CEBR) has said that financial services firms in London are likely to shed 29,000 jobs this year, but that employment growth will resume next year.

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Former HBOS CEO Andy Hornby and Lloyds chief executive Eric Daniels, not seeing eye to eye

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COVER STORY

Marry in haste, repent at leisure Lloyds TSB and HBOS: a match made in heaven or the marriage from hell? FST editor Huw Thomas investigates.

O

n 19 January 2009 the UK financial industry bore witness to one of the biggest events of an already incidentpacked few years. The marriage of Lloyds TSB and HBOS was supposed to be the wedding of the century, creating Britain’s biggest financial company and protecting the taxpayer from excessive bailout losses.

Lloyds Banking Group, as the new union was dubbed, was to be Britain’s new superbank, a financial powerhouse strong enough to ride out the downturn. But the honeymoon period for Lloyds Banking Group ended all too quickly. Less than a month after the merger was completed the new organisation was forced to admit losses of £10 billion in HBOS that meant the Scottish lender was worth significantly less than the £12.2 billion Lloyds paid for it.

Considering that cost efficiencies allowing the new financial entity to save £1.5 billion a year by 2011 were a key factor in the merger, discovering that it was much further in the hole than previously thought has come as quite a shock. But should we really be that surprised? For a deal of this size and complexity you would generally expect a considerable period to elapse between the announcement and completion. For Lloyds and HBOS, it took just four months. The fear that insufficient due diligence was leaving the then very strong Lloyds TSB exposed to some fatal holes in HBOS’ accounts was addressed by Lloyds Chief Executive Eric Daniels at the November 2008 meeting called to persuade shareholders of the wisdom of the takeover. He stated that ‘5000 man hours’ had been spent picking through HBOS’ books. Taken in isolation, this seems pretty impressive.

However, Daniels’ later admission to the House of Commons Treasury Committee that, had time been available, Lloyds would have completed three to five times as much due diligence, suggests that expedience trumped responsibility in this case.

“I believe everything is out there as far as HBOS is concerned.

They’ve made three or four statements over the course of last year explaining exactly what their financial position is.” Lloyds Chairman Sir Victor Blank, January 2009 “Since its 12 December 2008 trading update, HBOS’s 2008 trading has been further impacted by increasingly difficult market conditions, an acceleration in the deterioration of credit quality and falls in estimated asset values.

The Group expects HBOS to report an underlying loss before tax of some £8.5 billion for the year ended 31 December 2008.” HBOS results statement, February 2009

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UK Chancellor Alistair Darling So why did the deal go ahead? What pressures forced through a move that, even to the casual observer, now seems terrifically misguided? A key factor has to be the state of the UK banking system in the weeks leading up to the deal. It has since come to light that total collapse was a very real possibility, and was only averted by the narrowest of margins.

Lord Paul Myners, the Financial Services Secretary to the Treasury, is reported as saying, “There were two or three hours when things felt very bad, nervous and fragile. Major depositors were trying to withdraw from a number of large banks.” In such a climate of fear it is understandable that the necessity to do something overrode a little of the caution the might usually be expected.

Liberal Democrat Treasury spokesman Vince Cable From the perspective of Lloyds TSB’s leadership, snapping up HBOS and becoming the leading financial institution in the country makes a great amount of sense. Despite its troubles, the group had traditionally been a good franchise with plenty of solid business. Between 2004 and 2006 it produced a net income of between £14 and £16 billion. Though it is unlikely that it would produce comparable returns in the near future, it remained an acquisition with plenty of potential. The uncertainty sloshing around the economy provided the perfect opportunity. In more stable financial times the deal would almost certainly never be approved, as a result of competition restrictions. In the midst of the meltdown, the Government turned matchmaker and coughed up a £17 billion dowry to ensure that it went through.

City Minister Lord Myners

“We will do whatever is necessary to maintain the stability of the financial system.” UK Chancellor Alistair Darling, February 2009 “The Government enabled the merger to take place, by including a new condition in competition legislation, which allowed financial stability to be a factor. That was enabling — but it didn’t oblige the merger to take place.” City Minister Lord Myners, March 2009

The Government’s role in the affair is one that warrants particular scrutiny. Long known to be opposed to further consolidation that would leave the UK with only four major high-street banks, the UK’s financial leadership underwent a dramatic change of heart. Not only did the Government suspend any objections, it participated in the negotiations to make the deal a reality.

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Who calls the shots?

UK Financial Investments Ltd. (UKFI) has been set up to manage the Government’s shareholdings in faltering British financial institutions. Run by a small group of ex-bankers, officials and other business professionals, its aim is to protect the taxpayer’s investment while remaining at arms length from central Government. Though it remains to be seen what the UKFI’s long-term approach will be, it has already stated its intention to oppose Royal Bank of Scotland’s plan to award full pensions to Sir Fred Goodwin and Johnny Cameron after the role they played in the institution’s collapse.

While arguments can be made that this makes good financial sense, punishing bankers is also a populist move frequently touted by Government. Only time will tell if the UKFI is really independent of political influence.

In fact, the whole process of the merger was about as far from business as usual as it was possible to be. “Generally you go through and announce these things in principle, but then there is the due diligence process,” says Bob McDowall, Research Director, Tower Group. “What normally happens with the consideration is so much is up front and then there’s an amount held back because things might come out of the woodwork. Some of this might be held for a year or a year and a half before it's handed over finally, because clearly some of the issues don't surface or the risks and so on don't crystallize. What really surprises me about this is that it appears that it was virtually done on the spot and that the due diligence, if I can put it like that, was speedy.”

This has led to speculation that the state exerted pressure to accelerate the process. Due to a heavy veil of secrecy, it is unlikely that the exact nature of the discussions that took place will be known for quite a while.

However, it doesn’t require too big a leap to picture the scenario of Government dropping its objection to excessive bank consolidation on the understanding that any deal be done immediately. While the Government, and even Prime Minister Gordon Brown, was originally keen to talk up its involvement in making the Lloyds HBOS deal, the tone has changed since the extent of the new company’s problems has emerged. It insisted that, rather than pushing the deal, all Downing Street did was provide the conditions to allow it to happen. Nonetheless, a strong feeling remains that if the Lloyds HBOS union was indeed a shotgun wedding, then the Government was at least one of the parties with its hands on a weapon.

“Economies and markets are by nature cyclical, and if you set a prudent policy it gives you much better consistency and much less

volatility. At some point I think there will be recognition that those kind of values are worth something.” Lloyds Chief Executive Eric Daniels, March 2008 “It looks increasingly as if Lloyds is being dragged under by the dead weight of HBOS.” Liberal Democrat Treasury spokesman Vince Cable, February 2009 But regardless of who’s responsible, there remains the question of what the creation of Lloyds Banking Group was meant to achieve. “If the merger hadn’t taken place, then almost certainly we would have had to have nationalised HBOS: the taxpayer would have taken all the losses and HBOS would probably have to had been broken up.” These were the words of a senior Government source when asked about state involvement in the plan. While it is true that Lloyds’ intervention prevented a conventional nationalisation of HBOS, the current situation doesn’t look that different from nationalisation anyway. Following the initial bailout of Lloyds Banking Group, the Government were left with a 43.3 percent stake in the new company. As a result of the Group’s participation in the Government asset protection scheme, a new set of fees for toxic debt was imposed which effectively increased the state’s stake to more than 70 percent. In all but name, Lloyds Banking Group is already nationalised.

“The opportunity to acquire HBOS was considered against our other strategic options, and before deciding to proceed the Board considered a

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THE MONEY PIT number of alternatives… after a thorough review, the Board decided that the HBOS acquisition would offer the highest value strategy for our shareholders.” This was the reasoning stated by Lloyds for going ahead with the merger in its 2008 results, but it is extremely hard to see where this value might now come from. Prior to the takeover, Lloyds shares were trading at 275p. At time of writing they hover around 100p. While in the past being described as ‘boring’ might not have been particularly desirable, in the current interesting times, a little less excitement is just what everyone needs.

What is clear is that Lloyds has traded stability and independence for uncertainty and external interference.

While this is a nationalisation at arm’s length, administered through the newly created entity UK Financial Investments plc, it is nationalisation nonetheless. As with any shareholder-led enterprise, the biggest group tends to get its own way. This raises certain questions about the exact nature of Government involvement in Lloyds Banking Group and those other institutions that have fallen under the control of UKFI. “Inevitably, you can't avoid there being some political influence,” says Bob McDowall. “This could come as pressure to lend to small and medium corporates or other things that could be described as gesture politics. That will always be so because at the end of the day they’re accountable to the Government and the taxpayer. It’s not a question of subterfuge, it’s a stark reality.”

But now that we’re already going down that road, what happens next for Lloyds Banking Group and other institutions that are under Government control? First of all, UKFI needs to establish a clear plan for the future, one that satisfies a number of different requirements. “It does need to set out a route map for what it’s going to do,” says McDowall. “Whether it wants to privatise as soon as possible or whether it wants to hang on and get more value for the taxpayer, there’s a whole host of permutations. But it does need to quickly set out its roadmap. Unfortunately, it’s not just a financial roadmap, it’s a political roadmap as well, because you can’t divorce the two.”

As for the specific case of Lloyds Banking Group, the debate is not yet over. The Group already expects to post a loss for 2009 and with the economic outlook as it is, any chance of improvement is uncertain even after that. The restrictions likely to be placed on the organisation by its Government masters will also limit any ambitions of expansion until its debts to the taxpayer are cleared. While rivals like Barclays and HSBC have rejected bailout money and are consequently free to seek their fortunes in international markets, Lloyds is going to be kept on a very short leash. This reality has led to calls for the Lloyds HBOS merger to be unpicked before it goes any further. The process remains in its early days, so it might not be too late to reverse it. Lloyds could revert to the solid, if unspectacular, performer it has been for so many years while the unfortunate HBOS could be absorbed by the Government in much the same way as Northern Rock has been. Might it not be better to preserve one functioning institution at the expense of another, rather than to allow the continued existence of one, much larger, failure?

However, so much effort and political capital have been spent on the Lloyds Banking Group story, it seems unlikely that such a step backwards will be countenanced. This is a position that all concerned may come to regret. No one wants to admit their marriage isn’t working, but this is one case where an annulment might well be preferable to a complete breakdown. n

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Key dates in bailout Britain 18 February 2008 – Northern Rock Months after the first run on the troubled lender, the Government steps in. It is the first such nationalisation since the 1970’s.

29 September 2008 – Bradford & Bingley The Treasury stumps up more than £40 billion for the building society’s failing mortgage book. Spanish giant Santander steps in to take over the remaining branches and deposits.

13 October - RBS, HBOS and Lloyds TSB A further £37 billion is pumped in to prevent the UK banking system from imploding. RBS receives £20 billion while Lloyds and HBOS get the remainder. The Government takes equity stakes in all three banks.

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FEATURE

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PETER STAFFORD ED P34-38.indd 34

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It takes a Nation of millions How do you achieve true business evolution in an economic downturn? According to Nationwide’s Peter Stafford it’s all about picking your partners.

I

n early 2008, Nationwide Building Society announced a €350 million business transformation project. Naturally, as IT Director, Peter Stafford has been at the very heart of this process. “I suppose you’d call it an umbrella that encompasses a series of IT investments,” he tells us. “What we’re trying to do, like everyone else, is basically undo some basic constraints that the IT architecture has forced on the business. Over the last 25 or 30 years, systems that were transaction-based have had a great deal of complexity added to them. The thing that a business wants from technology now is flexibility and not having to get IT involved in the launch of new products.” In response to these changing needs Nationwide announced a number of IT investments around products engine, origination systems, point of sales systems, business process and back office processes that were intended to drive up flexibility and build greater efficiency into the systems. “Then from an IT perspective that will lead to consolidation of some of our backend IT setup by rationalising onto fewer platforms, not running so much technology and not having so many systems,” Stafford continues.

The motivation for this huge investment comes from a familiar source: aligning IT with business and providing better service to customers. As the world’s largest building society and by virtue of its mutual status, Nationwide already occupies a unique niche in the market. With a long-held focus on customer service, the society wanted to continue giving its customers good products which displayed flexibility, speed to market and the ability to personalise on a very individual level. “The systems that we had weren’t conducive to that,” says Stafford. “We had to turn those systems into what we wanted them to be, which is why we’re investing in them across the

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board. So if you look at what we’re doing with SAP deposit management around the product engine as an example, we’re working with them on these solutions and putting more origination software in.”

Outside partners play a big part in Nationwide’s technology setup.

For Stafford, bringing in specialists affords a flexibility, reliability and agility that would otherwise be harder to achieve. The partners are roughly split into two different groups: those that assist in the general day-to-day activities of the organisation and those that cover the more IT-intensive aspects of the business. For example, 2008 saw the beginning of a sevenyear agreement with BT to manage Nationwide’s networked IT services. While the Society traditionally has developed and run its own operations in-house, rapid growth over recent years has led to a rethink. Ultimately this partnership, and others like it, boil down to being able to offer a better service to customers. “These guys do it for a living,” says Stafford.

“They’ve invested in the tools, the process and the people. It would be difficult for us to take it to that level of expertise.”

There is also an inevitable financial impact to outsourcing.

“Something I like as the senior IT guy is that it very much changes the dynamic of my costings,” Stafford continues. “At the moment I’m running a large fixed cost. If I’m asked to do something to reduce those costs then I am limited in what I can do. The idea is to move to a more variable cost model.” The result is that rather than having to shut down an internal call centre to reduce costs, for example, the company would have that ability to just reduce the number of seats its outsourced provider is running. “It makes budgeting and flexibility and the ability to react to changing markets, circumstances and business demands much easier,” Stafford continues. “IT can move more quickly.”

A key benefit to handing over some of the more nuts and bolts workings of the Society from Stafford’s point of view is the freedom it gives him to really do his job. “Rather than being an expert on running networks or desktops, it lets me focus on managing risk and IT strategy,” he says. But this is not to say that the whole process is a walk in the park. “If you’re not ready or aren’t clear what you’re getting into, if you don’t know what ‘good’ looks like and you can’t articulate what sort of service your business wants, it’s very hard to set the right set of expectations both in the business and with the supplier about what you require from them,” Stafford continues. “Similarly, if you don’t know where your money goes and you haven’t got some degree of control, you give away a lot of the goodness to the supplier because you don’t really know the levers to pull.”

In short, it’s vitally important that any company looking to outsource really does its homework. “We spent a good four to six months looking at this, getting into due diligence and defining what we wanted out of it and certain expectations correctly,” Stafford explains. “We make sure that they can prove they can do it because you don’t want anyone learning on your behalf.” But it doesn’t end there. As with any relationship, there has to be good ongoing understanding to keep things moving smoothly. “You’ve got to make sure something’s in it for both parties,” he continues. “So you’ve very much got to penalise bad performance as well as incentivise good performance. You can’t always predict how change will work or what the future will be, so you’ve got to factor in a degree of flexibility, a degree of benchmarking and a good definition of what value looks like so that if you have to flex the resource around projects then you are capable of doing that.

There are a number of ways of doing this: there’s benchmarking, and in certain circumstances you can go to another third party just to get some competition into it.”

In the current business climate where consumers are unusually attuned to any perceived weakness in a financial institution, a strong technological base can be a key differentiator. It’s a view that Stafford ascribes to and it is one of the main reasons behind Nationwide’s ongoing transformation. “One thing you’ve got to be at the moment in this market is nimble,” he says. “An organisation relies on technology

“Spending money is the easy bit. It’s more difficult to know why you’re spending it”

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natiOnwiDe FiguReD Out The numbers behind the world’s biggest building society

15 million members

£200 billion in assets

900 retail

outlets

19,000 employees Launched UK’s first

internet banking service on 27 May 1997

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to be nimble from a product launch or a service perspective. It contributes a lot. The other thing is it’s just paramount that your day-to-day service is good because if you’ve got some prolonged service outages on your web channels, for example, that’s not going to look good in the current climate. Your technology needs to stand up and focus on and protect that service.” Stafford goes on to describe the issue of demand as one of the key areas where robust technology can be a real boon. “You can launch a good product especially on the sales and the savings side of it and demand can regularly increase fourfold from normal levels. Technology can help the organisation take that strain by pushing it through the web channels, for example. Technology can’t sort it all out itself but there are things it can do to contribute.”

But at times like these, with budgets shrinking and costs under the microscope, there is always the risk that investment in technology

Caught in the web

Peter Stafford explains the importance of online to Nationwide and its customers We were one of the first organisations to offer online retail banking in the UK. Our online presence has traditionally been very important to us and will only become more so in the future. You’ve got to give people choice, and more and more of them are choosing to do banking online from the comfort of their own homes. Online security is something we’ve invested heavily in over the past two years. Hackers and fraudsters out there are getting better and better and more and more innovative.

We’ve got to keep ahead of them and also support our customers. Our online presence is a big part of this €350 million business transformation. We are going to be replatforming our internet bank because it was written 11 years ago and want to put more flexibility into it, so that it’s better integrated with some of the other things we’re doing. It’s been a real asset and it’s something we’re justifiably proud of.

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will be targeted for cuts in efforts to help the bottom line. Though Nationwide’s sizeable and continuing expenditure seems to indicate that these concerns are not affecting the Society as much as certain other institutions, Stafford nonetheless acknowledges that the downturn has had an impact. “It’s caused us to look at what we thought our priorities were,” he says. “We’ve moved forward certain things that we’re doing, specifically around initiatives to protect our depositors, get good products out there to savers and develop a better service around things like ISA renewals where you get high peak volumes at certain times of year. So we’ve reshuffled a few things and put more investment into that so that we retain our competitive edge. Our reputation is a service if you like.”

Stafford also tells us that there has been increased activity around regulations. It is understood across the financial industry that more regulation is on its way in the wake of the credit crunch, but as yet there seems to be little idea of exactly what form this regulation will take. This can make things extremely difficult for IT professionals: how exactly do you prepare for something when you don’t know how it is going to look? “You can’t really,” is Stafford’s response. “You can just get involved and try to anticipate the implications of it. There are people in our organisation who will be talking to the regulators, helping them shape what the future will look like. You just have to make sure that you play your contribution around that.”

For Stafford though, the biggest impact the downturn is having on his professional life is the increasing need for IT to demonstrate its value to the business. “We have been looking at things that historically we would have done and asking the question, ‘Do we really need to do this?’” he says. “We’re looking at ways to challenge IT spend and IT cost base.” Inevitably, it falls to Stafford to explain the reasons behind any major technology decisions. “It’s an increasing part of my job and it’s something I pride myself on,” he confirms. “Spending money is the easy bit. It’s more difficult to know why you’re spending it. I think it’s quite easy in an IT department to lose sight of what you’re doing, just forget to enter a dialogue with the business about what risks they’re willing to accept and what service they want. You have to make sure that you’re getting a fair price and good value but also that you’re actually doing what they want rather than more than what’s required. IT costs are some of the biggest costs in the organisation. It’s obviously going to be looked at very closely.”

At Nationwide at least, senior business leaders seem to recognise the role that technology plays in a successful business. “I think they’re certainly aware of the importance of IT in delivering service and acting as the life blood that sustains the organisation and the oil that lubricates it,” Stafford says. “To agree the sort of investments that we’re doing is a clear vote of confidence. We’ve probably still got a little way to go in terms of exactly aligning the IT portfolio with the business portfolio. That’s one of the key business priorities for the next year.” n

“We’re looking at ways to challenge IT spend and IT cost base”

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PLUGGED IN BANKING Can e-commerce be all things to all people? HSBC’s Marcus Treacher thinks so.

B

y thinking like treasurers and our customers, we can This way of thinking has led us to change our ways quite a bit. For exwork in terms of what’s required versus what we believe ample, a few years back, we were challenged with SWIFT’s repositioning as we should be delivering for people. What we’re trying to a method for corporates to connect to their banks. At HSBC we spent a lot of do with e-commerce at time with our customers, getting under the skin HSBC is working like the of what they really needed and where the issues treasurers we are supportreally were. We made a very early decision to ing and creating value for. drive our SWIFT capability for our corporates That moves us away from creating core prodand we’re now arguably one of the leading coructs to thinking about solutions, thinking about porate access banks in the world in the SWIFT things that really matter to business leaders community. That’s a direct result of not looking and treasurers within the organisations that we at SWIFT per se, but figuring out the value that work with. it can bring to the larger corporations and the That mode of thinking, that way of tackmidsize corporations around the world. ling the transaction banking challenge is, if Understanding where these people are coming anything, more important when times are diffrom, what their concerns are around security, ficult. If you’re thinking in terms of where your around efficiency, around lack of information clients are focusing, what their challenges and tackling that, then saying, “Okay, well, what Marcus Treacher is global Head of Eand concerns are, it’s easier for you to then be does that tell us about our views on where commerce for HSBC's cash helpful to them. Maybe they want to focus SWIFT is trying to go? Should we, as a bank like management business. Previously at more on their supply chains; they want to HSBC, be a supporter of that, should we be poCitigroup and Accenture, Treacher has focus more on their credit; they want to focus sitioning in that field?” spent over 20 years in the financial more on delivering value from their operaBut it’s also important that you strike a balservices industry and is a specialist in tions. It’s really about knowing how they work ance between being reactive and being proacglobal transaction banking services. He versus traditionally thinking in terms of prodtive.

You have to lead the market as well as holds a B.Sc. Hons degree in Physics uct and gadget and precooked solutions. respond to it. There’s a quote from Henry Ford from Nottingham University.

It’s really about working with the marthat goes something like, ‘If I gave my cuskets, being out there, spending a lot of time tomers what they wanted, I’d have given them with corporate treasurers and the market research organisations and a faster horse.’ There’s an element of getting a balance between underjust dealing with our clients as if they were partners. We focus on our standing what people are trying to achieve in the field and then demonsales teams and our relationship managers, so we get a very incisive strating thought leadership, figuring out where they could go. I think the two feel for what’s behind the requirements that could come. are very closely linked together.

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If you understand where your clients are heading and what their concerns are, then combine that with some good innovation, you free people up to think openly. You can connect dots in very, very value-added ways. It’s that combination of looking ahead, being a leader in the thinking space because as a bank you touch corporates around the world. You have a view that most organisations don’t have of the financial process, but it’s critical not to lose touch with your clients’ thinking and their needs. The two come together.

One of the big concerns engendered by the current financial situation is that the industry could neglect innovation in favour of sticking to what they know, but I don’t think that is a problem as far as e-commerce is concerned. E-commerce is changing how banks work with their customers in a fundamental way that is bigger and deeper than any economic cycle. I think the trend towards greater use of technology and of information will continue. I can’t see that really changing on an overall basis.

STAYING ON THE FENCE

Why HSBC’s e-commerce has to be platform neutral: We are in the business of transaction banking through e-commerce solutions. We feel very strongly that we should provide an open connectivity solution to our clients worldwide. So we work closely with the leading vendors globally to make us more relevant and to make it easier for us to add value. But we’re very careful not to focus in on any one technology or vendor over another in the corporate world and the FI world, purely because that creates difficulty for our clients. If we were an SAP-only bank, for example, then that would make it difficult for us to be relevant to clients using something like Oracle Financials. If we were a SWIFT-only bank, it makes it more difficult for us to be relevant to organisations that require more open network solutions, direct IP and XML solutions. So we try and create a proposition that really is truly open. We concentrate on the most prevalent and the most widespread and leading technologies, and we work on creating solutions in those technologies, but solutions that are vendor and method-agnostic.

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What I can see happening in the next few months though is a refocus from using e-commerce for organisations to create new capability to go to market, to using it for greater efficiency. It’s that which we as a bank provider are focusing more on with our clients. We’re being asked to look more at helping clients be more efficient in the treasuries through ERP integration linking into their back offices, better reconciliation of data, looking at the payment to cash cycles and working on the efficiency side. So the focus might change but the underlying trend is very strong, and I think it will continue through economic cycles.

For e-commerce, we’re very much outwardly focused. We focus on our clients and on the support of where our corporate and financial institution clients are heading. We are clearly adding value, helping them develop and helping them focus on their cost basis. For us, that translates into transaction volume, revenue and market share growth. This is a very positive thing for the bank as a whole. It demonstrates viability to work with organisations in good times and bad times.

So in terms of our investment in the e-commerce world that I’m responsible for, we’re always cautious, and we’re always careful. In this current environment, we are just continuing as we always have been to be carefully focused on where we spend our money.

Also, we’re very careful to look at the value that we gain as a corporation for shareholders, as well as a value we gain for our clients as a result of the solutions we are creating. It’s pretty much business as usual for us at HSBC with e-commerce.

That said, I still believe we are in the early days of e-commerce and we still have a way to go before we realise its full potential, particularly with issues around authenticating and validating online customers and the potential of straight through processing with digital signatures. There’s clearly a growing need worldwide to get smarter at identifying individuals for authentication or repudiation digitally. Most corporations find it very difficult dealing with multiple banks, which demand multiple certificates, multiple passwords and multiple access. It’s very difficult and on an individual level, most people have wallets full of cards and full of ID’s. So there’s clearly a need there, both in the corporate world and in the consumer world to unlock the power of e-commerce. There is a temptation to write off technologies if they don’t start to perform as quickly as hoped, and that is something that has happened to an extent with ideas around biometrics. But I think that is a mistake.

There’s a concept of technological maturity. Most new technologies go through an initial phase of euphoria, then through a trough of despair. Then gradually, they tend to find a level that they originally were intended to achieve, but often many years further on than the futurologists originally projected. A good example of that is image processing. In the late eighties, the idea that you could dematerialise documents and put them on to image processing systems captured the imagination of most organisations looking to save money and reduce paper. The initial technology didn’t get too far. It had issues and there were things that just didn’t work properly. There were legal issues, a lot of barriers to taking documents and putting them onto non-material media. If you roll forward 10 years, we’re now in a world where, in the US for example, physical checks are happily scanned in the process as images. It works very well.

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BANKING 2.0 What impact will new web technologies have on business?

It’s interesting. I think the value is really around creating ways to be relevant to touch the client and maintain the engagement in a world that is more internetbased and arguably remote for the use of internet technology. I can see how using a collaborative information exchange and not a transaction-based exchange opens up the field for greater client contact, adding more value and direct conversation, as well as using e-commerce to do process transactions, machineto-machine, or person-to-machine. I think as people use these web 2.0 technologies, whether it’s an online chat or YouTube concepts, I think over time, it’ll probably settle into the fabric of how banks connect to the corporates.

But I think at the moment, it’s very early days.

Both within the corporate world, and the consumer world, we now often use images online. We don’t think about it any more. It’s a technology that’s built into the fabric of the internet and we are very familiar with it today. It just happened 12 years later than we thought it would. I think that biometrics will go the same way. There’s an inevitability to being able to track biological traits with an individual. I think there are lots of barriers there to getting that right and getting the balance right. There certainly are some social barriers as well.

But I think if you fast-forward 10 or 15 years, probably beyond our career lifetimes, you’ll probably see a world where little pieces of biometric technique are imbedded in how people identify themselves and where people are comfortable with those technologies.

The major challenge is to create solutions that fit the many different types of client that we work with through internet technology and through e-commerce. We deal as a global bank with corporations around the world who reside in very different financial cultures. For example, in continental Europe, we have a very SWIFT-aware, collaborative culture where networks that are owned by members of banks, or members of financial players, are highly regarded.

In the Anglo-Saxon world, the internet is highly regarded as a method to connect to banks. As a global bank, we have to work in a number of these different models and connect the dots together, so that we can create a banking service to our global clients that fits their specific need without focusing too much any more on any one technique.

There’s also a need to provide solutions for the very small companies who require very simple, reliable and easy to use banking services online.

At the other end of the spectrum, we have to provide inventive bespoke solutions for some of the larger organisations that have particularly unique pressing global challenges. Banks that work in any one of those or segments, whether it’s the global banks or regional banks, or consumer banking, can afford to focus on one method. For a global bank with a customer base as wide as HSBC, our challenge is to blend those different techniques together. Doing that well creates a huge differentiation for a global bank. It

helps us stitch together the global economy for our clients, and that’s the prize. But the challenge in attaining that prize is significant.

Looking ahead, I think a few major themes are emerging which are very important to us. One is the maturity of mobile technology, and the mobile changing from the phone in your pocket to the gadget that’s the window to the world. I think the handheld computer will be a thinking machine, much more so for consumers and corporates. There are some very exciting developments around international payments from mobile connections. I think we’ll transform how people look at payment processing, for example. In time that will drive change in how banks and providers address that new need.

Coupled with this is what I call the iPod generation. People are coming through today who are very comfortable with click and push technology.

They expect information now; they live online and chat online. That generation will put a much greater demand on information and will push the banking industry to create new ways of executing banking services in much higher volume, which will also put pressure on the infrastructures that we have and the oversight that we maintain.

The third important trend is internationalisation. Currently, globalisation is a thing for the larger corporates around the world, the big guys.

We’re increasingly seeing the smaller corporates working extensively and interactively internationally, mainly through the growth of the internet and online sales. We’re seeing a lot more companies operate in combinations around the world than just the usual suspects we’ve worked with for decades. We’re also seeing individuals, not just the private banking individuals, but mainstream banking individuals, consumer bankers, starting to interact internationally. So the whole idea of the globe is really coming to life as a long-term trend that will play to the advantage of banks that can connect up globally and can be a leading international partner in order to create that linkage. This will soon which be common to people individually, to small companies and large companies in a way that just isn’t there today.

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ctr ic?

Ar ef rie ele nds

The internet is making life much easier for consumers, but the same cannot be said for those tasked with satisfying their expectations. FST asks Aviva’s Ian Baxter about the challenges that the digital world brings for financial institutions.

How important is a company’s online presence in this current market, and can online customer interaction be a competitive differentiator?

Ian Baxter. As a life insurer, we’re primarily dealing with advisors rather than with the end consumer directly, so it is important and certainly can be a competitive differentiator. Our function is giving our advisors tools and capability, building a platform, as currently within the industry there seems to be a race towards developing the best one. Standard Life has a very good platform; AXA are coming on with their platform very quickly, so we’re all in that race.

For the end consumer, online presence is much more about being able to make quick inquiries, address changes – simple stuff. What we have now come to expect is an Amazon-type experience where you can log in, do something very quickly and log off again, and some of our backend systems really aren’t up to that task currently. So we are doing a lot of work to make sure the experience is right, but in terms of functionality of investment, a lot more is going towards our intermediaries and our advisors.

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Our targets are to reach around five seconds for a screen to top, which sounds pretty horrendous, but that is a significant challenge if you’re going back to a backend system. Often, when trying to gather pieces of information, several backend systems do evaluation, run a calculation, and bring it back to an end consumer. Five seconds is a challenge for us, and we believe that to be roughly acceptable. It often happens much faster than five seconds, but that is usually one of the functional requirements we put into our certifications.

With online use continuously growing over recent years, what particular challenges does this present for a global company like Aviva?

IB. The challenges for Aviva are due to its structure as a company that has come together from a series of acquisitions and mergers over many years. Typically on the backend is a massive array of disparate systems, which are often into the hundreds, and you might need to touch those systems to complete what the end user would consider to be a transaction.

So getting some kind of orchestration from front to back across multiple systems where currently we use people to do that, trying to make that as an automated task in a reasonable timeframe, is a significant challenge for us. This is true for lots of financial services organisations and insurance companies where their backend systems were built between 10 and 30 years ago, before there ever was any e-commerce or online experience. So trying to maintain that investment you’ve made in those systems whilst simultaneously giving it experience, which is not designed for internal staff usage but for an end consumer, is one of the biggest challenges we have.

IB. The impact will be positive, and I suspect it will continue for several years. What has happened is a complete clarity and focus of every investment dollar. The e-commerce strategy we had was a broad, general strategy and we now have a very clear strategy. Everybody understands where we’re making our investment, so we’re not investing less currently, but we’re investing it in two very specific areas. And that has been a positive change, because until now we had a broad strategy, but it wasn’t easy to articulate. We’re looking at spending with a lot more rigour than we would have in the past, which is only a good thing.

“Getting some kind of orchestration from front to back across multiple systems is a significant challenge for us”

What approach is Aviva taking to eradicate the problem between legacy and modern systems, to modernise its core systems?

IB. One of the things we’ve been doing recently is consolidating our view of the customer. I’ve been working on this challenge for over ten years – when I previously worked for Zurich Financial Services we had exactly the same problem of creating a consolidated view of our customer. Back then it was very difficult. Aviva’s just in the space now whereby we’re able to achieve that. From there, you can start to add on things like the advisory information, commission information, so you can start to build a whole new proposition. It’s pulling that relevant data forward into a new level, a new layer if you like, and then using that as a leverage point, and that’s what we’re doing right now.

But that’s been a challenge for us for many years, and we’re just at the point recently of achieving that.

Difficult times can often lead to both customers and providers neglecting innovation and progress perhaps in favour of sticking with what they know. Do you think that the financial turmoil will have an impact on e-commerce?

Do you find the e-commerce platform to have been accelerated by having management focus on it?

IB. It certainly has. If you look at our spending over the last couple of years, there’s been a genuine migration towards e-commerce spend. I look after the e-commerce portfolio, so I happen to know the two directors who work alongside me. My area’s grown dramatically.

So if you look at where we’re making our investment, it’s clearly in the front end, enabling straight through processing.

That area of security is a big issue, so we’re making those investments, and that shift has been quite dramatic this year.

How has e-commerce managed to avoid cutbacks in the current downturn?

IB. We were late to the party, and there seems to be a general sense that the financial services industry in general, and Aviva, is probably playing catch up. So if we have to make the cuts, e-commerce is still generally protected as the area where we will make investments and we are pushing forward. So in terms of headcount, we are largely protected. That doesn’t mean the scrutiny’s any less; it just means we validate that the job, the person and the spend is right. But to date, we’ve been very lucky in that regard.

Ian Baxter has been Head of E-business for Aviva since May 2008. He is an IT professional with many years of experience across the financial services industry, with a key focus on value and leverage gained from IT investments over the mid to long term. Baxter’s past roles and responsibilities include Executive Director at Fidelity International, Director of Strategic Change at Lloyds TSB, and Global Head of Transformation and Change Management at AXA.

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Information overload

How close are we to realising the full potential of e-commerce?

IB. We are close in our business right now. At our board meeting currently, we’re talking about paperless and signature free. Those are conversations we weren’t having last year. There’s an appetite to kind of accelerate the direction to move towards that, despite there being issues around regulation and government control, and it’s a general topic of conversation. Could we go paperless, could we go signature free, how long would it take, and what would that mean for us? So those are exactly the conversations we’ve currently having. If you get into the security world, we unfortunately have several login methods and mechanisms to get to some of our data, depending on who you are and how you come in, and we’re looking at a single method for authentication. Big projects again, but seen as critical enablers to moving us upwards.

How are you planning to handle the problems of excessive data, caused by going paperless?

IB. We’ve not come across that as an issue. The amount of data isn’t our biggest challenge; it’s gathering it, making it electronic, and then making the best use of it; those are the challenges we’d like to address. The storage issue, the manipulation of our overtime and security, are probably things we think of as more housekeeping tasks, which we’ll deal with, but it’s certainly not a challenge we’re facing right now.

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We currently maintain massive amounts of data. A more interesting challenge for us is data quality– as we start to expose that information to our advisors or end consumers, that data typically was internal data. Now we’re going external with it, the quality matters a whole lot more. So creating a single view of our customers was a challenge, but the bigger challenge is what do we do about data? How do we clean it up? How do we make it presentable and ready for our customers? And that is proving as big a challenge almost as the initial task of pulling that together and creating that single view. Data quality –moving from an internal operation where it’s masked by the telephone operator or the staff to one where an end consumer can log in and see his or her own details and say, “Just a minute, I changed that address three times already,” or “That policy’s been cancelled; why is it still showing the way it’s showing?” So the quality of data is becoming our next biggest challenge.

We’re currently addressing it through using tools like rules engines, to try to mask data to make sure the quality is there. It’s a runtime type activity wherever possible, but clearly we’re looking at operational procedure so that data is input and used differently than it was 20 years ago. We are using tools like rules engines to help us in that task, and clearly when we go live in June this year with our platform and our opening up of that capability, we’ll be making or managing or manipulating spot data. This is not something you necessarily want to do, but it’s the only way we can progress forward without addressing millions and millions of records.

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The widening web The online world offers many measurement benefits. What are the key metrics for you?

IB. We’ve got a series of metrics about how we entice some of our advisors to become user. We have lots of incentive plans to track the take up within the advisor community for us, first of all, and then our user satisfaction. We track all those journeys for our customers — how long do they stay on the site, what journeys do they take? Again, we found that we had several pages of data that hadn’t been seen for many years in some cases. So figuring out that there is stuff out there that we maintain and support that nobody cares about and isn’t value adding has been a bit of a disappointment, but based on that, you can re-architect and redesign, just like what we’re doing now.

As online interaction becomes the norm between a customer and their financial institution, how do you work to maintain the humanity at the core of that transaction?

IB. Within the life insurance business, we do that by keeping that person there and being part of the transaction. So again, the advisor who comes round to your house or goes through a proposal with you, who helps you to figure out what to invest in or which pension fund to use. Using our e-commerce, we spend a lot of time supporting advisors because the products that we sell are complex, they’re difficult to understand, and the consumer still needs that human interaction. We’re not in a space where we could expect to sell online at this time.

What are the technical challenges with everyone attempting to access the Aviva system differently?

IB. This has been a problem for us because the platform technology until very recently wasn’t mature enough. So we had a different solution from a different vendor that integrated a different way almost for every access, every device and every product or piece of data. Some of the new products out there that we’re currently using are the WebSphere products from IBM. If you look at those products, they now offer a kind of portal solution. The security and the device addressing aspects are managed by the platform itself, so you’ve got one type of data and you present to the portal; the portal manages the transformation and the interaction with the device, and that’s properly come along in the last 18 months. It’s starting to mature. Our task right now is to migrate all the methods into the portal world and to rely on the industry standard as a portal to do that.

With the range of online functionalities rapidly changing and technologies springing up almost overnight, how do you decide which technologies you’re going to use at Aviva, and how do you prioritise those?

IB. We’re seeing the Web 2.0 stuff right now inside the organisation, and we’re learning about that. So some of the blogging type activities, some of the chat room stuff, we’ve got going with our employees. There’s a conversation over what we do with this, how we use it, and we’re very much still in the learning phase. We’re releasing it globally, it’s called our Aviva World Solution – it’s an internet site with all those capabilities and it’s something we’ve put together in

The rise of broadband means that the internet is big business 44 percent of EU households now have broadband access This figure is expected to reach 71 percent by 2013 Penetration figures are expected to reach 81 percent in the UK, 72 in Germany and 69 in France

the last several months. The idea is to learn in that space with our employees, get some feedback and consider what we do with it, but again, given our slow-moving industry, we’ll be taking our time. It might be that we start to open up that capability to our advisors who are online, who can dynamically make contact in chat or short messaging, but it’s still a learning phase for us.

According to Peter Weill of MIT in his book on the subject, IT governance should account for three things: What decisions need to be made? Who is accountable for making those decisions? How will those decisions be made, namely the process? It all sounds so simple, so why do so many IT projects fail?

IB. That’s a massive question and something we’ve all struggled with. I’ve spent 20 years struggling with that one issue. I think when we get it right, it’s because we’ve got the right kind of engagement, and I think we often struggle to get the engagement model right, and get to the right people at the right time, with the right information, so we can make the right decisions. In my recent experience, we’ve just stopped a project of some millions of pounds halfway through because we’ve got the right governance model, and stopping it was the right thing to do. If this doesn’t happen, these projects would just trundle on to the end. The IT folks would deliver something and the business community would be pretty upset with the outcome, or it would just sit and languish on the shelf and not be used. I feel we’ve got the governance model correct in this case, because we had the right engagement model, we’ve got the right dial up with our chief executive, and he said, “I think we need to stop this.” We agreed, and we did, so the governance model worked for me. Unfortunately it was stopping a very big project, but the model worked.

I think so often the IT community struggles to get the engagement right within business, and that’s the biggest area that I spend time trying to solve and fix. n

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EXECUTIVE INTERVIEW

Worth the risk Absolute Software’s William H. Pound explains why security is so important when dealing with mobile banking devices.

FST. With so many mobile devices now in use in the workplace, what new security risks must businesses manage?

William H. Pound. As mobile technology becomes more advanced, so does the security threat to businesses. An increasingly common phenomenon is computer drift, the habit hardware assets can have of dropping off an IT team’s radar, taking with them valuable data and software licences.

Computer drift is symptomatic of a workplace culture that seems to view both data and hardware as disposable, but it really shouldn’t be that way. Too often companies let employees take tired old laptops with them when they leave, other times they forget or don’t invest in the process of recalling those laptops, failing to recognise the value isn’t in the outdated machine but in the intellectual property and the software licences stored on them.

Especially at the moment, with all the talk of lay-offs, computer drift is a risk of doing business, but it needn’t be a cost of doing business. Drift is a risk that can be mitigated. What’s more, companies churning high numbers have all the more reason to keep track of digital assets FST. What are the risks for financial companies that fail to protect the customer data entrusted to them?

WP. The finance industry, more than any other, is at risk from security threats. The value and sensitivity of the data stored in this sector is very high and data loss can mean

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customers’ personal details being seen by unauthorised eyes.

When such confidential information gets into the wrong hands, it can cause serious problems for the organisation; not only is the data itself at risk – but the reputation of the entire business. This can be catastrophic, and headlines are not easily forgotten.

FST. What solutions are available to protect mobile devices and the data they contain in the event they are lost or stolen?

WP. The vast majority of stolen laptops are taken by opportunists or as a result of burglary. In such instances, the laptops are stolen for their nominal value and sold on cheaply. In these circumstances, strong encryption will protect data from any prying eyes.

However, if the theft is targeted, the thieves sophisticated enough and the information desirable, then many kinds of basic security can start to look pretty shaky. The key is to have a back-up in place so that, if a

device or data does fall into the wrong hands, there are processes in place that can handle the fall-out.

Software that allows you to remotely delete or retrieve data can be a great benefit.

This means that any sensitive data can be kept from prying eyes even if the device itself is not recovered.

A GPS system can also be used to help recover the missing machine. Like data recovery – this helps create a complete security system. One that, even if breached in the first instance, can be put back into place.

FST. Encryption has traditionally been the main line of defence in IT security. Is it enough to simply encrypt information or must other measures be used to guarantee security?

WP. Encryption works very well as part of a layered defence. The problem is that few companies bother to implement it or enforce its use. Research conducted by The Ponemon Institute recently found as many as 40 percent of security professionals don’t even implement encryption on their laptops.

This is why the vast majority of stolen laptops still contain information that is not protected. For that reason, businesses need to have a safety net that enables them to remotely delete data from a stolen device.

Even if the information is encrypted, 70 percent of data thefts are internal, according to Gartner, that means the person stealing the laptop, or the information it contains, almost certainly holds the encryption keys they need.

Businesses could wait forever for staff to act sensibly and use all the tools available to them or they could be realistic and have a watertight plan for the day when, not if, a device goes missing.

William H. Pound oversees Absolute’s International Operations and has 25 years of experience facilitating international business and developing strategies to move new products into foreign markets. Prior to joining Absolute, he managed a consulting group to help companies with their global expansion strategies. He has also lectured on international business at Ryerson University in Toronto, Canada.

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INFORMATION SECURITY

A human fix The financial services sector often places much emphasis on the technology side of the business, but ultimately, all technology is only ever as good as the people behind it. FST speaks exclusively with David Lacey about the importance of managing the human factor of information security.

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n David Lacey’s new book (see our review on page 138), he investigates the growth in social networking and the vital need for all enterprises to ensure that computer users adhere to corporate policies. “Technology security is a big issue,” he explains, “and certainly we don’t place enough effort on it. In fact, over time, the balance between whether you need more effort on technology, people, or processes does tend to shift a lot.”

As Lacey details, there have been times in the past where the financial services sector have needed a ‘technology fix’, but at the moment he believes that the real problem lies on the people side. “You can’t get a perfect solution with people,” he notes, “you need technology as well. People make mistakes – they’re only human. And there will always be incidents arising from that.”

People can be easily fooled, for example, and Lacey stresses that there needs to be a lot of emphasis on people simply because they are behind everything: “People design systems: they supervise them and they operate them. They also attack the systems, and it’s actually people who then identify the risks, spot the incidents and then turn them around.”

Another important factor for Lacey is the issue of major incidences that can also be an opportunity for organisations. “There is a lot of publicity that comes with a major crisis,” he explains. “There is a lot of opportunity to transform the organisation – and it is possible that you can come out on top.”

In fact, according to research by Oxford Analytics, shareholder values for companies that manage a crisis well can actually go up quite significantly, by as much as 10 or 20 percent; although initially, it always fails. It can also go down by 10 or 20 percent if the incident is managed badly.

“The key thing with people is that we’ve been going about the whole process the wrong way. We haven’t learned from areas like safety, for example, where there is a distinct no-blame culture. You do a root cause analysis of every major incident to find out all the different things that contributed to that, and

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MANAGING RISK you fix them. The safety field also realises that behind every major incident, there are, on average, 29 minor incidents, 300 near misses and thousands of bad practices.”

This is something that currently isn’t being done in the security field.

Here, professionals wait for a great big incident and then carry out a kneejerk reaction where a lot of money is spent to try and stabilise the crisis. “If you’re instilling the kind of blame-culture where everybody knows if they do something wrong, they’re going to be immediately disciplined and punished severely, then that’s the wrong kind of culture to promote. Behind every incident, there are many causes. It’s never just down to a single person and that becomes a big distraction in tackling the root causes of such crises.”

“Behind every major incident, there are, on average, 29 minor incidents, 300 near misses and thousands of bad practices” Lacey identifies that incidents are often the fault of varying layers of responsibility, and he stresses that organisations need to understand that people are going to make mistakes. He even notes that it is often the best staff who will make these mistakes because they are working harder, are working longer hours and are under more pressure – particularly during this recessionary climate where layoffs and cutbacks result in harder work schedules for those left behind.

“If staff are working too hard,” Lacey explains, “they are more liable to make mistakes. If they’re not supervised properly then that’s another factor, and if they’re not trained properly or aware of the risks then that poses another problem too.” He also adds that badly designed systems, that are neither user friendly or ergonomic enough also play a role as a root cause of an incident happening.

David Lacey discusses the relationship between technology and the human risk, and whether technology professionals have a hard time managing that risk he starting point is to realise that the people who work in security and technology don’t have any training background on the essential sciences that are related to how we communicate in messages. I believe that communications need to be developed by communications professionals, not technology professionals and as I point out in the book, it’s much cheaper to hire a journalist than a security consultant. The question is, why are we using security managers and consultants to develop educational awareness material?

What we need is a lot more emphasis on getting professionals in to support security people.

But it’s not just the psychology of communications that we need to understand, it’s also taking on better practices that prove to have longevity, like those within the safety field. And we, as secutrity professionals, could learn so much. There’s almost a whole culture of reeducation that’s required in the area.

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“Having said that, there are things you can do to bolster your defences,” Lacey continues, “and these include more rigorous background checking when recruiting people.” He also notices that organisations don’t do enough in terms of disciplining and encouraging people not to commit crimes, because everyone who commits a fraud or tends to justify it to themselves. “Fraudsters have to rationalise why they did it, and they often believe that they did the right thing. Evidence shows that even serial murderers think they did the right thing for society. That’s how they live with their actions.”

Bolster your defence Lacey believes that if organisations allow people to get away with the Insider threat is another major issue, and people processes are besmall things – like someone browsing inappropriate material and nobody coming more and more important because of networking and its use in the doing anything about it – it creates a climate that is encouraging people to workplace. “Networks connect people, and with the growth in social nettake that step further and commit a fraud. “People will only do something working, you’ve now got a collective power of people to do things which wrong if they can justify it to themselves in some way and if they believe they never could do before and therefore make mistakes on huge scales they’re going to get away with it. What we tend to find is, ‘acceptable use that they could never do before either. All of the centralisation of power and policies’ are absolutely worthless within an organisation and, oftentimes, the powerful access an individual can have enpeople just don’t know about them, they’re courages insider threats and encourages exterbadly written or are incomprehensible.”

David Lacey is a leading authority on nal attempts to manipulate people inside.

What’s more, they’re not communicated Information Security management with Because of this, there are some really severe properly through training, nor are they enmore than 25 years professional things going on. forced consistently. “So every now and experience, gained in senior leadership “The problem with insider threat is that it’s then, when somebody does enforce one of roles at Royal Dutch/Shell Group, Royal very hard to actually differentiate a potential crook these policies, it’s always a shock to the orMail Group and the British Foreign & from a high-flying, effective manager. They both ganisation, and it shouldn’t be that way; Commonwealth Office. Lacey is now a show the same characteristics of being deterpeople should know what the rules are, freelance director, researcher, writer and mined, competitive, ruthless, aggressive and fothey should know exactly how far they can a consultant to organisations, venture cused, and therefore it’s often the case that go, and they should know that they will be capitalists and technology companies. fraudsters do well within an organisation. enforced consistently.” n

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ASK THE EXPERT

Recessionary Crises Perhaps now is the time for a little subversive transformation, says Dr Richard Sykes.

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he instinctive response to the current recessionary crises is to freeze into stasis.

The CFO is hoarding cash (so definitely no capex) and the CEO is aggressively scrutinising headcount. It is not the time to take risks and launch new projects. And yet the crisis looks set to be both severe and long lasting, so is now really the time to reinforce the status quo?

Especially if it includes inflexible and expensive to maintain legacy?

Time, rather, for a little subversive transformation. Indeed, two transformational exercises will speedily deliver the immediate benefits of sharply reduced operational costs and increased operational flexibilities.

But subversively? SOA technical architectures now enable the means to cut the Gordian legacy knot of older, tightly integrated architectures without the need for mega projects that take years to deliver with all their investments of human resource and capex. New generation business process management capabilities, built holistically with open systems/SOA architectures at their core, can be used to deconstruct legacy structures in virtual terms.

This enables the implementation of systems change through simpler and shorter term projects that, by steadily breaking the restraints of tightly coupled legacy, will deliver returns measured in months rather than years.

These are projects that can be managed as opex exercises.

In aggregate their impact is transformational – but compared to classic transformational initiatives, subversive. Ian Thompson, former Managing Director, Group Operational Services at Lloyds TSB, comments: “Balancing the long-term business requirements for modernisation with the shorter term P&L needs as well as the current capital constraints is one of the biggest challenges CIOs face today. Setting out a strategic road map including SaaS and virtualisation and then implementing fast, short-term projects can provide the win-win that the CIO is striving for."

So what are these two transformational exercises? The first is the determined commoditi-

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sation through virtualisation of data processing, data storage and data networking requirements.

Through conversion of the business’s own facilities or through migration onto externallysourced ‘on-demand’ infrastructural services ‘from the Cloud’ (or a mix of both), the outcome is the same: business operations underwritten by a specifically crafted platform of highly scalable on-demand capacity, delivering much reduced and commoditised transactional costs, a flexibility for further change, and the end of the need to raid the corporate capital programme.

The second is the developing SaaS transformation of the software supply chain. Generic back office and front office systems requirements can increasingly be sourced as standardised and competitively priced SaaS capabilities – and the same SOA architectures enable them to be easily managed and integrated with inhouse delivered systems on the operational platforms described above.

Steria’s Financial Services Sector managing director Yvonne Spalding is keen on this type of subversion. She comments: “The combined exploitation of these two developments represents a significantly transformational journey. This requires careful scoping and design, as all change brings new risks in ensuring the maintenance of security and continuity with the assurance of un-

broken legal and regulatory compliance. Steria is a trusted partner of choice in crafting and making this journey, able to draw on extensive experience at every step. And the design of the journey as a series of distinct and short-term projects, with rapid pay backs, to be delivered within the restraints of the business’s opex cash flows, plays to the core of our solutions creativity: a leader in delivering the subversive transformation business model.”

So the CIO is now on side – no capex requirements and a sharp reduction in operational costs. And the CEO? In tough times, the focus has to be on ensuring the business has the right people focused on the right roles in delivering front line competitive core competencies. The transformational journey scoped here modernises and commoditises underlying infrastructural and back office operations, so that the people agenda can be correctly re-focused where it really counts – on exploiting those front line competitive core competencies. Making the CEO delighted. n

Dr Richard Sykes is Director of Services for Bloor Research. He is an advisor in the strategic transformation of technology & business process sourcing, outsourcing and offshoring business models. Group VP IT of chemical major ICI in the 1990’s, he is an elected member of the Board of Intellect, the UK business association of the IT, Telecoms and Electronics industries.

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INSIDER

THE CONVERSATION

Difficult times call for new approaches.

For IT, that means getting out of the back office and talking business, says Gulf International Bank CIO Seb Kacary.

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n a recent survey conducted by the Economist Intelligence Unit, 59 percent of 360 Middle East executives surveyed said they had been prompted by the financial market turmoil to scrutinise their risk management practices in greater detail. This demonstrates the need for having the organisation as a whole understand the importance of risk within the banking arena. Certainly within Gulf International Bank (GIB), we’ve taken great steps to highlight and improve the risk appreciation across the board, so we can see the importance of getting more thorough processes in place and more targeted technology to support those processes.

To foster a culture of risk management, education is fundamental from the outset. We’ve been fortunate enough that because of the crisis, people understand the need to have the group in the corner covering risk management. But now they understand full well the importance of that group and how it can support both the trading function and the operational function of the bank.

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A perfect fit The IT function of managing the business need for speed and the innate slowness of risk is done by getting the right technology in place, right now. It’s about understanding technology that’s fit for purpose. Too often, organisations, banks in particular, over-engineer solutions and over-engineer the process to support those solutions, and you need to have something far more slick and targeted to understand how the business performs and how it wants the information available to them.

Finding the technology that’s fit for that purpose is about getting the right people in place who understand the processes, how to measure the risk and understand the scope of our business and what we need to support that. It’s getting the right people educated in order to get those tools in place. Too often, you have a salesman selling you a tool or a chief executive reading about a technology, which becomes implemented and then you find that it’s not fit for purpose. So you need to get the intelligence in the organisation, or draft it in, in order to properly see out what’s required and what you need to build.

From a technology point of view, one of the most important things that we need to do is have all the requirements thoroughly mapped out and approved, and then make sure we have a full support structure around that. That is far more important than what may be the new technology to support the business. It’s fundamental to get the right technology in place and have that completely supported, without having pockets of technology that evolve from the business.

It’s important for all of IT to look at best practice outside of the IT arena.

Some of the areas I’ve looked to introduce within IT are having a proper service management governance structure to bring in an ITO framework within the bank, which has been very successful. So we’ve implemented the processes, and now it’s implementing the tools to support those, which we’re having the fun part of doing now.

We’ve introduced a newsletter within IT as a means of fostering communication within the IT community. It’s a way of IT having something that’s purely for us. We can poke fun at some of the banana skin moments we have within IT and we can applaud good work. But we can also foster that communication across the organisation.

Security Fortunately, the issue of convincing management to follow us with our ideas has not necessarily been true for us in terms of security. There’s been enough press and media attention around issues of our IT security function and the lapses in security, and the effects have been positive – it’s almost done the job for us to a certain extent. It’s certainly not easy to get the funding for these initiatives, but there’s enough profile within the business now, and I’d imagine it’s similar in other organisations, that as long as we can jus-

Communication Building effective communication channels is vitally important.

Without those, if you don’t communicate with the business and you don’t let them know what you’re doing, the natural assumption is you’re not doing a great deal. What they typically see is that you’re not prioritising their requirements as high as they would like you to be, yet you’re spending an awful lot of money on upgrades and software patches.

Unless you communicate the importance of those, they don’t adequately see why you’re doing it. Building effective communication channels is key.

IT also needs to adapt to the corporate culture in which it lives. As a department, they are quite often working as an island to themselves and have a view that they should be able to operate in isolation. Business doesn’t understand what IT are doing, and think we should just be left to work the way we should be working. But we need to look at how the business operates. Are they a centralised organisation? Is it process driven? Is the company seen as a measurement company? Do they measure much more beyond financial records? Are they risk tolerant? And so when you build and conform to that corporate culture, IT and business tend to work far more effectively together.

It’s important, not only for IT but the entire banking sector, to look outside of itself. I try to encourage my whole team to look at best practice across the board. A good example of this is Reuters – they have evolved quite remarkably as a company – and how they’ve sought to allow technical staff to progress within a technical sphere and have that promotional capability, without them having to move into a management role that potentially is not suited for them.

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FEELING THE PINCH IT and operations are often one of the first areas that the organisation will look at to cut costs. When you work in IT, you always see yourself as being one of the areas that will be approached first when there is a financial downturn. Sometimes that helps lead to an element of distrust between business and IT. That’s part of my role – to try to build those bridges and eradicate the distrust that’s created by that. But from the heyday we had a decade ago, IT has been trying to rein back the costs and the over-engineering that has been put in place across a large number of organisations. From a structural point of view, we’ve completed an exercise to help contain the costs from a resource angle, and now it’s really looking at further instilling a strategy across our technology that not only makes us more agile, but also can contain costs.

Historically, business and IT have elements of distrust. IT didn’t do themselves any favours from Y2K and the fiasco that that was, and a lot of business representatives haven’t forgiven IT for that yet. What’s important in building that trust and building those bridges is really laying out to business representatives exactly what service we are providing for them. A key part of that is to build SLAs into what you deliver to the customer without being too regimented into how you dictate those. However, if you’re leaving yourself as open to the service you provide, you’re really leaving yourself open to failure as far as business is concerned.

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tify and show the benefits it’s bringing to security, then we often have the approval to proceed.

From a security point of view itself, we no longer have issues – they’ve pretty much recovered from the early initiation of software as a service, where that was an obvious flaw. That box has been ticked now. However, software as a service doesn’t provide what we’re looking for in terms of customising the applications. You need to integrate the customisation of the application, and that’s where any provider would struggle to support us as a bank. You almost need a larger bank providing services to smaller banks like us, or us engineering our solution and being a profit centre rather than a cost centre, being a software as a service provider to other banks in the UK.

Reliable resources

looking more at how the business is supported by that technology. And that’s what I think is becoming far more important.

Whether technologists have that experience comes down to whether each company want their CIOs to focus purely on technology, which isn’t a bad thing. n the right situation and with the right people, they’re serving their best skills. However, what we need to do is to move the IT function to work better with the business. You need to have more of a strategic overview, and I think it does come down, to a certain extent, to education, having more business education amongst IT. Something I’ve introduced within GIB is having business talk directly to IT, which has gone down very well. It’s having the opportunity for IT to listen to the people that are conducting the business and are on the trade floor talking about future plans, talking about how well the business is doing, talking about issues that they have, both with technology and outside of technology remit. It helps IT appreciate far more exactly what business is all about and think of new ways in which we could offer solutions or offer products that we could market within the organisation.

Streamlining functions and becoming resourceful is one way of cutting costs within the department. It’s a similar thing that you’ll see across a lot of organisations. The strands we’re looking at are predominantly simplification of the environment. So a lot of organisations evolved organically and found themselves supporting multiple applications and multiple streams with similar core functions.

They turned to Reuters as having a common platform, and “In order to reduce impact from the financial crisis, it’s a similar process I’ve looked to instill within GIB to drive an we’re deploying a tactic of moving away from some of initiative that was already ongoing, and pushing back a very complex network of applications that were meshed together the over-engineered solutions that we had and moving into something that’s far better suited to the organisation we to solutions that are inherently more reliable” are now, and far more directly supports what business functions we have. Also important is looking at technologies such as virtualisation both from a server point of view – storage and desktop – and having the flexibility that affords us as a bank.

You can always work to improve the gap between IT and sales – it’s Difficult times such as these can often lead to both customers and mainly down to communication across the teams. It has suffered and still providers neglecting innovation. In order to reduce impact from the finandoes suffer from the fact that you typically don’t have a seat on the board, as cial crisis, we’re deploying a tactic of moving away from some of the overthis is typically allocated through a finance, marketing or sales function, not engineered solutions that we had and moving to solutions that are IT. However, that view is changing more and more, and IT is getting more repinherently more reliable and robust because you build in resilience as part resentation at a senior level because, fundamentally, it’s core to a lot of what of it, rather than buying very large units that are fully resilient. businesses do now. From a sales function, it’s important in that there are chanIt’s more the provision of the technology rather than the technology itnels of sales, such as effective internet for example, that IT could help the self that will flourish in these times. This will happen more if less organisasales function deliver the message far more cleanly and efficiently. tions invest heavily in the bespoke applications for their sites, and far more The problem is that people only really hear of the IT projects that fail. organisations that are our size will look to buy software as a service or an If you went to most organisations, the vast majority of IT projects succeed, ASP model to support their business and then look at the technology to and typically they are within budget and within the agreed time scales. But support the integration of those services. you can’t get away from the fact that certain high-profile projects do suffer Strategist and are widely reported.

The role of today’s CIO is still in flux from technologist to strategist.

My view of project work is that the time spent upfront is the most imporThey no longer hit a glass ceiling at a senior developer stage, and they can tant time in any project, and that helps the project be a success.Too often with progress within the organisation. That helped stop the Peter Principle proproject planning and initiation, people try to cut corners, and they try to rapidliferating through IT, where 10 years ago it was very common. ly produce a business case or forget about it all together. So it’s getting back I strongly feel that the path that CIOs are following more and more now, to the basics, back to what we need to implement, and to know what you’re is one where they’re becoming much more strategists than they are pure implementing or the success criterias of what you’re implementing, and a rotechnologists. Along that path they need to pick up far more business bust project team and project governance must be in place. knowledge, business education and look to stretch themselves a bit more.

Most importantly in any project is communication. If those channels They are no longer looking at technology with their head down and only aren’t built and you don’t have a proper communications plan, you’re ulticoncerning themselves with providing a good technology solution, but are mately going to fail.

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BPC EXEC:co proof 23/04/2009 14:20 Page 58

EXECUTIVE INTERVIEW

Transaction stations Nigel Cox tells FST about the need for flexibility in modern payment solutions

BPC persuades global banks to displace legacy and home grown processing and card management systems with modern, open standards solutions. What are the key advantages in operating modern processing solutions over the legacy and proprietary systems currently used in many financial institutions?

Nigel Cox. Legacy and proprietary systems impose both a cost burden and an inability to innovate on the financial institutions that operate them. Some of these systems were designed and architected 20-30 years ago and, whilst excellent in their day, they no longer serve the purpose of putting the customer at the centre of the bank’s services. Modern systems, like BPC’s SmartVista, have been built around the concept of open systems in conformity with the industry standards that have emerged, for example ISO8583, EMV, PCI DSS, etc, and were designed to serve a financial market where growth can only be driven through innovation and systems must facilitate that. Their technological features allow modern solutions to create an effective customer management environment, better integrate to any IT and business infrastructure and support innovative products and services ensuring their faster time-to-market. The latter is an essential reason why the banks prefer to build

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in-house solutions instead of using third party processing services.

The payment space is more complex today than it has ever been. How important is it that a processing solution is able to support all modern delivery channels?

NC. Without a processing solution that supports multi-channel delivery the financial institution may well be left to invest in separate solutions to support different channels with the resultant cost, skills and integration overhead. In the end a payment is a payment and to maximise its return investment any system user must seek to drive as many payment types and transactions as possible through its chosen platform.

The payment card industry is offering more and more points of interaction with a customer.

The IT infrastructure should support these ongoing changes to allow the bank to gain competi-

Nigel Cox is General Manager of BPC Europe, the division of the international BPC Group established to address the market opportunity for card management, electronic payment processing and switching software in Western and Central Europe.

tive positions at the market and better meet its challenges. SmartVista supports all these services as standard.

Financial companies currently operate in a very uncertain market. How important is it that any payment solution is both scalable and flexible?

NC. Many financial institutions have burned their fingers dabbling in investment categories they did not fully understand. What they do understand is payments. In advanced economies such as Iceland, electronic payments represent nearly 75 percent of all transactions. In Central and Eastern Europe it may be below 15 percent and in Western Europe perhaps 25 percent: If these markets can increase the proportion of electronic transactions, using the flexibility of modern systems to innovate, then banks would benefit at their bottom line.

A great advantage of the modern solution is the ability to grow in parallel with the business.

SmartVista customers can always be sure that they can easily expand the solution as the need arises by adding new functionality and increasing throughput capacity. Today the largest SmartVista based processing centre supports over 31M cards, 135,000 POS-terminals, 18,500 ATMs, processing about 7M TPD while benchmarks have shown that the system can be increased in scale even further reaching throughputs of over 7000 TPS on real workloads.

With customers demanding more and more ways to interact with their banks and other financial solutions, how can a processing solution reduce the risks of identity theft and guarantee security?

NC. Traditional fraud management and detection solutions use simple rules and are essentially retrospective. But as transaction volumes increase it becomes more and more possible to model individual consumer behaviour using fraud systems that learn the behaviour of customers. The greater the transaction level the more accurate these models become, and as a result, anomalous behaviour like fraud can be more accurately detected. This is excellently supported by SmartVista’s Fraud Management capability, which provides a set of online and offline mechanisms, from transaction filtering, to user-defined rules technology, and neural network based monitoring to help organisations reduce losses due to card fraud. n

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SECURITY

Phish

tales

David Jevans discusses the challenges faced in fighting the global war on phishing and crimeware during the financial crisis

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hen I founded the Anti-Phishing Working Group in 2003, I thought that we would have eliminated phishing by mid-2004. How wrong I was.

The Anti-Phishing Working Group (APWG) was founded to bring together the diverse communities of banks, ISPs, e-commerce companies, security vendors and law enforcement agencies. Our core philosophy was to create a forum where these diverse players could talk frankly and honestly about the evolving phishing attack situation, without fear that these conversations would become public. This format proved to be immensely successful, and the APWG now has over 1500 member companies and government agencies.

In 2003, phishing attacks spread from attacks against eBay and PayPal customers to a wave of coordinated attacks against the customers of Australian financial institutions. In the summer of 2003, these attacks were

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then aimed against customers of UK financial institutions and in late 2003 US banking customers began to be targeted.

This global pattern indicated that cyber criminals were becoming just as organised as traditional crime gangs. They were testing new techniques in smaller markets like Australia, where users are easily targeted by both their network address and because there are a smaller number of financial institutions. The model was then perfected and expanded in the UK, where there were still a small number of institutions, and an easily targeted customer base. The scam was then scaled up to the US market, particularly targeting customers of the top few banks.

It became clear that one particular group could not solve the phishing problem on their own. It would require cross-industry collaboration. Thus the APWG was formed.

As phishing scams became ever more sophisticated and professional, members of the APWG were able to discuss the evolving tactics and best practices for detecting these attacks, shutting down the phishing sites and tracking and reducing losses. In closed-door APWG meetings, members were able to discuss the indirect financial losses from phishing attacks, for example the costs of call centres receiving tens of thousands of phone calls from consumers when a major attack was launched.

The APWG publishes monthly reports that track phishing statistics around the globe. These statistics allowed us to see patterns where some financial institutions would be attacked with much more intensity than others. Eventually it became clear that one significant factor in the number of attacks that an institution faced was related to how easily criminals could transfer funds out of compromised customer accounts. We also began to see cross-channel fraud, where account numbers and PINs were used to create ‘white plastic’ ATM and debit cards. Financial institutions started to realize that the phishing problem spanned all types of fraud, and was involved in ATM, debit card, cheque card, wire transfer, ACH and account opening fraud. More recently we have been seeing the telephone banking channel used as an attack vector, where phishers send out emails requesting customers to call a fake call centre, where the IVR system is used to collect account numbers and PINs from customers without them ever having to visit a spoofed bank website.

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The cyber criminals fight back Through 2005 and 2006 the security community began to develop antiphishing technologies and service offerings such as outsourced takedown services to get spoofed websites shut down in a timely fashion. The phishers responded by increasingly hosting their spoofed websites in foreign countries, making takedowns very time consuming and requiring foreign language skills and working around the clock to deal with sites hosted in varying time zones.

For every defensive measure that is put in place by the industry, the criminals react with a creative new approach to continue their fraudulent activities. For example, the security and web browser community began to track known phishing sites and share those web addresses as a block-list, which would allow browsers and email servers to prevent users from receiving known phishing emails or visiting known phishing sites. One of the prominent phishing gangs, known as the ‘Rock Phish Gang’, responded by using tens of thousands of sub-domains on their phishing sites, thus overwhelming the block-lists.

Another example of escalation in the war against cyber fraud was the invention of fast-flux technology by the leading phishing gangs. Fast-flux is a DNS technique used by botnets to hide phishing and malware delivery sites behind an ever-changing network of compromised hosts acting as proxies. A sophisticated type of fast-flux is when multiple nodes in the fraud network register and deregister their addresses as part of the DNS record list for the DNS zone.

This makes taking down phishing and crimeware sites extremely difficult as they are hosted on many machines with changing IP addresses. The APWG and our members have been working with ICANN, the Internet Corporation for Assigned Names and Numbers, to create policies for rapid takedowns of fraudulent domain names that are being used to host phishing and fast-flux sites. This has been a multi-year effort, and there is still much work to do with policy and education among the registrar and registry communities.

A very disturbing trend over the last year has been the use of social networks to spread crimeware and phishing. There have been attacks against users of MySpace and LinkedIn that have infected tens of thousands, and in some instances up to a million users in a very short time frame. These attacks do not rely on traditional email, as they spread inside the social networks using their internal web-based messaging systems. This can make these attacks very difficult to track and profile.

2009 and beyond We expect that the current global financial crisis will continue to give phishers new ways to create believable social engineering attacks to steal account credentials and to spread crimeware. In the fourth quarter of 2008 there were numerous attacks against customers of major financial institutions that were being acquired or were in the news receiving government aid. In 2009 we can expect an increase in money mule recruitment scams, where criminals recruit unemployed consumers to act as online funds transfer agents, or to reship goods that were purchased using stolen credit card numbers.

The rapid and continuous evolution and expansion of online financial fraud through phishing, crimeware and social engineering is something that

CRIMEWARE ESCALATION Over the last several years we have seen phishing be augmented by the spread of malicious software that is designed to steal online account credentials. This malicious software that is designed for electronic crime has been dubbed ‘crimeware’. The crimeware wave seems to have started in Brazil in the 2003 timeframe, and has naturally spread around the world. Crimeware variants are merged with remotely controlled malicious software to create networks of hundreds of thousands of compromised home computers (botnets) that are used by cyber criminals to launch phishing, crimeware and spam attacks. The botnet explosion since 2006 seems to have infected millions of personal computers around the world that are being used by criminals without the knowledge of the person who owns the computer.

Recent activity in the crimeware landscape is the evolution of targeted crimeware that is designed to get onto the computer of a targeted employee in a large corporation or government agency. Once that person’s computer is infected, the criminals can upgrade the crimeware to add new functionality to compromise other computers, steal intellectual property, create backdoor access paths into the corporate network, or even to run customised software to generate transactions inside the company network. This represents the ultimate professionalism of the cyber crime industry, where crime gangs are plotting these attacks for many months, and using highly sophisticated crimeware and targeted social engineering to get this crimeware into corporate networks. We call this ‘spear phishing’.

requires a coordinated global response from the financial services industry, ISPs, security vendors, e-commerce merchants and law enforcement agencies. The APWG and our members have been working to expand our systems and tools for secure collaboration and data sharing. We have facilitated the sharing of phishing site URLs between members, and are expanding this to allow financial institutions and security researchers to share information about fraudulent websites and IP addresses of known and suspected cyber criminals.

In these challenging financial times, its more important than ever for the financial services industry, the security industry, ISPs and law enforcement to work together to share information and pool our resources to keep our customers safe, and to secure our assets. Come and join us.

David Jevans is the Chairman of the Anti-Phishing Working Group. For more information please visit www.antiphishing.org

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Right now, the financial industry is tumbling.

Properly managing risk can reduce the impact, says Mikael Krohn.

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t the moment it seems impossible to open a newspaper without reading about vast bank bailouts, stimulus plans and the dire economic situation that we find ourselves in. Far from being yesterday’s news, industry experts are anticipating that the current recession will have long-lasting consequences on the global economy, not least because it has forced both businesses and banks to refocus their priorities. Despite the £37 billion bail out in October 2008 and measures in January this year aimed at getting UK banks lending again, the lending has not recovered in anything like the volume necessary to get the market back up and running. So instead of striving for growth and market dominance, the trend is now towards business survival, stability and maintenance of current market positions.

Inevitably, this shift in priorities is accompanied by a close examination of budgets across the board. What’s more, many UK companies have already begun to re-examine their IT budgets, and according to Gartner’s annual survey of business priorities and CIO strategies, total 2009 IT budget decline in the UK will be 2.2 percent, compared to 0.5 percent across Europe and 0.2 percent globally.

Controversy has also appeared at the heart of the recession. According to a recent survey by City headhunter Whitehead Mann, more than one in eight risk

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managers believed that their employers ignored their warnings. The research comes after the emergence of corporate ‘whistleblowers’, who have claimed that their earlier warnings about a dangerous culture of risk-taking were not heeded. In addition to these revelations, the inadequate implementation of risk management systems combined with the recent dramatic market events has caused financial institutions to scrutinise their risk management practices.

While new regulations are expected, existing ones will receive more prominence, such as the Basel II advanced Internal Ratings Based (IRB) approach.

The Basel II accord requires banks to examine and address internal and external risks – specifically operational, credit and market risks. It further requires a financial institution to have a minimum amount of capital to cover these risks should it be compelled to meet its financial commitments.

Compliance with Basel II and its advanced IRB approach offers commercial lenders a number of competitive advantages. These include access to greater funding as well as positive changes to how bank use their information and operate overall – and how adaptable they are to change.

Applying for advanced IRB status is a complex and time consuming process, meaning that it is often restricted to larger banks. At least, that was the traditional perception. However, smaller and mid-tier banks are increasingly finding new and innovative ways to apply. However, the primary obstacle that these banks face in becoming IRB compliant is the cost of the investment required to develop the solutions to support their business processes.

To make it possible for the banks to overcome this they need to look at sharing the development and product purchasing costs for common solutions and a collaborative approach may offer the answer. In Norway for example, seven mid-tier banks which are looking to become advanced IRB compliant have begun to pool their resources to invest in the required score cards and data pooling. This initiative might also be a model for the European markets, allowing banks to take advantage of the business benefits of being compliant.

Prior to the credit crunch, commercial lending went through a period of substantial growth and as a result, volumes of transactions also increased. As the emphasis for firms has now shifted to getting their houses in order and regulatory requirements, firms require systems that can streamline the administration and help achieve operational excellence. Crucially there must be a provision to capture the process structure that has to be followed through the full loan lifecycle. This will make the firm less depen-

maximum flexibility for the banks to access a centralised data pool and thereby enables superior knowledge-based strategic decision support.

The road to recovery A meaningful pick up of the economy seems unlikely while the financial backdrop remains pessimistic. Eventually, the measures taken by the government should lead to an improvement. However, the adjustment process has a long way to run and changes in

“instead of striving for growth and market dominance, the trend is now towards business survival, stability and maintenance of current market positions” dent on people, reducing the risk of human fallibility as well as increasing transparency and auditability.

Therefore, the availability of historical data is crucial to effective risk management systems. To create maximum efficiency and ensure data quality, banks must automate the process of importing the data from both internal and external information sources into the commercial lending cycle and ensure effective integration of the databases, including the customer database, collateral database and scoring systems. This will result in greater operational efficiency, increased accuracy and the faster processing of loans.

One important tenet of successful management of risk in commercial lending is the ability to document the risk profile of the portfolio, which requires data to be managed in a more robust manner through providing a consistent ‘single view’ of data to all user groups and minimising duplication of data and cost of data storage. This allows banks to better rate and manage their portfolios whilst improving their risk management and covering credit, market and operational risk.

Having the right data capturing tools in place in order to become compliant provides

terms of how risk is handled in the future will need to be made.

The challenging times give the financial industy an opportunity to rethink their IT strategies. There is a great potential of cost sharing by adapting a more collaborative approach. If we look beyond the North Sea towards Norway, small to medium-sized banks are pooling together their resources to achieve compliance. By adopting a collaborative approach, the banks are able to not only achieve the advanced IRB compliance that would previously have been unattainable, but also set a standard for best practice amongst other banks by ensuring that their credit processes are both efficient and of high quality. With this standard in place, the banks will gain a competitive advantage as they will be able to ensure that they can accurately monitor credit risk and subsequently set the right prices at a customer level. It might only be a matter of time for banks in other countries to follow suit, remembering that it is not only about surviving today but building a strong foundation for tomorrow. Mikael Krohn is VP at EDB Business Partner

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EXECUTIVE INTERVIEW

To be continued

Maurizio Capuzzo examines the critical need for financial services organisations to invest in business continuing planning.

Why is an effective approach to business continuity essential for financial services industry? Do you think enough is being done in this area?

Maurizio Capuzzo. Business continuity planning has evolved in recent years, and has become institutionalised as a global function that must be planned and managed at the corporate level, and executed at the country/ regional level. BCP has shifted from a pure IT driven process that includes communications technology, people, organisations, business procedures and infrastructure to a business function.

The growing intricacy and refinement of technology makes managing the disruption a very pinpointed challenge. Firms must keep vigilant in protecting associates, property and maintaining services to their clients in unexpected business situations, whether a natural disaster, terrorist threat or technology interruption. Traders need to make fast decisions, cover their positions and let customers know what’s happening no matter what.

What main challenges currently face the successful implementation of BCP measures?

Are there significant differences for large and smaller organisations?

MC. It’s a notable fact that of all the capabilities available at a modern trading desk, the trading turret and trader voice services are the two most critical to include in a practical business continuity plan. Unfortunately, it is also probably the most challenging.

Providing redundancy for computers, email, market data and electronic trading platforms is relatively straightforward, however, the trading environment requires dedicated access to client private lines which provides a much more challenging task.

The reality is that a practical BCP for voice trading communications has to consider the traders and his/her partners. Seamless communications means that traders can trade

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from designated BCP sites, without forcing clients to change the way they conduct business with the firm.

With regard to the differences between small and large organisations, BCP preparedness is critical to broker/dealers, top tier management firms and the major banks, industry utilities and organisations. Tier II firms are focusing more and more in BCP preparedness than in the past, particularly when it comes to the customer engagement.

We see a different approach between tier I and tier II firms, particularly when it comes to ‘outsourcing’ to external vendors.

Maurizio Capuzzo is vice president at IPC and is responsible for managing the company’s unparalleled range of product marketing, solutions and marketing communication programs for trading floor in the financial services industry.

Do you think there is a lack of understanding as to what BCP actually is? What needs to be done to help the industry understand it?

MC. Business continuity and disaster recovery processes are the holistic process performed by FS organisations to ensure mission critical business functions are

available to clients, suppliers, regulators and other entities any place, any time. IPC has been fostering this concept for many years and many of our customers have reached a very innovative approach to the problem assuring a certain level of redundancy and ‘natural resiliency’ across data and voice access by guaranteeing no single point of failure.

There is more understanding and maturity to this concept than in the past and this reflected by the fact that BCP has often a defined space in IT budgeting. There has also been a progressive maturity in the awareness and importance of BCP. Aside from quick recovery from adverse events, does a good BCP approach have the power to offer value and competitive advantage to an organisation?

MC. In the last decade the development of internet telephony, specifically VoIP, has had a dramatic effect on traditional telecom services. Capitalising on robust and hardened data networks utilising IP technology has allowed non-traditional network service companies to offer voice services at reduced costs for consumers.

What many IT professionals might not be aware of is that the initial investment many trading firms made in IP-based systems can continue to pay dividends. Beyond the gains offered in flexibility, the continued adoption of SIP in modern IP-based systems and network services are creating opportunities to support new business continuity solutions that were not possible or economically feasible a decade ago.

With the continued evolution of communication technology and networks connecting financial service firms together there is an emergence of new trading floor designs that can improve business resiliency without putting a strain on IT resources and CAPEX budgets.

Conversely, developing an active BCP that leverages existing regional offices is a far more practical approach. What was impractical a decade ago is now technically feasible and often economically advantageous for small, large and global trading organisations that have already invested in IP-based trading communications. n

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ANALYSIS

DIAGNOSIS

MERGER The current financial turmoil is seeing a wave of fast-track mergers and acquisitions. Capgemini’s Sean Drewett looks at the risks and opportunities of an accelerating market.

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here are a number of factors as to why so many banks are looking at mergers. The first is the most obvious one, which is that some of them are being forced into it because if they didn’t merge, they would fail. The other one is that there’s a lot of value out there. Bank stocks are low. So if you are a bank that survives or a hedge fund or a private equity company that’s in a strong financial position and you’re looking at what your growth strategy’s going to be for the next fi ve years, now is the time to go out and acquire.

I read a great quote recently from a banking COO that said, “Banks are not bought; they’re sold.” We have seen exceptions where a government agency or other third party is forcing the issue, but generally a bank that’s being bought has to want to be bought by the acquirer.

What we’re seeing now is certain organisations getting in quickly to acquire those assets while they’re available. We’re going through a period where some banks are weak, their balance sheets are weak and they need to find partners. European banks may not be looking at the regional bank setup in the US, but there is a lot of value there that they can go after if they’re looking to become bigger global players.

But there is the counter to that. While I’ve seen some banks going into acquisition with the aim of becoming the HSBC of the future, they could be hampered because many of them are now nationally owned and will be for several years. If they are a nationally owned bank or a majority shareholder is a government, there are legal constraints and business constraints around what they can do. For example, in some countries there’s a limit to how much of a bank can be owned by a foreign nation.

There are a lot of legislative constraints that will maybe inhibit those banks that have large national owners, which will drive them to try and pay back that debt as quickly as possible so they can get back to business as usual. But on the other side of the coin, you can take the Spanish banks as an example. They came through this not completely unscathed, but without having to take a lot of, or any, government money. Their banks are now looking both to increase their acquisitions, but they’ve also been acquiring over the last few years anyway, and they’re looking to consolidate their position.

The nature of the fast moving environment that is promoting this wave of M&A does present certain challenges. The difference between the fast track and what might have happened 18 months ago is that in the past, an acquirer would have looked at the assets to establish that they were sound, but there would also have been time to do proper due diligence on IT, the people, everything else. There is a risk that certain things may be ignored that will come back to haunt some of these banks later on.

Nobody’s going to end up on the news because they acquired a bank and then found it had bad IT, because the most important thing in any merger is always going to be the assets. However, there are potential impacts involved in not knowing exactly what you are buying.

They won’t get the returns that they may normally have expected from a merger. They may not get some savings on consolidating banks or consolidating their IT because they may be acquiring a bank purely on the basis of its assets rather than on the synergies between its HR, its finance department or their strategies around how they’ve done outsourcing on their IT. The difference is that if you do a traditional

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Sean Drewett is the leader of the Strategy and Transformation Consulting Practice of Capgemini Financial Services Global Business Unit. Drewett has over 16 years in Business and Consulting and joined Capgemini on 1996. Before joining and then leading the Strategy and Transformation team within the Financial Services Global Business Unit Sean has worked as a transformation consultant, corporate development manager, Project manager and financial Controller. acquisition, you would have looked and said, “Okay, this is a bank that has a similar strategy around its technology which will be able to give me savings quicker than one where I’ve got to merge two banks with completely different technology strategies.” Those are the risks around generating the savings and also taking longer to truly integrate the banks.

Fast track mergers There are ways that organisations can limit the risks of fast track mergers. They will have a limited time for due diligence so they have make sure they build teams and plans to enable them to do to as much as they can. It’s far better to do that than to just accept that they’re going to have to deal with it later on.

Of course, sometimes an acquisition will be pushed through before they have a chance to get that due diligence done. If that is the case, then it is vitally important to get moving on it from day one. It may not affect the decision anymore around the acquisition, but it at least allows the CIO to know about all of the problems he’s got ahead of him. Hopefully he will then have a great chance to develop a strategic plan for his own IT going forward.

For example, if two banks merged and one of them had a strategy that was around outsourcing as much of its processing as possible, and the other one’s strategy was around keeping it inside, the CIO should very quickly develop what the future strategy and what the future setup for IT should be. It may be a long time before he gets there because he’s got two different organisations, but he needs to start to make sure he has a plan and knows where he’s going, rather than just spending all of his energy on trying to keep both banks running as they were before.

And it isn’t just IT. As with any merger or acquisition, looking at cultural fit is important. It is rarely a factor in the final decision around an acquisition but it can prove to be an issue. There are a couple of possible approaches depending on the kinds of organisations involved and it’s really a question of going with the one that fits. If there is a major difference between the type of banks that are merging, you may consider that actually you don’t want to have a single culture. An example might be a bank that’s primarily focused around retail banking and just bought a large wealth management or asset management firm. The two operations are different there and the histories are different, but also the type of people that you need to run them successfully may not be the same. So the executive who’s grown up through running regional banks and traditional retail banking products will have no understanding of the products in the asset bank, but also the culture’s going be different. In those cases the decision to keep the two cultures separate might well be the best thing.

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Culture The big risk around culture from the perspective of the acquiring bank is around customer relationships. That’s not so much a problem on the retail banking side, because your customer’s personal relationship with their bank is not as strong. But on the private banking side, it’s all about the relationship between the customer and the advisor.

If an advisor goes to another bank, they may well take the customer with them and you effectively become a drain on your assets. So the first thing that needs to be done is to make the decision on whether a single bank model and a single culture is really what you want? If you decide that the banks are relatively similar and you do want a single culture and a single organisation, make sure that you establish that up front.

What’s different in an accelerated merger situation versus a traditional one is once again the time you have available to get things working. What you would normally look at is what the future combined company should look like, taking the best of both and then creating a new company culture for that bank. In this environment, that may not actually be the right answer, because what you want to do is get to business as normal as quickly as possible, so it may be the acquiring bank that’s going become the dominant culture. Then it’s just a matter of managing the retention of key people who may feel uncomfortable about the change.

“Nobody’s going to end up on the news because they acquired a bank and then found it had bad IT, because the most important thing in any merger is always going to be the assets” The big question is will the global banking model survive? HSBC is a classic example of a big global bank that actually worked. So will we see more global banks emerging from around the world? My instinct tells me that in the long run, yes, because the efficiencies will drive new emerging global banks, whether they’re from some of the banks in the Far East, or some of the more successful US banks. But when the big UK banks emerge from being nationally owned and go back to being privately run, they will again become players alongside HSBC and try to drive that market.

Regulation is continuing to be a hot topic. There was a lot of discussion around it at the recent G20 summit. I don’t believe that there’s a rush to regulation because I think there is a general view that it is more important to get the credit flowing and fix the banking systems later on. I don’t know that any one country is going to benefit by rushing to over regulate the banking sectors too soon. I think there’ll be more forced separation between the types of banks and the assets.

But that’s something I think we’ll see a bit later. As for how government holdings are going to affect acquisitions, no one can really predict this marketplace. But those banks that are 70-100 percent government run, they’re not going to be allowed to do acquisitions while there’s still a large amount of public debt. I think the drive is going to be to fix those banks and then get them back into the private sector. n

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REGULATION FOCUS

The compliance

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he UK’s FSA has called for far-reaching changes to banking regulation and last year published a consultation paper on changes to the rules for managing banks’ liquidity, in which it described its proposals as ‘far-reaching’ and believes that ‘many institutions will need to reshape their business model significantly over the next few years as a result’. More recently, the Turner Review – a regulatory response to the global banking crisis – has sought to set out the actions that regulators, both individually and collectively, need to take in order to ensure there is no repetition of the failures that precipitated the credit crunch.

The causal analysis presented is very clear. First there were global macro-financial imbalances that grew unchecked as debtor nations (US, UK and Europe) funded their consumption. The collective debt was returned to these countries in the form of capital, which was used by banks to fuel a speculative asset bubble. The underlying assets were disintermediated by originating banks across a broad range of investors

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As the limits or extent of financial regulation across Europe comes up for discussion, Paul Thomas looks at how CIOs can comply with the expected changes to liquidity risk management. but the effect was not only to spread the credit risk but also to obscure the true value of that risk by over-reliance on models rather than market prices. The write-downs of assets, comprising large proportions of banks’ balance sheets, precipitated a crisis of confidence in interbank credit and liquidity that brought the banking system to the brink of collapse.

When the music stopped and banks had to be supported by government intervention, effectively, private debt was written off and replaced by public debt.

For those charged with supporting banking operations in future, what are the implications of the FSA’s Consultation Paper on Liquidity and its Discussion Paper on the Turner Review?

In summary, rules based regulation will become more important than statistical inference from historical data, with the focus shifting from models and VaR statistics to a broader array of measures; a greater emphasis on extreme scenario analysis will limit the scope for saving capital, effectively bolstering the capital reserves available to banks; the

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Paul Thomas concept of counter-cyclical provisioning has been proposed, and broadly welcomed, whereby over-reserving in good times to build effective cushions of capital which can be drawn down in difficult times; underlying data will become more important, with a need to capture more terms and conditions data around individual instruments. For instance, it may be necessary to ‘unbundle’ certain assets in order to re-habilitate them and make them marketable once again; similarly, the details of guarantees and subordination of instruments will need to be fully taken into account and submitted to stress tests affecting the entire portfolio.

The same picture applies across Europe as local regulators look to exert firmer control over financial institutions’ levels of liquidity risk. A broad structure is emerging with the proposals centring on deployment of liquidity buffers, whose size and duration are managed through a number of different mechanisms. The UK’s FSA has led the way by identifying the key components of liquidity risk that must be measured and controlled, while at the same time seeking to describe the framework on a supranational level. For regulators, they are clear that action and regulation must be coordinated internationally, while the interests of individual economies must be upheld by national governments.

Toxic IT The new rules will seek to expand the scope of the Basel framework so that a broader spectrum of controls emerges. Basel II hardly had a chance to be fully implemented before it was shown to be lacking; nevertheless, the work done in getting to this point indicates the amount of work that still lies ahead for operations and technology departments alike.

The banks caught up in the recent financial storms have not been quick to praise their IT departments for avoiding the worst consequences of the crisis and when the analysis of what might have been done to avert the global financial crisis is complete, the spectre of unwise or even missing investment in systems is likely to loom large.

We are now entering the puritan age of financial regulation, where fashion is dictated by conservatism and the many-layered coverage of exposure. The most powerful weapon CIOs have at their disposal is data. Availability of data, not just the notional characteristics and pricing of financial products, but also their place in the labyrinth of credit, guarantees and issuer balance sheet precedence is paramount.

Whereas before the largest and global players were able to feed from a broad diet of basic financial products combined with an excess of exotic (even toxic) instruments, the new global banking regime will doubtless favour a plainer diet of basic products, with strict limits on the amount of exotica. The purposes will be to limit impact of contagion should the underlying support for certain asset sub-classes evaporate.

The effect is likely to be a focus on ‘back to basics’ for the major banking groups, with financial innovation falling to a new class of ‘boutique’ banks, which in themselves will be well-capitalised and probably subject to policing by single regulatory authorities (ie no passporting or crossborder regulation). The overall impact will be to effectively firewall the influence of innovative products on the main financial system; while in the longer-term superior returns on capital will be achieved, risk stabilisation mechanisms will ensure that the proportion of overall capital allocated to such activities will not be allowed to endanger the whole system.

“The events of the past months have raised the issue of liquidity to the top of the pile and it is clear that the reverberations will continue for some time across our continent” There is also the issue of pan-European supervision – traditionally opposed by the FSA. Lord Turner, FSA Chairman, suggests an honest debate about the merits of ‘less Europe’, which would limit a bank’s ability to open new branches in other countries without separately capitalising each unit and letting them be overseen by the local regulator; and ‘more Europe’, likely to involve forming more pan-European agreements.

However, whether the result is ‘less’ or ‘more’, the FSA is expected to begin collating data from its supervision of individual banks to produce periodic reports, which will address industry issues, such as liquidity.

Intelligent CIOs across Europe already acknowledge that liquidity risk regulation is going to be the big issue of 2009. Compliance with this regulation will not only affect the banks and the insurance sector, but locally registered hedge funds and asset managers also. The industry has to respond to the consultation and rise to the challenge, but Gartner has described cash-strapped CIOs as facing flat and reduced budgets in 2009.

With tougher budgets, it will be the competent and responsive companies who make it through the year and also meet their regulatory requirements. The events of the past months have raised the issue of liquidity to the top of the pile and it is clear that the reverberations will continue for some time across our continent. The FSA has instigated the revolution and we are beginning to see the response across Europe from financial institutions and their regulators. And yet, it may turn out to be the technologists who have to make the revolution work. 2009 may not be a year of significant growth in the financial sector, but it will have to be one of intelligence, resourcefulness and agility. Vive le révolution! n Paul Thomas is Head of Consulting at GFT

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Labour of love For Michael Lardschneider, CSO at Munich Re, security is more than just a job, it’s a passion.

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ecurity and business continuity are two critical facets of business today that many organisations ignore at their peril. With the financial loss and subsequent damage to reputation being virtually incalculable, these last few years have seen the rise of a dedicated CSO try and cover almost all operational eventualities. With 25 years’ experience in security at Munich Re under his belt, it’s safe to say that Michael Lardschneider knows a thing or two about warding off threats posed to the group. He currently works in the Integrated Risk Management unit in charge of the whole gamut of security and business continuity; a role in stark contrast to his early days when he worked on loss prevention strategies in the event of robberies and theft.

A few years after his early role, the opportunity to move to the IT department emerged and Lardschneider grabbed it with both hands. “As a member of the IT helpdesk team I learned a lot about computer viruses,” he reveals. This part of the business became a passion of his as he got a taste for emerging cyber threats. “One Monday morning in 1990 I had to solve an issue with four PCs that did not boot anymore and my investigations, analysing the MS-DOS 3.2 Master Boot Record and the Partition Table, proved that some malicious code had caused issues with the operating system – the virus also infected me. From then, analysing virus code and investigating malicious behaviour of PCs became a favourite hobby of mine.”

He soon became Munich Re’s virus protection expert and later the Chief Information Security Officer (CISO) for the group’s worldwide operations before arriving at his current position. Down the years he has seen myriad threats but keeping one step in front of the bad guys is an uphill battle, admits Lardschneider. “Staying ahead of the criminals and hackers is nearly impossible. It may sound ridiculous but their big advantage is that they are not limited by laws in what they do – they just test exploits, attack and hack without caring for the existing laws.” Munich Re, like any other organisation looking to safeguard itself against attack, has to abide by strict regulations. These regulations apply to monitoring activity on the network, analysing log files or assessing vulnerabilities in systems.

“We know that we cannot win the battles,” he notes philosophically, “but we can make it harder for the average attacker.” One of Lardschneider’s tactics to outfox the villains is to build and maintain a multi-layer defence, which allows him and his team to react when the first or second layer is breached. This proves effective when an attack is perpetrated from the outside but it’s much more difficult to detect and stop attacks by insiders at the group. One such threat posed by malicious employees is their ability to walk

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off with confidential data that could be sold to criminal gangs. Memory sticks and USB drives are shrinking in size as their storage capacity increases. “You realistically cannot prevent this sort of thing from happening,” the CSO suggests. “Shutting down all the ports where one could extract data from an IT system whilst satisfying the need to communicate is not feasible in my eyes.” He says you need to put faith in your workforce. “The best way of minimising risk is to show, as an employer, that you have confidence in your staff. Letting them know, but not threatening, that their employment depends very much on the success of the company and keeping them happy and motivated is the best line of defence against these kind of incidents.”

While there is little doubt that it is becoming easier for rogue employees to steal information, the nature in which organisations do business mean that defences are becoming increasingly harder to maintain.

Ask any CSO or CISO, and most will bemoan the fact that company perimeters are being stretched as more staff use mobile devices and connect to the network in all four corners of the globe. Indeed, perimeters

“We know that we cannot win the battles, but we can make it harder for the average attacker” are becoming harder to actually define nowadays. “It is a headache” Lardschneider confirms. “And the headache is getting bigger the more one thinks about how young people communicate today.” He says that the way that staff expect to do business and communicate, both internally and externally, has evolved dramatically. The next generation of the workforce is driving this trend.

“Youngsters use their email account if their instant messaging (IM) system does not work or the SMS of their telecom provider is out of order, so the kinds of communication available have changed dramatically from when we were young. In a few years they will be the ones hired and will expect companies to run IM and use social networks to communicate and do their business so you could say that the perimeter has already gone.”

He continues: “More and more people have the ‘always on’ mentality so any second that one tries to fight against this development is a wasted second. We need to find solutions to cope with that development.”

Common dangers While Lardschneider suggests that the human element to any business is one of the biggest threats, information overflow is another important aspect – something that Munich Re is all too aware of. “The amount of infor-

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Speed limits Why business needs to stop thinking about security as an impediment “Security all depends on the company, its kind of business and its size but in most cases my advice would be to ask top management this: ‘Do you know why your car has brakes’? The answer will probably be ‘So I can stop my car’. I would correct them by saying that the real reason is it allows you to drive faster. You cannot buy a car without brakes so basic security is built in but you can equip it with better brakes so you can go faster. This analogy shows that better security also means more chances to be successful.

Unfortunately, many managers see security to be a road blocker or a hindrance to communications. This mind-set needs to change.”

mation we receive per day is tremendous and I sometimes think that it is more than the average person can consume without driving them crazy.”

Filtering this avalanche of information, whilst adhering to the raft of regulations, is “a kind of art”, according this security chief. “I say this because we have to separate the valuable from the unnecessary and make sure that we follow the regulations with regards to retaining documents, as well as adhering to when to delete personal data and how to store confidential data.” Lardschneider could be accused of understatement when he describes the situation as “not easy”.

He continues by saying that one of the main technical risks that Munich Re is faced with at the moment are botnets and malicious software. “These can tear down your complete infrastructure for quite a while and cause a lot of insecurity. You need to assess whether the calculated results are right or do I mistrust them and calculate a second time in a different environment? Also, which bits of information have been disclosed by an incident?”

Another challenge for Lardschneider and his team is cleaning systems and avoiding re-infections in a global network or by unknown built-in backdoors in web applications.

Second opinions On the business continuity side, Lardschneider believes that the best ‘testers’ a CSO has are his peers in other companies. You can bounce ideas off one another and suggest weak links in the system and how things can be improved, he notes. “The magic words are quality and assurance; we are in very close contact with business continuity experts from other companies and encourage each other to ask critical questions, to evaluate and review concepts, and to discuss emergency plans. It’s the community that shows you risks and makes you think about different scenarios that you have not thought about before.”

Of course, being a reinsurance company means that Munich Re has to seek out third parties to check and assess how it operates, including emergency tests. This is then funnelled into “lessons learned sessions”, says Lardschneider. “This concept will never be perfect but we can be sure that we did our best,” he concedes.” As for the road ahead, Lardschneider says he and other CSOs in other industries will be busy following how the economic crisis plays out and how it will impact on security and continuity strategies. Assessing crisis scenarios will, of course, feature high up on his agenda.

Lardschneider’s time spent in security has taught him that a CSO cannot afford to rest on his laurels because there is always more to be done. “I have been in the business for 25 years and I’m pretty sure that the next 25 years will continue to be very interesting and challenging,” he concludes. n

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IN FOCUS

The outer limits In an age of uncertainty, how should financial institutions approach the issue of outsourcing and how far should they go?

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hile outsourcing has long been a major part of doing business, recent years have seen it grow to a hitherto unimagined scale. The reasons for this shift are numerous, from the increasing technological complexity integral to so many organisations to the wish to keep costs down. The current financial situation seems to be acting as a further catalyst as financial institutions, anxious to control expenditure in such straitened times, seek to avoid the risk of long-term technology investment by handing off non-core functions to outside partners. But entering into an outsourcing relationship isn’t just a case of signing the contract and watching the benefits roll in. As has been demonstrated by the recent scandal at Indian outsourcers Satyam, making the wrong decisions can be very bad for a company’s health. While the circumstances there aren’t representative of the outsourcing industry as a whole, the episode serves to highlight what can happen in a worst case scenario.

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A key consideration when embarking on any outsourcing initiative is whether to phase it in or go for a rapid ‘big bang’ implementation. “The appeal of the big bang implementation strategy is that it focuses the organisation for an intense and relatively shorter period of time than if the project were phased,” says Harry Kaila of JPMorgan Chase. “This often helps address longterm resource shortages. It also condenses the pain and difficulty of a project into a shorter period of time, although the pain is typically more pronounced using this approach.

“The downside of the big bang implementation approach is that the project is often rushed, details are overlooked, and changes to business processes may not be the best ones for the organisation. More often than not, my experience has been that projects that implement an overly aggressive big bang approach are more risky and result in less satisfaction with the system's abilities to meet important business requirements.

Having strong piloting on several aspects of the environment will decrease the issues encountered and help with the overall success of the project and conversion.”

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It is a view echoed by Laurent Bertrand, COO at Dresdner Bank Switzerland. “One additional issue is that with the big bang approach, a lot of value is left on the table,” he says. “The gains are made mostly by the outsourcer which, naturally has more experience with such processes.

Phasing allows the organisation to learn how to outsource effectively.”

“A phased approach mitigates these risks and also provides time for the relationship and trust to be built up,” agrees Steve Baete, Trading and Accounting Manager at Calamos Investments. “Granted, this adds cost to the transition and elongates the pain of it all, but in the long run the goals are achieved. Of course for those providing the outsourcing services, a big bang is likely preferred as it mitigates the risk of the client changing their position on the desirability of it.”

The point the Baete makes about building a relationship with an outsourcing partner is also of vital importance. These partnerships can have long-lasting impacts, so the old adage ‘marry in haste, repent at leisure’ is extremely apt. “From experience I find the best way to make an outsource engagement work over time, and therefore be a success, is to overcome cultural and communication differences through very close collaboration with your outsource partner.,” says Robert Davies, Head of IT, Global Sourcing at Deutsche Bank.

“Embrace cultural differences. Build a proper partnership. Once you have to revert to KPIs, SLAs and contractual agreements the game is almost over. Conversely if you are invited to the family home for dinner, you're likely on to a win-

ner. In this game you tend to get what you pay for unless you invest proper and quality time with your provider.”

This is a view shared by parties on both sides of the outsourcing divide.

“I would suggest that with a professional outsourcing partner that isn't simply interested in selling as much of their services as possible, a thorough understanding of the client's business, objectives and long-term aims will deliver sustained tangible benefits,” says Jason Johnson of Meridian Payroll Services. “Every company is individual and therefore the solution provided must be bespoke. Flexibility can be built into an outsourcing agreement if an organisation has a clearly defined strategy and purpose for using such a service. Large outsourcing service providers are often unable to offer flexibility due to bureaucratic constraints and therefore considering smaller service providers can give business the tailored, attentive, contract-and cost-friendly necessities for realisable opportunity.”

The decision about exactly what a company should outsource also needs to be carefully considered. Hand over too much and you run the risk of losing control. Too little and it becomes harder to reap the benefits of the relationship. “As for how much know-how should be kept in-house, I think that the most appropriate answer is as much as possible,” says Marko Cicin-Sain, CIO at BKS Bank Croatia. “The same answers should be valid for controls. By having enough know-how, you are able to ask the right questions, and therefore avoid unnecessary expenses that very often happen because of poor user feedback to the outsourcing company, or because of lack of understanding of the problem. By having enough know-how you keep viable the option to reinsource or to develop in-house a solution in case of any problems you might experience with the outsourcing provider.

If you don’t have it, any reinsourcing or in-house development will be costly enough to verge on making this option impossible.”

Finding a fine balance between maintaining the control of the system and having a correct ROI for the outsourcing solution is one of the hardest challenges every bank has to face, at least in the technology space.

Perhaps unsurprisingly, there seem to be few hard and fast rules for tackling an outsourcing implementation. The only constant is that every relationship is different and needs to be entered into with eyes wide open.

Outsourcing can provide tremendous efficiencies and allow financial institutions to focus fully on their core business, but as with any relationship both sides need to be fully engaged to achieve their happy ever after.

WHEN OUTSOURCING GOES BAD The recent case of Indian outsourcer Satyam being defrauded by its leadership is a chastening example of the most extreme risks companies can face when handing off sections of their business to an outside partner. The company’s founder B. Ramalinga Raju now faces life in prison for his part in the biggest corporate fraud ever to hit India after admitting to fabricating fictitious cash and assets with a value of around US$1 billion. Satyam’s clients include many major global companies, such as GE, Nestlé, Dupont, Nissan and Citigroup, who now have to decide what to do next; try to disentangle themselves from the tainted partner, or stay in the hope that new management can right the ship. Though Satyam’s disgrace is an extremely unusual case, it highlights the very real need to know exactly who you are dealing with when you outsource, and the potential impact if you misjudge.

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ROUNDTABLE

In and out During a time when cost saving is essential to a company’s success story, outsourcing solutions are getting a resurgence of interest. FST gathers two industry insiders to discuss the benefits of such operations.

Why should financial companies consider outsourcing a proportion of their operations to an outside provider?

Jim Brown. There are many reasons to consider outsourcing. The one most commonly considered is cost saving, but there are other reasons too.

Specialist expertise may be available within an outsourced organisation. For example, the outsourcing company may understand the following requirements for differing FSA registrations in the UK. Other benefits include cover and continuity and remove the problems of management from a firm allowing it to concentrate on its strategic direction and to borrow a phrase from Tom Peters, to stick to their knitting. Remember that an outsourcing company focuses on improvements as you would on your core business, rather than the lower level of management attention that is often given to support functions.

Bjorn Reynolds. Non-core functions are always a Jim Brown has been a director of Bjorn Reynolds is the CEO of potential outsourcing opportunity for any compaFluency since it’s incorporation and SafeGuardWorld International (SGWI), ny looking to realise best practice in compliance, through his 11 year association with a leading global payroll outsourcing cost savings and operational efficiency. Outsourcing Fluency’s parent company. He has firm, providing consolidated multinon-core but mission critical functions removes the assisted hundreds of businesses to country payroll services across the burden of the surrounding infrastructure and cost outsource their UK and European globe. He has taken the firm from a base associated with payroll delivery but often enoperations. He has a Masters Degree small domestic payroll provider hances the commercial value of the payroll function. from St Catherine’s College, Oxford, based out of the UK to becoming a By outsourcing payroll management, the coman MBA from Imperial College and is recognised global brand on the pany is able to reduce the fixed costs associated an Associate of the Institute of international payroll market. SGWI with the payroll infrastructure, often gaining signifiChartered Accountants in England now has leading brands as clients, cant enhancements in reporting, compliance and and Wales. including FedEx, Janus Capital, P&O visibility of data. Outsourcing will provide quantifiFerries, Skype and Trend Micro. able ROI for the organisation, so generally there is a good financial business case combined with other key benefits which will increase compliance, improve workflows and provide key reporting back to the business. the best ‘kit’ available to do the job. The global payroll market itself is Particularly within the current economic climate, compliance and minimal relatively new and it is important for any company to ensure they are capital expenditure are areas that outsourcing providers can further add partnering with an experienced company who understands the issues business value to any company, not just those in the finance sector. global companies face and how to address them. A further key area is solution fit – in global payroll there is not a one size fits all approach.

What are the key considerations that any company should look for when Each company will have individual requirements and it is important for selecting a possible outsourcing partner? the company and vendor to work together to ensure that they both unBR. Selection criteria of a vendor are critical for any company – and not derstand the requirements, centrally and locally, and design solutions just in payroll. The key areas are around expertise, controls and using that meet the company’s objectives – corporate and functional.

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JB. As with any supplier relationship, the key is to make sure you have done appropriate due diligence. This should, as a minimum, include exploring the track record of the business and understanding (including obtaining references) that they have worked with clients in similar positions to you. You should consider their terms and conditions early on as these can considerably affect the flexibility of your relationship.

Within the contractual relationship there should be a statement of works detailing exactly what is being undertaken and a service level agreement, setting out expectations for both regular performance targets and guidelines for dispute resolution.

“Outsourcing by its nature turns a fixed cost into a variable cost” Jim Brown You should compile a list of important factors and give these a weighting. Mark each provider against these factors and use the results.

Finally, especially if you are setting up a relationship that spans international borders, it may be worth employing a professional to negotiate the contract and set such guidelines on your behalf. The long term savings can significantly outweigh the upfront costs.

Financial companies are currently under considerable amounts of pressure. What specific benefits can an outsource provider bring to a business, both on efficiency and cost basis?

JB. The benefits that an outsourcing provider can bring to a relationship will vary on a case by case basis. In replacing in-house accounts departments for example, it can be possible to make significant savings, and in two recent examples I have seen costs savings of 25 percent and 20 percent respectively.

Such cost savings ignore the cost of incorrect or delayed management information that may arise from a poorly run in-house department and do not include the cost of missed opportunities because time is devoted to internal fire fighting.

Efficiency gains can arise from a well structured outsourcing relationship and it should be noted that such gains will be higher the more time is spent on establishing the relationship upfront.

The main benefit is allowing a company to concentrate on matters that are really important to them and the strategic suture of the business.

BR. Outsourcing by its nature turns a fixed cost into a variable cost.

When companies are reducing staff, the payroll costs go down by outsourcing – companies that outsource know and manage their unit costs of delivery. Typically companies should expect outsourcers to be able to bring greater efficiencies to the process, which in-turn affects cost/ price; this includes automation and streamlining of processes which by themselves will reduce the human capital requirements on the client

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side and further aid in reducing costs, increasing compliance and reducing risk.

There have recently been big news stories about outsourcing providers who have failed to live up to their end of the bargain. How can providers assure their potential clients that their business will be safe in their hands?

BR. The key here is to make sure the proper scoping and engagement process is followed pre-contract. In any outsourcing relationship the major strength comes from the governance structure and having clear and defined deliverables.

Providers need to demonstrate that they have the ability to manage and deliver a project through to fruition and this is shown, both through references and past history, as well as through the contract and ensuring the full roles and responsibilities of each party are clearly defined and understood.

Good outsourcers will always encourage this – no one wants an unhappy client or to not deliver the goods – and it’s important that the global and local thinking behind the project is clear to all involved and that an attitude of ‘can do, will do’ is adopted by the project teams in order to deliver the benefits of the project.

JB. Unfortunately you can never be sure, much as you can never be sure that an employee will deliver on the promises laid out in their CV. All you can do as a customer is try and minimise the risks amd this begins with the due diligence and contract negotiations discussed above. The provider should be able to provide answers to all such questions promptly and succinctly amd if they delay at the ‘sales’ stage, services are unlikely to be at a higher service level after this time.

“A successful relationship will require active management by both parties” Bjorn Reynolds Over time the risks can be contained by effective management of the relationship from both sides. The ultimate responsibility for the outsourced relationship should not be delegated down lower than would have been the case if the service provision had been internal.

There should be agreed relationships at all appropriate levels so that any issues can be promptly escalated amd any problems should be identified early and followed up. A provider can reassure a customer by being open and honest about issues before the customer has to raise them.

A successful relationship will require active management by both parties and there is no better way of pre-empting that this will happen than looking at the track record of a provider. An outsourcing relationship can be of long term benefit to both parties but should not be seen as a quick fix or a simple process. n

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s one of the world’s leading providers of financial market intelligence, Standard & Poor’s is well positioned to answer the questions of financial professionals in the current economic climate. Fixed Income Risk Management Services (FIRMS) is a unit within Standard & Poor’s focused on providing financial professionals with a wide range of analytic

insight, data and risk management solutions to help manage credit risk.

Under the FIRMS umbrella is the Risk Solutions business, which provides comprehensive risk management solutions that leverage Standard & Poor’s intellectual capital to help financial professionals gain competitive edge through improved risk-based decision making.

It is here that we meet David Samuels, the global head of Risk Solutions. Samuels begins by explaining the primary goal of his group, which is to offer risk management solutions to help clients gain a sustainable, competitive advantage. As someone who has been in financial services for more than 20 years, he understands that it is a tough mission, given the current state of the market.

Risk Solutions has a global presence. Currently EMEA is the largest region but the group is experiencing steady growth elsewhere around the world.

What impact is the ongoing market volatility having on the business of managing risk?

David Samuels. As you can imagine, the current state of the markets and their ongoing volatility is having quite a dramatic impact on our clients.

They recognise the need for greater transparency in their risk management processes, as well as the need for implementing overall risk management frameworks within their organisations.

We are seeing a widening interest on the part of senior executives for improved internal risk management capabilities. Clearly, these executives recognise that they need to have a greater understanding about the risks affecting their businesses. Not only are they placing increased emphasis on having the right systems for assessing risk, but also on the right processes and the right people to evaluate risk across their entire business.

This trend represents a marked departure from the siloed approach of the past, where credit risk, market risk and operational risk were viewed separately within an organisation. What we’re seeing now is a real push toward ensuring that there is an integrated and common framework across the entire organisation when it comes to evaluating risk.

Is the increased uncertainty presenting particular challenges?

DS. One of the important changes that we’re seeing as a result of the current uncertainty is that organisations appear to be moving rapidly to better understand and manage the risks associated with sector and geographic concentrations across their businesses. In turn, this change raises obvious questions within an organisation, such as, where should the analysis start? This is the critical question Standard & Poor’s Risk Solutions helps our clients answer.

In Europe, where you have very disparate, individual countries in relatively close proximity, and lots of cross-border financial activity going on, issues like correlation risk become even more important. That’s why it’s critical that European firms understand how the correlations between different market sectors impact each other.

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/REWARD Standard & Poor’s David Samuels exclusively answers FST’s questions about managing risk in the shadow of a global financial meltdown. www.fsteurope.com

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THE NEXT LEVEL In addition, how these sectors interact becomes extremely important in uncertain times and here the goal is to determine the impact when highly correlated sectors, geographies and risk types all potentially go wrong at the same time.

Do you think then that the failings and the failures related to the financial crisis we are currently experiencing will change how we approach risk in the future?

DS. I believe that many organisations are already mobilising to implement what we refer to as best practice risk management. Such organisations recognise that they need to have the right systems, processes and people in place to analyse and manage a wide range of risk in a proactive fashion.

For Europe, some of the incentive for better risk management is associated with the demands of Basel II, but it’s not the only driver. Not all best practices can be derived from a regulatory framework; some are derived from just looking at what other institutions have done and profited from.

This is why we’re seeing a significant increase among financial institutions and investors starting to implement comprehensive workflow-based solutions such as our Credit Risk Evaluator product. Credit Risk Evaluator ensures a complete and accurate picture of an organisation’s risk profile across the organisation.

“With the right risk management systems, processes and people in place, organisations are in a far better position to identify, mitigate and manage risk” And, of course, in the wake of the financial meltdown, many have suggested that it was impossible to see it coming. Do you believe this to be true, or were there signs of what was to come?

DS. Our feeling is that no one system and process can predict everything.

However, with the right risk management systems, processes and people in place, organisations are in a far better position to identify, mitigate and manage risk. Proper risk management systems can help organisations not only quantify the risk, but turn risk into competitive and financial benefits.

It comes back to our overall mission within the business and being focused on our clients. Not simply to understand what the risks are, but how to turn those risks into an advantage for the business. There is a fundamental shift going on in the industry right now. Organisations are empowering themselves and realising that they can move from a reactive risk management process to a proactive one.

Do you see any significant trends in risk over the coming year? How do you predict the financial industry will continue to respond to the ongoing difficulties?

DS. We see several significant trends that are driving our clients and indeed the direction of our business.

The first trend is actually a continuation of one I have already mentioned. We believe that senior management will continue to expand its role in risk assessment and risk management and require their organisations

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f looked at as more than just regulation, the risk management requirements under Basel II can offer a financial firm many advantages beyond meeting compliance demands. Today of course, many organisations are focused on complying with Basel II, especially in EMEA and other regions where Basel II is mandatory. However, we often advise our clients to look at Basel II as an opportunity to move the needle of their internal risk management capabilities even farther and not stop with satisfying the basic requirements of the convention.

Human nature being what it is, many organisations tend to look at what they have to do to comply with regulatory requirements and say, ‘Okay, this is the minimum I need to do to keep the regulators happy’.

We counsel our clients to think differently and to see the money they are investing in their organisations for Basel II as a reason to go even farther to run their businesses better. We believe what firms should be saying is, ‘let us leverage the regulatory investment and pick additional best practices that we can put in place to turn the overall initiative into a competitive advantage.’

In this manner, organisations will see regulatory controls as not always being about constraining their activities, but about providing a better framework for using risk management to drive controlled growth. This is what organisations of all sizes should be doing with their risk management investments to take business to the next level.

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to broaden, improve and integrate this capability across the entire organisation company.

Another trend will be the increased focus on risk management as a step in business improvement, not just control. History suggests that you have to take risks in order to grow your market. From this we can deduce that organisations that have effective risk management programmes should be in the best position to turn controlled risk into competitive advantage. We are already seeing many organisations come to us for help in putting in place industry best practices to avoid any number of the pitfalls that other’s are running into. n

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You’re on record criticizing post 9/11 airport security measures as little more than window dressing that don’t actually make passengers safer. Do you see any similarities to this situation and the steps financial companies take to protect their customers?

Bruce Schneier. The phrase I use is ‘security theatre’, and one of the reasons we fall for it in airline security is that attacks are very, very rare. Security theatre is exposed when it’s obvious that it’s not working, and there simply isn’t the attack data to assess the effectiveness of bag screening, liquid confiscation, photo ID checks and other useless security measures.

Financial fraud is different, because there is a measurable crime rate that reacts as security countermeasures are applied.

Financial companies know what is and isn’t working. They may decide not to tell their customers and keep up a charade of security theatre, but that only works in the short term.

So while there certainly is security theatre in the financial industry, it won’t last. People will, for example, eventually figure out that two-factor authentication doesn’t reduce identity theft and fraud.

LOCK DOWN The so-called ‘rock star’ of the security industry, Bruce schneier, exclusively reveals some interesting thoughts regarding current security issues

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What do you see as the key security issues currently facing financial institutions and their customers?

BS. Crime. Crime, crime, crime. Crime in the form of fraud. It may come with the fancy name of identity theft, but it’s really just fraud due to impersonation. That’s the key issue, and it’s not changing. The tactics of fraud might change – phishing, pharming, key logging, social engineering, password guessing, whatever – as security measures make some tactics harder and others easier, but the underlying issue is constant.

Are customers concerns about online security matched by that of their banks and credit providers, or is there any disconnect with what consumers want and what companies are prepared to do?

BS. There is always a mismatch, and you can easily see it when you look at where the liabilities are. If financial institutions manage to pass off the cost of fraud onto consumers, then of course the consumers will want more recourse than the banks provide. Think of a

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Bruce Schneier is an internationally renowned security technologist and author. Described by The Economist as a ‘security guru,’ he is best known as a refreshingly candid and lucid security critic and commentator. The best selling author of eight books, he has written articles and commentary that have appeared in numerous prominent publications. Regularly quoted in the media, he has testified on security before the United States Congress and is also Chief Security Technology Officer of BT.

situation where someone steals a customer’s password, breaks into a customer’s account, and steals money. It’s far cheaper for the bank to foist the cost of that fraud onto the consumer. But the consumer is perfectly right when he says: ‘What do you mean, it’s my fault? I wasn’t involved.’ The best way to mitigate security risks is to have the entity best situated be responsible for the risk. Customers can’t improve a bank’s computer security, so it makes no sense to give them the risk. The bank can improve security, so it should be responsible for the risk, regardless of who is at fault.

Think about credit card security. In the UK the law states that customers are only responsible for the first £50 of card-present fraud, and not at all for card-not-present fraud, even if they were at fault. That law has

done more to improve credit card security than anything else.

FST. What needs to be done to truly create an environment where customers are protected from threats such as identity theft? Are banks and other financial institutions capable of achieving this on their own or will outside influence be required?

BS. It’s easy. Make banks responsible for all the costs of identity theft. Once you set the economic incentives properly, the marketplace will come up with all sort of technical and procedural solutions.

“The tactics of fraud might change as security measures make some tactics harder and others easier, but the underlying issue is constant” Do you see any particularly striking new security threats emerging at the moment?

BS. No. I’m asked to make predictions like this regularly, but honestly, I think we’re going to see more of the same for the foreseeable future.

Does the increased ubiquity of online commerce mean that resolving new security threats is a purely technological issue or is there other aspects to consider?

BS. Mitigating security threats is never a purely technological issue. Security always involves people – people doing the attacking, and people as the victims – so security will always have a people component. And actually, one of the reasons online crime is so successful is that so much security tries to take people out of the equation. Technology can do a lot to improve security, but it can only augment what people do, not replace them.

We recently spoke with PayPal’s CISO Michael Barrett. He believes that the war on phishing is winnable, but it will require a great deal of hard work and coordination between many different parties. What is your feeling on the subject?

BS. I think that comment illustrates a lot of what’s wrong with current security thinking.

It’s not a war on phishing, it’s a war on fraud.

Phishing is just a tactic, and if you concentrate your effort on defeating that particular tactic – something I agree is possible but will take a great deal of hard work and coordination – the criminals will just move to another tactic. If we’re ever going to truly reduce fraud, we need to look beyond tactics and deal with the economic motivations of both the criminals and the victims. n

Wormhole: security in action n recent months a worm, a malicious software program, has swept through corporate, educational and public computer networks around the world. Known as Conficker or Downadup, it spread by a recently discovered Microsoft Windows vulnerability, by guessing network passwords and by hand-carried consumer gadgets like USB keys.

Experts say it is the worst infection since the Slammer worm exploded through the internet in January 2003, and it may have infected as many as nine million personal computers around the world.

Worms like Conficker not only ricochet around the internet at lightning speed, they harness infected computers into unified systems called botnets, which can then accept programming instructions from their masters.

Many computer users may not notice that their machines have been infected, and computer security researchers

I

said they were waiting for the instructions to materialise, to determine what impact the botnet will have on PC users.

It might operate in the background, using the infected computer to send spam or infect other computers, or it might steal the PC user’s personal information.

In response, Microsoft rushed an emergency patch to defend the Windows operating systems against this vulnerability, yet the worm continued to spread even as the level of warnings grew.

Security researchers at Qualys, a Silicon Valley security firm, estimated that about 30 percent of Windows-based computers attached to the internet remain vulnerable to infection because they have not been updated with the patch, despite the fact that it was made available in October last year. The firm’s estimate is based on a survey of nine million internet addresses.

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Javier Perez MASTERCARD:23 APR07

FEATURE

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Mr

Nice Guy Y

ou’d expect the head of one of the most successful businesses in Europe to rule his organisation with an iron fist. But according to Javier Perez, President of MasterCard Europe, being a ‘nice guy’ is the key to running a successful business – even in today’s cutthroat banking industry.

“I believe that being a nice guy gets you results,” he says. “Today to get the best out of performing teams of people you need to have an environment where people are appreciated, recognised and praised for the good things that they do. And being able to have a frank and honest discussion about the things that didn’t work out is the secret to having a performing organisation. If you don’t have a nice environment with nice people it’s very hard for that to happen well.”

And judging by MasterCard Europe’s results for 2008, Perez has been very nice to his team indeed. The company is one of the few in Europe to have experienced double digit growth in a year when most were battling to survive. The company’s gross euro volume grew by 15.5 percent, purchase volumes by 15.7 percent and purchase transactions by 13.2 percent. In the same year alone, European customers made 6.4 billion

purchase transactions with their MasterCards. Beaming proudly as he relates these latest results, Perez clearly has all the evidence he needs to support the fact that being nice gets results. And seemingly not even the prospect of worsening economic conditions across Europe can wipe the smile off his face.

Indeed, he believes that MasterCard could profit from the changes in the spending habits of consumers during the credit crunch – particularly the pattern of spending little and often rather than making less frequent high value purchases. “We have a situation in Europe, like everywhere else, where we have worsening economic conditions. What is the consumer doing to deal with that? Well the way people are behaving is to simply do what they want to do but they are doing it differently. A typical example is the spending behaviour of a Belgium family on holiday. In the past the family would travel by plane and paid say 1000 euros for the four of them. Now they will drive instead and make lots of smaller purchases along the way such as paying for gasoline, buying meals en-route, then when they get there buying food from supermarkets instead of paying for big meals in restaurants.”

Javier Perez, President of MasterCard Europe, is one of the few company leaders who believes the economic downturn will be good for business.

Diana Milne reports.

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MASTERCARD CHIP TECHNOLOGY The role of chip technology in the payments industry is growing rapidly, and issuers all over the world are embracing chip programmes for a growing list of reasons.

Chip is a powerful fraudfighting tool. It’s also a cash displacer, a loyalty builder, and a competitive differentiator. And consumers are realising a whole new world of advantages with chip and PIN, from security to convenience to time savings.

The cornerstone of the new chip payments infrastructure is the global EMV standard for credit and debit payments, jointly developed by Europay, MasterCard and Visa in 1996. The latest version of the standard, EMV 2000, is a powerful, rich and comprehensive definition of chip payment functionality.

All over the world, MasterCard is helping customers leverage their investment in EMV to build market share, identify new revenue streams, and gain competitive advantage. EMV chip technology brings the potential for stronger security, wider acceptance, deeper relationships, and new marketing programs. MasterCard Chip Solutions give customers everything they need to migrate to chip and evolve their businesses on their own terms.

This situation, he goes on to say, is beneficial to MasterCard because it relies not on the value of single transactions but on the volume of transactions that are carried out: “MasterCard is not that sensitive to the economic conditions as long as customers keep spending money. It is not so dependent on volume but is very dependent on transactions. So for us it’s more attractive to have 10 transactions of €80, than one transaction of €1000.” Another attraction of the credit crunch to MasterCard, claims Perez, is the fact that consumers will increase their usage of credit cards in a bid to better control their finances: “[In this climate] people start to be a bit more mindful and rather than happily using cash, we have seen in the past more usage of plastic in order to keep the money in the bank longer and take advantage of the card. When you have a lot of money in the bank and you’re not that concerned you just burn cash and it’s fine. When you’re a little bit concerned, you start thinking, ‘Maybe I can match my salary with my expenses by taking advantage of my credit card and paying by the end of the month.’”

That’s not to say that Perez believes MasterCard is immune to the woes affecting financial services providers across the world. He acknowledges that

HISTORY OF MASTERCARD

1966

1979

1983

The Interbank Card Association (ICA) is founded

Master Charge is renamed “MasterCard” to reflect commitment to international growth

The company introduces the hologram security device, an industry first

1969 ICA acquires exclusive rights to the ‘Master Charge’ name and the trademarked interlocking circles

1988 MasterCard acquires the Cirrus ATM network

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there could come a point where the credit crunch is bad for MasterCard’s business. Going back to his earlier analogy, he says: “The other end of the spectrum is that if that Belgium family becomes unemployed and they simply don’t have any money to spend that is bad for MasterCard. I know from experience the impact it will have on MasterCard if indeed the consumer stops spending. To what extent the incremental spending of small amounts will compensate for that remains to be seen.”

technology change and expense that would be necessary on the acquiring side in order to deploy chip. You would have to change every terminal in Europe without exception in order to deploy chip.”

He goes on to say that reaching standardisation among the card providers also hampered progress – an obstacle that was later overcome by the introduction of the EMV standard which was developed through collaboration between Europay, MasterCard and Visa. “At the beginning MasterCard had one standard. Visa had another. Some domestic schemes Changing times had another. So we had to create the EMV code in order to avoid language While he bases his predictions of consumer spendissues in which one chip doesn’t talk to another. Or a ing habits on the patterns displayed in the past, Perez chip doesn’t talk to a terminal. So when you put all knows that the payments landscape has changed dramatthose things together that is why we have been slower ically in the 30 years since the MasterCard brand was than we thought.” launched. To date the number of MasterCard cards issued This slow progress is even more frustrating for Perez,

by European financial institutions is a massive 195 million given that technology is now rapidly moving onto the and making payments by plastic is now a global phenomnext level, leveraging the the EMV payment platform for enon – fuelled in recent years by the explosion in the popcontactless payment technology. In the UK alone ularity of online shopping. Today technology is MasterCard has issued one million MasterCard PayPass Number of revolutionising card payments further, and addressing branded Barclaycard cards, and has been involved in MasterCard cards many of the public concerns that proved obstacles to their partnerships with Royal Bank of Scotland and the UK’s issued to date wider adoption. In particular the introduction of chip-enStagecoach bus company to introduce the first ever use in Europe abled cards through the EMV standard, has addressed seof contactless bankcard payments on public transport in curity and fraud concerns. Over half of the MasterCards the UK and France’s La Banque Postale, Germany’s BW that have been issued in Europe are now chip-enabled.

Bank, and the VfB Stuttgart football team, as well as the However, according to Perez, this is not enough. He says progress on the inintroduction of PayPass for students of the Warsaw School of Economics. troduction of chip-enabled cards in Europe has been disappointing – given While slow deployment of the technology by retailers has delayed the that it was a decade ago when the company first introduced the technolowidespread adoption of chip and PIN cards in Europe, Perez said that where gy to its customers. He blames the slow progress not on customer uptake it is deployable, merchants have been highly responsive to contactless paybut on the response by retailers. ment innovations – primarily because it makes their jobs easier. “We are re“We thought chip would come out faster. And we thought the multi-apceiving an extremely good response from retailers to the contactless plications would come faster. The first time we recommended chip was 10 technology. They absolutely love the PayPass product because it provides years ago. It’s been slower than we expected. It’s relatively simple to modmuch more speed at the register and a very nice experience for both the ify the cards because they expire every three years, more or less. But it is cashier and the consumer. It makes the transaction faster and easier and hard to modify the acquiring infrastructure, such as the terminals that are quicker. So that is evolving really well.”The key to spreading adoption of placed on the retail side. I think we underestimated the magnitude of the the technology, says Perez, is to ensure that it is not proprietary and that

195 MILLION

1991

2002

2006

Europay and MasterCard launch Maestro, the world’s first online pointof-sale debit network

MasterCard merges with Europay International to create MasterCard International.

MasterCard launches and completes the initial trial of its MasterCard PayPass contactless payment programme in Orlando, Florida, with Chase, Citibank and MBNA

A new corporate name, MasterCard Worldwide is launched along with a new corporate signature and tagline, The Heart of Commerce

1997 Launch of the Priceless, advertising campaign which goes on to run in 98 countries and in 46 languages

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branded contactless cards or those made available through partnerships with transport providers, for example, can also be used to make payments at other outlets: “Retailers like the subway in Paris have realised that proprietary technologies are not the way of the future. If they want the consumers to use the card they need to make sure it can be used everywhere.

In other words, if you as a consumer can have a card that can be used everywhere, the chances are you can also use it in the subway. Therefore (in the future) you will see a migration from proprietary technologies like Oyster to products more like PayPass. The same thing but a global technology that can be used everywhere.”

In control

MasterCard, resulted in profits of €38.54 million for the teams that reached the knockout stages. MasterCard commissioned a study by one of the world’s leading marketing experts Professor Simon Chadwick of the UK’s Coventry University, who said at the time: “In uncertain economic times, sport’s universal appeal remains strong, making it one of the most lucrative industries to be involved in.” Backing up this claim, Perez says: “We have the best sponsorship platform in the world, which is football. The consumers like it, the retailers like it and that’s giving us excellent results.

We continue to use those assets. They deliver good results. And we intend to continue using them.”

Like the captain of a good football team, Perez has proven that keeping his team happy gets results. But as playing conditions in the financial services sector get ever tougher, and with competitors hot on his heels, Perez must now work harder than ever to ensure MasterCard remains at the top of the league.

Another innovation MasterCard is hoping to introduce, taking advantage of EMV technology is the In Control technology, which allows customers to control their spending on credit cards by customising them to have certain limits on spending amounts and where the customer can actually spend money.

This, says Perez, will appeal not just to the budget conscious but “We want to make sure that in this also to parents and to companies changing environment, we continue with corporate credit cards: “It to provide to all our stakeholders the means the consumer, through accessing a website, will be able best possible product that would to set spending parameters for enable them to face difficult times” their credit card. You will be able to define where and when you spend money and how much you can spend per transaction. Whenever your card does something that you want to be informed about, the system will send you an SMS. This is very useful for the consumer but also for companies and for families. For instance children can be given cards that they can only use for school transport or school cafeterias.”

Ever the nice guy, Perez claims that the thinking behind the product is that it will enable customers to better weather the financial storm. “I guess in a situation like today the first question we ask is how MasterCard is going to wrestle with the economic environment?

I have already said that it doesn’t impact us much directly. But it does impact our customers, the banks and the retailers. So we are very keen to make sure we continue to deliver value to all our customers. We will deliver value to society in general by providing a means by which people can spend money wisely and be able to continue to have access to payments in an organised and safe way.

We want to make sure that in this changing environment, we continue to provide to all our stakeholders the best possible product that would enable them to face difficult times.”

The successful introduction of MasterCard’s new products relies less on current economic conditions than on the company’s aggressive branding and marketing strategy. Perez says the ‘below the line’ approach, such as direct mail, still continues to deliver strong results for the company, however the company’s continued success has allowed it to embark on a high profile above the line campaign. One of the keystones of this is sponsorship of international sports events – most notably the UEFA Champions League, which according to

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IN FOCUS

CUSTOMER POWER

In today’s volatile financial services market, keeping your existing customers happy whilst growing your customer base is absolutely vital. How do you define a ‘good’ customer experience? How do you measure it? To find out, Adam Burns put a flower in his hair and took off for San Francisco...

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rovide a poor customer experience and you run the risk of creating legions of detractors: customers who will complain loudly about your company and switch their loyalty to your competitors at the earliest opportunity; but providing a good customer experience is notoriously tricky.

How do you change your customers from brand detractors to brand promoters, the sort of people who generate healthy profits and sustainable growth, and how likely are your customers to recommend the goods and service from your company? Knowing how to effect and measure the answer to these questions is key to retaining the best customers and finding new ones, even in a down economy.

To get to the heart of the matter, I travelled to San Francisco, home of the Net Promoter Conference, to talk with Fred Reichheld, author of The Ultimate Question and partner at Bain & Company.

Reichheld originated the Net Promoter system of customer experience metrics, now a widely used system across a variety of industries, including financial services.

I also spoke with two executives from the sharp end of customer loyalty – Brad Smith, President and CEO at Intuit, named America’s most ad-

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mired software company, and Laura DeSoto, Senior Vice President for Strategic Initiatives at Experian, a global leader in consumer and business information services – about how, by putting customer experience to the fore, they have managed to outperform their competitors.

The ultimate question Measuring customer experience is a thorny issue, one that companies and individuals have been wrestling with – to varying degrees of success – since the dawn of commerce. Reichheld’s approach has garnered plenty of interest because, on the surface, it seems simple. And it starts with a simple question: have I treated you in a way that is worthy of your loyalty?

“How do you get at that? We’ve found that there’s one question in most businesses that is a good shorthand tactic,” says Reichheld. “It’s ‘How likely is it you’d recommend us to a friend or colleague?’

“People don’t recommend you enthusiastically to a friend unless you’ve really done something special. You’ve treated them in a way that’s worthy of their loyalty.”

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Changing executive minds Most executives, of course, believe that their company does provide a good customer experience. I asked Reichheld if he found that view changes when his metrics are put in place and ‘proper’ customer feedback is established.

“I find that executives are startled. They are dismayed when they actually measure this process of ‘Am I doing a good job building loyal relationships?’ We find at Bain and Company that about 80 to 90 percent of companies or executives believe that they deliver an outstanding customer experience. Then when you ask the customers of those same companies, about eight percent actually believe that company is offering an excellent customer experience. The gap between perception and reality is astonishing.”

“People don’t recommend you enthusiastically to a friend unless you’ve really done something special” Fred Reichheld, author of The Ultimate Question and partner at Bain & Company

What, then, are the fundamentals for good customer experience metrics?

Reichheld: “True success is behaviours, and the behaviours that indicate loyalty are customers repeating, coming back, buying more things from you, adding product lines, generating referrals to their friends and family or colleagues.

“The last one is a little more subtle but equally important, and that’s an investment. They invest their time, their most precious asset, for free to give you feedback or to plan jointly with you.”

Reichheld maintains that those four behaviours drive profitable organic growth. But what of those startled executives? A metric will give you a score, but what should they do with it – and how do they secure buy-in to what may seem a nebulous process?

“It is not about the score,” states Reichheld. “It’s about using the score effectively to take action and turn more of your customers into promoters.

“The only way you can grow profitably is to make sure your front line is treating customers in a way that makes those customers want to come back for more and bring their friends. That’s a simple idea. The other thing is that your reputation is everything.

“Your legacy really is a function of every time your brand or your company touches a customer, did they come away feeling that they were treated correctly? It’s understanding how do I take what I have today, which is a mishmash of different satisfaction systems and market research, and how do I get that into a serious operational process that makes sense not just to our front line but to our board of directors.”

Sustainable growth Reichheld started to analyse customer experience for Bain & Company when he realised that many companies were optimising profitability in the short term. He wanted to find a way to get them to focus on building the

right kinds of relationships and creating sustainable growth, and focused initially on retention rates and loyalty.

He made, he says, “some nice progress”, but was still left searching for a practical, timely way that leaders could measure development, hold people accountable, and see where they are succeeding and, as importantly, where they are failing. Did he ever consider the other side of the argument?

That loyalty is often the surest way to get the worst pricing, service and treatment?

“The squeaky wheel is the one that gets the oil?” He laughs. “In today’s world, I’m finding that companies who are serious about living up to golden rule principles are also growing profitably. Their people are recognising that ‘no, it’s not the golden rule versus profits’. Frankly, the only way to have sustainable profits and beat the competition is to be better and more consistent at living up to the golden rule and earning loyal relationships.”

If the squeaky wheel argument is no longer true, what about the oft repeated statement that a happy customer tells one or two people; an unhappy customer tells nine or 10. Is customer experience fighting against a rising tide?

“No. I find that if you delight a customer and just shock and amaze them with your thoughtfulness, the value that you deliver, how you treat them, you can get hundreds or thousands of comments out of that, and the same thing happens if I shock and amaze you on the downside and do something evil.”

So how do you differentiate between customer retention and customer loyalty? Someone may be on a long-term contract but spend every day bemoaning the state of that contract.

“We had 40 percent of customers’ questions last year answered by another customer, with an accuracy rate higher than anything we’ve ever delivered in 24 years” Brad Smith, President and CEO, Intuit “We initially looked at these behaviours. At Bain, we have an accounting and finance mentality, and retention rates seemed like such a great way to turn loyalty from a soft, fuzzy idea into real, practical, measurable results.

So we developed this science from retention. The problem was in some cases you’re keeping a customer for the wrong reasons. Sometimes they’re locked in a long-term contract. More often, they might not even be aware of the superior alternative or it’s just laziness, so that really wasn’t the ideal metric. That made us move to ‘Would you recommend it to a friend?’.

“It’s not something you would do lightly. You’re putting your own reputation on the line when you recommend to a friend, and when you do it enthusiastically you know something very special took place.”

It sounds good, but this conversation is taking place against the backdrop of a serious economic downturn. When people are unhappier, your overall score will drop and that must have a demotivating effect. Can customer experience metrics turn against the company? Reichheld reiterates that the ab-

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THE PANEL

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Fred Reichheld, author of The Ultimate Question and partner at Bain & Company

Brad Smith, President and CEO, Intuit

solute level of score is not where the focus should lie – it’s what you’re doing versus the competition. “Even if your score is going down,” says Reichheld. “As long as it’s going down slower than the competitor’s, that’s the goal.”

“In fact, in our case in TurboTax (Intuit’s tax software package), we had 40 percent of customers’ questions last year answered by another customer, with an accuracy rate higher than anything we’ve ever delivered in 24 years.”

So there you have it. Treated well, customers can become a very real part of your value proposition.

Putting theory into practice To find out how customer experience metrics work in the world of business, I asked Brad Smith, President and Chief Executive Officer of Intuit, about the ‘real’ benefits of a good customer experience program, starting with employee engagement.

“One of the questions I hear most often is, ‘How do you get your employees to care?’,” he says. “And the simple answer we’ve discovered is they already do. Employees join a company because they want to be a part of something great. We’ve gone so far as looking at our employee satisfaction scores and we’ve discovered the No. 1 driver is our commitment to making our customers’ lives better. When we’ve made deviations from that, we’ve had big policies and procedures get in our employees’ way, employee satisfaction goes down.

“We had great leadership that stood by the initial conviction and belief in customer centricity, and we were right” Laura DeSoto, SVP for Strategic Initiatives, Experian “When we empower employees to do great things for customers, our employee satisfaction and our customer satisfaction goes up: They already care. As leaders, we have to find a way to empower them to do great things and get out of their way.”

Smith further explains that a good customer service programme can get customers themselves involved, pointing out that an average of two blogs are being posted every second and over 200 million online searches are being conducted every day. “Word of mouth,” he says, “has never been more magnified than it is right now.”

What of the technology behind that customer experience? He says he’s happy with the way it provides end-to-end feedback and the way it has envolved, with user contribution systems, to the stage where customers can actually be a part of the development process.

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Goal setting and managing change Experian is another company that has made the customer experience transformation. I asked its Senior Vice President for Strategic Initiatives, Laura DeSoto, about the leadership and management challenges behind implementation. How important are formal goal-setting performance and recognition programs versus day-to-day direction?

“This is a great question for us,” laughs Laura, “because we had great leadership, certainly from the senior level, and a lot of engagement with

THE SOLUTION PROVIDER CA is a US$4.3 billion software company, based in Islandia, New York, that helps technologists enable the best customer experience. Mark Bubar, CA’s Vice President of Sales for Global Financial Services, explains...

Financial institutions in all sectors (insurance, Mark Bubar, VP of Sales for Global banking, brokerage, Financial Services, CA institutional and retail) have shifted their focus from ‘defensive’ risk management, compliance and security to making money through improved customer retention, cross-selling and customer acquisition.

As financial institutions seek to boost revenues, however, industry consolidation and competition from Web

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Laura DeSoto, SVP for Strategic Initiatives, Experian

our line managers [but] we probably swung the pendulum too far to the goal setting.”

In its exuberance in delivering this experience, Experian cascaded its scorecards, its goal-setting exercises, all the way through the organisation, from the CEO to the frontline employee. “So we ended up with literally thousands of these client Experian scorecards in the organisation where people were trying to measure against certain performance,” explains DeSoto. “This became unwieldy for us and after the first year we abandoned it at that level.

“We certainly do goal setting today, but it is much more focused. We’ve balanced out between the leadership and the culture aspect and setting performance goals.”

DeSoto also warns not to expect an instant solution. “It took about 18 months before we saw any impact in the scores and/or some of the key

2.0 companies offering financial services have left them to face the challenge of commoditised service offerings as well as decreasing transaction fees and profit margins.

To differentiate their offerings, firms are focusing on improving customer experience. Indeed, a Forrester survey of 190 North American banking executives about their customer experience efforts found that 76 percent of respondents said that customer experience will play a critical role in their company’s competitiveness.

levers that we were looking for. We’re in a business-to-business environment and many of our relationships are long term, and so we really had to prove ourselves. [We] put some changes in place and then over time our customers began to reward us by telling us, ‘You’re on the right track. We see the difference you’re making?’. And then we started to see our scores really escalate.”

Experian began it’s process by investing a great deal of time and effort upfront, interviewing customers to look at what they expected from a provider of information services, what kind of experience was being delivered, and where there were gaps.

The company used this exhaustive research and statistical methodologies to hone in on the key ‘loyalty drivers’ for its customers. Did it get them all right? “There was a lot of questioning in the organisation early on,” says DeSoto. “How come we’ve put some of these changes in and we’re not seeing necessarily all the behaviours that we want? We fortunately had great leadership that stood by the initial conviction and belief in customer centricity, and I think we were right. It just took a period of time for our customers to really see the difference.

“We are constantly having to question: ‘Are these still the right aspects we should be focused on?’ And so we’re very, very intent on listening to customers, making adjustments as we get new data in the door, and aligning the organisation around that.”

Ensuring a good customer experience may be a process that never ends, but for all of these companies – and many more – it pays well in the meantime.

Watch the full interviews with Fred Reichheld, Brad Smith and Laura DeSoto in ‘Customer Experience: The Ultimate Question’ on www.meettheboss.tv

If your firm is embarking on the journey of improving customer experience, you will need to begin with an understanding of the ways in which technology impacts that experience. In working with 50 of the top 50 financial institutions worldwide, CA has developed a methodology for relating business strategies to IT imperatives based around eight dimensions of customer experience and the related technologies.

These components include:

The eight dimensions of the customer experience In the past, customer experience was the purview of customer service representatives in the field. Today, many factors affect customers’ satisfaction and willingness to recommend a financial institution. Multiple channels, including online, branch, telephone/call centres and ATMs, together with a rapidly growing number of products and services, represent customer touch points that contribute to the customer experience. Because technology underlies them all, IT has become essential to delivering on the customer experience.

1.

2.

3.

4.

5.

6.

7.

8.

Customer-centric architecture Extended enterprise security Transaction efficiency Transaction performance Value for cost Anytime, anyplace service An ethical and compliant partner A constant stream of new solutions

To find out more, visit www.ca.com

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THE INSIDER

Trust me, I’m a banker

By Jens-Henrik Osmundsen

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he banking industry has endured a very public fall from grace in recent months – arguably due to a misunderstanding of risk, which has seen some of the world’s largest names in banking and financial services struggle and, in some cases, fail.

Newspaper headlines speak of emergency bailouts and predict a deep recession. With each article penned, consumers lose even more confidence in banking services and the tenth annual Trust Barometer survey published by communications firm Edelman shows decline in trust in corporations. Almost two thirds of upper income, highly educated opinion leaders in 20 countries say they trust corporations less today than they did a year ago and the challenge the industry now faces is to overcome negative perceptions and rebuild trust. Technology can play an integral role in

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improving performance, service and experience and HP is one of the leading technology companies, developing solutions for banks all over the world, enabling growth, however that may look. So, in this case, how can technology help rebuild consumer trust?

In a recent discussion group with HP, Martha Bennett, Research Director at Datamonitor, offered two critical areas where technology can make a big impact to help rebuild consumer trust: • Customer care. Banks should revise and enhance layers of communication with their customers. Information breeds confidence in times of fiscal insecurity and more communication and reassurance is required if customers are to feel safe.

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• Increased automation. Implementing a greater level of technology to expedite processes will improve operational efficiency and reduce errors. When customers see better services, confidence and trust will grow.

Communication excellence Providing great communication is not as easy as it sounds. A growing population of Generation Y are using the web more to debate and share views of financial products and services (social networking site Facebook has over 120 million users, of those over 50 percent are over 25 years old).

Banks and financial services are being discussed in web forums, on blogs and on Twitter. This is where the Gen Y group is choosing to share information – therefore this is where banks need to interact.

In 2007, Bank of America was the first bank to enable a section of its website for customers to post reviews of its products and services.

Following that, Belgium-based financial services organisation Swift (owned by a co-operative of member banks), engaged its customers with a blog in order to combat negative perceptions that its service was slow to market and too expensive.

“Of course, regulation will stop banks from saying too much in these ‘unsecure’ mediums, and they will need to be careful about what can they can say” Martha Bennett Over the last decade, Edelman’s Trust barometer tracked the growth of peer-to-peer communications at the expense of standard top-down communications normally deployed by banks. With the exception of one or two examples, banks overall are missing an opportunity to interact with customers and influence a community of potential new customers. New media forums offer direct recommendations and discussions about financial services on the market.

“Of course, regulation will stop banks from saying too much in these ‘unsecure’ mediums, and they will need to be careful about what can they can say. But at the very least, banks need to be aware of these new communications channels and investigate how they can help customer service,” explains Bennett.

Another element for consideration is that if customers are to notice a seismic improvement and trust banks once again, the message needs to change. Messages need to be customised to the recipient and, where possible, intuitive, predicting the next service the customer may be interested in. Many banks have mapped the product lifecycle that customers require.

Some may already be using these techniques intelligently to better service their customers in a timely fashion. This is good news for customers and good news for these banks, which will be quicker to rebuild the relationships with their customers.

However, experts advise caution: “Where the challenge lies is that banks need to make sure they are not doing anything that would breach regulation or breach the customer’s privacy,” suggests Bennett.

Better processes and transparency The technology is available to overhaul front and back office systems of retail banks. However, in light of recent problems, and because government intervention was necessary in the form of emergency bailouts, it is almost certain that government regulation will be imposed, firstly, to make sure this does not happen again and also to serve as a public reprimand.

In a funny way, this too will go some way to install more trust back into the banking system.

Monitoring controls and regulation have been introduced in the past to help banks act transparently. However, some may argue these have been at the expense of processes, efficiency and financial cost and have done little to help banks achieve their goals. SEPA, designed to improve the transfer of funds and remove barriers to international trading, was launched in January 2008 and one year on, we now ask: why banks have been slow to adopt SEPA and pass the benefits on to customers? The answer is sadly simple: only two percent of payment transfers in the SEPA region are cross-border payments, so there is no business case for banks, making the investment (time and cost) to adapt payment systems largely unnecessary.

Furthermore, the Markets in Financial Instruments Directive (MiFID) came into effect on 1 November 2007 and the directive has imposed a significant challenge for investment banks to prove ‘best execution’ of deals and also a substantial amount of auditing – retaining five years of records – to comply with.

Both MiFID and SEPA are examples where regulation has not positively received by banks. HP is confident that future regulation can been positively impact the process and efficiency of a bank while maintaining total audit capability. By removing human error it will free up employees to deal with customers.

Here’s to the future ‘Trust is a something that takes a lifetime to earn but a moment to destroy’. The origins of this quote may well be unknown, but sure enough the meaning still rings true today. Technology can play a significant part in rebuilding trust, and new media forums and social networking can provide a vehicle to engage new and existing customers at the point of interest.

Product lifecycle management, for example, can allow banks to be one step ahead of their customers, enabling premium customer service. However, these are underpinning a back-to-basics philosophy and today banks should be thinking ‘customer, customer, customer’ at every opportunity.

The next two or three years will not be an easy journey. Banks will face greater competition from sometimes unlikely places. Traditionally, when a business loses the trust of its customers, its competitors will benefit; in this instance the whole industry is out of favour so banks are on a level playing field. However, there is a real opportunity for agile businesses outside of the financial services industry (not associated with the credit crunch) to diversify and capitalise on the negative feeling towards banks. Supermarkets and mobile operators, for example, would be well positioned to accomplish this, making use of the relationship with their customers.

It will be an unpredictable ride in the short term and extremely challenging in the long term – but banks can and will recover. n Jens-Henrik Osmundsen is Director General of HP Indigo Europe

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ASK THE EXPERT

Down to the wire As wireless local area network (WLAN) implementations increase, Dr Amit Sinha examines the risks associated with a more mobile financial sector.

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s mobility has proven to play a vital role in improving productivity, WLAN deployments in financial institutions have accelerated. However, the introduction of wireless technologies has also created a new avenue for data breaches, circumventing traditional security architectures.

The cost of a data breach for organisations can vary from US$200 to US$300 per compromised record according to studies done by the Ponemon Institute, Gartner and Forrester.

The Motorola AirDefense solution, currently deployed by several large financial institutions, is designed to secure the institution’s wireless airspace by eliminating rogue wireless devices, preventing wireless intrusions and facilitating compliance with requirements such as Sarbanes Oxley.

However, WLANs introduce certain vulnerabilities in a financial institution’s data network that traditional security solutions cannot mitigate. A rogue wireless Access Point (AP), for example, is an unauthorised AP physically connected to the wired network. These provide attackers with unrestricted access, bypassing firewalls and VPNs to internal servers, just as if they were connected to an internal wired port.

In addition, hackers can masquerade as an authorised wireless device and connect to an authorised AP. MAC address-based filters are useless since wireless MAC addresses are broadcast and hackers can easily change the

Dr Amit Sinha serves as Fellow and Chief Technologist of Motorola’s Enterprise Wireless LAN division. He was the Chief Technology Officer of AirDefense prior to its acquisition by Motorola and he specialises in both wireless communications and security. He has authored over 25 journal/conference papers, contributed chapters to three books, and is the holder of 16 US patents.

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MAC address. And while WEP encryption can be cracked in a few minutes, WPA-PSK is easy to implement and does not have the vulnerabilities of WEP. However, one common key is used between many devices and once a key is stolen or a password compromised, hackers can easily gain access without breaching a security perimeter.

Hackers can also easily perform wireless denial of service (DoS) attacks preventing devices from operating properly and disrupting network access. Wireless DoS attacks can cripple a wireless network despite the use of sophisticated wireless security protocols like

connected to the wired network and can be setup to automatically terminate a rogue device over the air.

Wireless Policy Compliance provides financial institutions the ability to define granular wireless policies for how WLAN devices should be configured and operated and then monitors all devices to identify when any deviates from that policy. AirDefense can understand and monitor all WLAN authentication and encryption policies and allows network managers the ability to define WLAN device and roaming policies, channel policies for approved channels of operation and usage policies such

“WLANs introduce certain vulnerabilities in a financial institution’s data network that traditional security solutions cannot mitigate” WPA2 and hackers can insert malicious multicast or broadcast frames via wireless APs that can wreak havoc on a financial institution’s network.

Furthermore, wireless APs and client devices are frequently misconfigured and the majority of all wireless security incidents happen as the result of misconfiguration. These happen for a variety of reasons – including human error – and a misconfiguration at a bank or remote office can be detected and exploited to gain access, allowing hackers to attack internal servers and applications.

The AirDefense solution addresses three key areas of network security and management. The first is Comprehensive Wireless Intrusion Detection/Prevention, which provides the industry leading solution for rogue wireless detection and containment, with 24/7 wireless intrusion prevention. AirDefense Enterprise can accurately distinguish neighbouring devices from rogue devices that are

as approved hours of operation. By rigorously monitoring WLAN activity, AirDefense offers a historical database that powers robust forensic analysis and historic trending, as well as incident investigation.

Advanced Troubleshooting can provide the administrator with a live streaming view of all devices, channels, bands and networks to identify hardware failure, RF interference, network misconfigurations and usage and performance problems. With Advanced Troubleshooting, IT managers can remotely analyse and perform network testing from a central location, as well as take advantage of next-generation self-healing features for hassle-free network management and optimal wireless LAN performance.

This new solution can help significantly reduce wireless network helpdesk support costs and related onsite troubleshooting expenses by providing IT departments with the ability to identify and fix network configuration issues remotely. n

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CRM FOCUS

The future of CRM Santosh Kumar Sinha of Frost & Sullivan describes why there is growing demand for CRM applications.

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he phrase “the customer is king” has never been more apt than in the current market scenario. Global slowdown has forced companies to revisit their strategy and devise ways to boost their relationships with their customers. Companies are focusing more on retaining existing customers and increasing their loyalty to fight the economic slowdown. Getting more out of existing customers by identifying their individualised needs has become even more important.

Concentrating on key customers in order to enjoy their continued loyalty is the strategy of companies across the globe. All this has brought Customer Relationship Management (CRM) services into the limelight.

Global market landscape

pects of the software apart from a significantly lower price level has attracted many small and medium business houses to adopt such solutions. The number of open source CRM projects are on the rise with more than 350 projects being listed on SourceForge Inc. Earlier, CRM was more operational in nature. Customer insights were used to increase the employees’ effectiveness in managing the relationship with customers. Today the customer is demanding more personalised products and an individualised relationship with the company they choose to do business with. CRM products have undergone remarkable transformation to meet this rising demand. Social tools such as wikis, blogs and enterprise mash-ups have been incorporated into CRM solutions.

Quite a few vendors have tried to make CRM applications available on mobile. However, the complexity of providing such functionality on small screen thumb operated mobile devices and slow networks has hindered the success of such attempts. With new devices coming into the market and greater adaptation of 3G as standard for mobile devices, vendors are expected to achieve a higher success rate in their efforts. The focus on platform interoperability is also expected to increase the penetration of such applications in future.

The CRM market has witnessed healthy growth rates in the past couple of years and the trend is expected to continue. In 2008, the market registered a growth rate of 12 to 15 percent and reached a value of €7 billion despite economic meltdown. SAP has maintained its leadership in CRM followed by Oracle. Both the companies experienced higher growth in their on-demand software compared to that in their on-premise software. Riding on the increasing demand for Software as a Service (SaaS)-based CRM software, Salesforce.com has strengthened its market position further. There has been a significant increase in the demand for and acceptability of open source CRM software as well. North “Today the customer is demanding more personalised America and Western Europe are the largest markets for products and an individualised relationship with the CRM software. Regions like the Middle East, Africa and company they choose to do business with” Eastern Europe have also registered high growth in the CRM market. In the Asia Pacific region, both India and China are attracting more CRM vendors due to long term growth prospects in these countries.

Future outlook Higher bargaining power and the demand for personalised products The future holds the promise of a high demand for CRM solutions. by end customers, the advent of new technology like Web 2.0 and cloud However, clients’ increased focus on ROI and investment requirements for computing, strong focus on the ROI of CRM software, and untapped desuch solutions is going to grow in the coming years. Customers are likely mand for medium and small segment businesses have prompted CRM vento demand more clarity on pricing and a stringent case for the return on dors to look for new technology and innovative business models. their CRM software investment. Reduced funds are expected to increase Under this model, companies generally purchase a license to use the softinterest in on-demand or SaaS-based models. This is expected to prompt ware and the service provider manages the logistics and hosts the inframore vendors to offer such services and experiment with unique pricing structure at his premises. Companies can even choose to rent a solution models, such as connecting the application’s cost with the customer’s and then decide whether to purchase the solution at a later date. With the profitability to gain market share. Vendors who are able to deliver high software running at a centralised remote location, on-demand solutions value solutions at low cost using innovative models are most likely to sucprovide lower software implementation and customisation costs as well as ceed in future. faster implementation.

Open source CRM software has gained strength in the last two to Santosh Kumar Sinha is Industry Analyst for the Information & Communication Technology Practice, South Asia and Middle East at Frost & Sullivan. three years. Ownership of code and the liberty to tailor different as-

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TECHNOLOGY FOCUS

The writing’s on the wall Do e-signatures really spell the end for paper and ink? FST investigates.

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n November 30 1999, The Electronic Signatures Directive was adopted by the European Commission with the aim of guaranteeing the security of e-signatures across the Eurozone. Fast forward to November 2008 and the Commission unveiled its ‘Action Plan on e-signatures and eidentification to facilitate the provision of cross-border public services in the Single Market.’ While it is good to see that this issue remains on the agenda, it does beg the question of exactly what has been going on in the e-signature space since the beginning of the century?

The lack of interoperability and standardisation in e-signatures is a major brake on both the technology’s progress and the speed of business in general. For financial institutions, e-signatures offer the potential for faster and safer transactions, but the fragmented state of the market promotes uncertainty. “One major problem has been the very limited amount of standardisation, making it difficult to interchange electronic signature information.” says Andrew Yeomans, VP of Information SDecurity at a major European investment bank. “Over a

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period of several years technology moves on, but the ability to process old signatures usually doesn’t. Understanding information management and document management flexibility requirements can also be an issue.

For example MS Outlook supports electronic

“One major problem has been the very limited amount of standardisation, making it difficult to interchange electronic signature information” signatures on emails. Unfortunately the normal means of forwarding such signed documents results in the signature being replaced by the last sender; not usually what is wanted for a chain of evidence of signing.”

This lack of clear understanding can have a big impact on companies seeking

to employ e-signature solutions. “Many times when thinking about implementing esignature in organisation, the scope tends to leap incrementally after virtually every discussion,” says Timothy Elliot, Operational Risk Director at Comerica Bank. “If enabling a single application is too tactical and creating an entire e-signature strategy across all platforms is too costly and complicated, then analysis and paralysis is guaranteed.”

Elliot describes a project he worked on with a previous company, where discussions around e-signature for mortgage applications quickly devolved into conversations around related components such as data warehousing, document imaging, workflow and global deployment. Once the conversations were complete, the cost benefit no longer made any sense and the project died.

While those conversations were relevant, sight of the real objective was lost and things spiralled out of control.

“I think the regulations are pretty clear here and that a good solution is possible,” Elliot continues. “The real question is; where is the real value and at what level of detail?

In these economic times, the cost/benefit is going to have to be pretty dramatic to justify an expense.”

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And for some, the very value of esignature remains an open question. “In the banking sector there is no absolute need for digital signatures,” says Boris Hemkemeier, Group Information Security Manager at a large German bank. “As soon as there is a contract, for example an account opening, between the bank and the customer, the bank can agree simpler authentication methods such as SMS codes, EMV CAP or iTAN to authorise orders.” The differing rules and regulations across the continent can also serve as an impediment to wider adoption. “Currently German law does not allow an account opening via digital signatures,” Hemkemeier continues. “Together with the solutions we already have it is not easy to see a ‘killer application’ for digital signatures in the banking business.”

But according to Bill Brice, CEO of esignature provider Alphatrust, this is technology with a future. “It is correct that the business model does not work if public key infrastructure technology is used due to deployment costs – except among trading partners doing repetitive business with higher value transactions,” he says. “But this is not where the business value is located for most banking applications.”

He gives the example of the US, where billions of dollars in loans and contracts have been concluded via e-signing over the last eight years. Unlike in many EU markets, these transactions have incurred little or no deployment cost for users, with either fixed infrastructure costs or transaction costs for banks and other financial service companies.

To date there have been no public cases of loss on transactions related to issues with e-signatures in the US. US experience shows that the highest value for both end users and relying parties such as banks or insurers is high volume, lower value transactions. These usually fall into two classes: signed documents required by regulation or law and documents required for contractual purposes.

In the first case, you are required to obtain signed documents. “It is to everyone’s advantage to do so at the lowest possible total process cost,” Brice continues.

“An electronic straight-through process achieves this and is generally preferred by

consumers and other users.” In addition, Brice asserts that a five to 10 times ROI can be expected.

In the second case, there needs to be a risk assessment as to whether an all electronic e-signature processes is appropriate.

Since the largest volume of data handling and paper processing occurs at lower transaction values and the large number of transactions spreads any single transaction risk, these routine transactions are excellent candidates for automation.

But we don’t need to look as far afield as the US to see e-signatures building momentum in the financial industry. The Nordic countries in particular are embracing the technology with gusto and the results have largely been positive, as Antti Larvala, Head of Sales at Finnish bank Aktia, explains.

“Our experience is limited to one country, where all the major banks have agreed to use a common solution for e-signatures,” he says. “Our intention was to benefit a similar log-on system used by all the banks with one-time passwords which is common to all the customers. There are no external applications or installations to use.” In fact, so successful have these efforts been that the

government of Finland has even adopted the e-signature system for all the documents it presents online.

But this wholescale acceptance of digital signatures currently remains the exception rather than the rule. As with any emerging technology, it will take time for users to become entirely comfortable with it. Ultimately though, as the technology matures, it seems increasingly likely that digitally signing off banking transactions will become commonplace. One need only to look at the rise of internet banking to see how technology can radically alter the way customers approach financial institutions.

And let us not forget the importance of demographics. As each year passes, the population becomes more tech savvy. Tomorrow’s consumers will be the digital natives who have grown up online, for whom Facebook and Twitter are second nature. For these customers, the idea that signing a sheet of paper is more natural than handling the whole transaction digitally will probably seem quite alien. So while it might be a few years until e-signatures completely assert their dominance, it looks as thought the writing is on the wall for their pen and ink predecessors. n

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A sign of THINGS TO COME

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ROUNDTABLE

Ralph Maute, Product Manager eSigning Workflow Solutions, joined SOFTPRO in 2000. Prior to his product management position, Maute gained broad experience in challenging projects for signature capturing and verification worldwide. Being a dedicated mountain biker and holding a degree in Medical Informatics he is known for both expertise and stamina.

Peter Craik established Steadlands in 1993 in order to act as an independent sales agent for manufacturers in the electronic component industry. Product developments led the company into other fields including IT peripherals and sales success in the IT field has seen valuable growth for the company.

Rolf Schröder looks back on 25 years experience in the IT industry. He was one of the founders of Isobar GmbH and worked in the Project and Corporate Business at Canon Germany during the 1990s. Since 2002 he has worked at Wacom Europe GmbH as Business Development Manager.

Gerald Cäsar, President & CEO of xyzmo SIGNificant Group, holds a Masters degree in Engineering from the University of Linz, a Doctors degree in Technical Sciences and an MBA focused on sales and marketing. Over the last 19 years, he has held several executive positions, exhibiting a wide range of business, managerial and marketing skills in companies like SERVO DATA and CSC.

FST gathers four industry insiders to discuss both the importance of eSignature solutions and what the future for such technologies holds.

What key features should an eSignatures solution possess?

Ralph Maute. According to our experience there are some factors successful projects have in common. These include the ability to choose an appropriate signature-capturing device, depending on the level of proof quality required for the particular process – and it’s our aim to be a navigator for our prospects when selecting pen pad or a Tablet PC; supporting hybrid environments where paper documents and e-docs still co-exist and in the absence of dynamic signature parameters, static features may be used for comparison; and ensuring the seamless integration into existing or dedicated processes to cover the complete electronic document lifecycle.

Peter Craik. The key feature is simplicity. Any eSignature solution, especially those involving members of the public, should deviate little from the current, trusted processes. Take a process such as a new account application form, and, if not already in electronic form, convert the paper-based system to an

electronic version. At this point, instead of going through the procedure of populating the form, printing, signing, scanning, then securely storing the original, the ‘print-sign-scan-store’ can be replaced by applying a handwritten signature captured on an electronic pad and embedded into the document.

The form, containing the data and eSignature, is protected using hash algorithm technology to maintain the document’s integrity.

Once the initial system is in place additional processes can be added: start with account opening, then add change of details notifications, new card or PIN requests, mortgage, loan and insurance applications, and so on. Of course as eSignature technology has matured beyond capturing a handwritten signature on a pad, standardised procedures can be developed across more sales channels; in-branch, in-field and online.

Importantly, mitigation of risk to the organisation should be ensured.

Any system must meet compliance and regulatory requirements and a solution with irrefutable e-processes and a verifiable audit trail is critical.

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“Implementing an eSignature solution can speed up processes and reduce sources of error. It also enhances accessibility” Rolf Schröder Rolf Schröder. An eSignatures solution should guarantee maximum security, not only as part of legal requirements, but as customers need to fully trust such solutions. With respect to the whole process and the infrastructure involved, it should also be cost efficient, and finally – and this is key for the acceptance of the solution by users – the visual signature quality has to be extremely high so that the haptics of the surface are as close to paper as possible.

Gerald Cäsar. The key features an eSignatures solution should possess include review, assent or abandon functions, enabling a transparent view and full users comprehension of what they are signing, as well as the support of various hardware devices, such as signing pads, tablet PCs and flat screens capturing signature biometric traits.

Other important features that enhance security are authentication and signature execution using multiple authentication methods, in addition to enabling multiple signatures for different parts of forms. To allow flexibility and easy integration, the eSignature solution should also include interfaces for existing applications with conversion capabilities, support of various tokens, smart-cards and soft certificates in addition to desktop and web interfaces. High efficiency is achieved with a highly scalable solution which includes mass (batch) signature capabilities and enables on the fly positioning of signature fields with automatic signature positioning functionalities for documents that have the same format. Additional features

are the ability to verify incoming digitally signed documents, perform realtime comparison of signatures against pre-enrolled profiles and enable vaulting, which can be implemented as an external call to a file or content management system including PDF/A support.

How can the implementation of effective eSignatures solutions drive productivity and business effectiveness for financial organisations?

PC. The ROI period following the implementation of an eSignature solution is relatively short in comparison to other capital investments financial organisations will make. The reduction in equipment and materials, as well as the risks associated with NIGO (not in good order) paperwork, handling, distribution, physical storage and secure destruction of paper documents is a major driver. Relating to paper reduction, eSignature solutions support any organisations drive towards a ‘greener’ eco-friendly message.

In addition to this, eliminating re-processing costs and creating a straight-through electronic process, an organisation’s systems can be automated, thus reducing head-count, opportunity for human error and speed up delivery of services; by having the ability to close business across more sales channels, organisations can enjoy reduced business attrition rates and improved customer service performance.

“Any change to a process should be considered at a cultural level as well as technological. Any organisation will tell you that their most important assets are their customers, followed by their staff; people are key but are prone to be suspicious of change” Peter Craik

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RS. Implementing an eSignature solution can speed up processes and reduce sources of error. It also enhances accessibility: electronic documents can be verified directly and be viewed in connection with other documents without searching in binders or archives. eSignature solutions also save a lot of time and money for copying or sending documents from a branch to headquarters and vice versa and make document transfer much quicker.

GC. eSignature solutions drive productivity and effectiveness for financial organisations by reducing operational and back office overhead, as when business processes become paper-free, the need to perform paper-related tasks is eliminated. In addition, all documents are available to the back office systems for real-time decision making and immediate electronic archiving, eliminating document loss, duplication or missing signatures.

These solutions also increase security and reduce fraud because the integrity of the content and authenticity of the signer are guaranteed. The eSignature helps accelerating turnaround times by avoiding searching for contracts or forms, reducing customer-waiting times. Accounts can be opened faster and withdrawals completed more efficiently, meaning that financial institutions can do more business. In addition, customers continue to sign like they always did but with an improved experience, leading to customer satisfaction and retention. Financial institutions can also increase revenue by having more time available for up/cross selling, thanks to increased efficiency of sales/consulting staffs. Finally, eSignature solutions drive improved legal compliancy and limited liability, as any manipulation within the document will result in invaliding the signature.

RM. The DSGV has reviewed the effects of electronic signing for 438 savings banks and summarised as follows: Digitising signatures at the teller enhances the customer experience and achieves substantial cost savings.

Some banks could also optimise their back office processes, for example, Bankenservice GmbH in Berlin runs a multi-tenant system which includes specialised services such as automatic signature verification for giro processing. Their quality of stored reference data of signatures has increased tremendously thanks to the reduced effort of manual post-processing.

Fraud attempts on the documents are detected more efficiently, at a lower cost to the bank, and this characterises a holistic approach of signature processing: The extraction of signatures from electronically signed documents for further processing is enabled, while maintaining the security and integrity of the signed documents and their signatures.

of the paperless environment. In addition, input devices could differ, depending on the organisation’s needs, meaning where and how they are meant to be used.

RM. The major hurdle is to develop a joint understanding of what processes should be supported with electronic signatures and consider the relevant legal aspects that may differ from one country to another, especially when it comes to the terminology.

In general there exists a common confusion between the terms electronic signature and digital signature and our focus is on the aspects of handwritten signatures digitised throughout the signing process – so called ‘dynamic’ signatures which are also sometimes referred to as ‘biometric’ or ‘online’ signatures.

The term digital signature usually refers to a digital signature protocol using cryptographic techniques, as is sometimes applied to an electronic document. The digital signature is properly defined as a subset of electronic signatures and the idea of trustworthy digitising of a handwritten signature was not in the minds of regulators until the late 1990s. Until today people have known little about how to use dynamic signatures in dig-

“The specific business processes have to be analysed and adopted in order to help streamline existing processes and achieve the benefits of the paperless environment” Gerald Cäsar

Should the implementation of eSignatures be viewed as purely a technology issue, or are there other elements that need to be considered if they are to be employed successfully?

RS. The implementation of eSignatures into business processes is more than just a step forward in technology. The handwritten signature is an accepted part of our daily business life. By signing, we execute a declaration of intention and this is a process that has been developed throughout history and is accepted on a cross-cultural basis today. Besides the legal aspect, the handwritten signature has a psychological aspect of a feeling of security.

GC. The implementation of eSignatures is definitely more than a technology issue. The specific business processes have to be analysed and adopted in order to help streamline existing processes and achieve the benefits

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ital processes, but the technology has reached a maturity where it is now being used by several customers in banking, insurance, telecommunication, retail and other verticals.

PC. Any change to a process should be considered at a cultural level as well as technological. Any organisation will tell you that their most important assets are their customers, followed by their staff; people are key but are prone to be suspicious of change. Humans have signed paper documents with wet ink for years, even a small change such as signing the exact same signature on an electronic pad can be considered strange. Training and explaining the use of the system is essential in order to help put consumer minds at ease.

I always encourage anyone who is considering the introduction of eSignatures into their processes to ensure they have a Champion from other stakeholders within their organisations. Someone from each affected department should be included to avoid objections later in the process development; often someone in IT will not understand legal requirements and, at a minimum, it is best to involve someone responsible for process delivery, IT and legal.

How are financial institutions using eSignature solutions to distinguish themselves from their competitors? What are the challenges facing financial companies in getting the best from this process?

GC. Financial institutions using eSignature solutions can distinguish themselves from competitors by enhancing their efficiency and enabling faster processes for their customers. In addition, financial institutions can offer improved services given by sales and consulting staff, resulting with better customer experience, higher satisfaction and retention. Their customers enjoy improved signing processes, which include reduced waiting periods, increased security, and reduced fraud with no change in their habits. Last but not least are the abilities to improve their legal compliancy, limit their liability and create a better image by promoting an environmentally friendly initiative.

The challenges financial companies face in getting the best from this process are getting all the necessary departments on board and aligned, by involving them in the process in order to integrate the solution efficiently.

In addition to embedding the solution gradually by starting small with two to three branches, in order to learn which improvements are needed in the process, but always have the big picture in mind and, finally, secure topmanagement support.

RM. Besides eSignatures needing to enhance the customer experience they are expected to work in a self-explaining manner and to create the benefits described. Most of the e-signing solutions on the market have weak links when it comes to the signature itself: These solutions are primarily designed to seal a document, however, they lack a clear strategy on a minimum quality for trustworthy signature capturing, which has caused a lack of trust in potential buyers.

What might be an advantage in the first stage – as a solution may also run on a Pocket PC or on devices that do not support the differentiation into pressure levels as well as sufficient time signals – might result in disappointment whenever a signature is in doubt and needs to be verified. So, while it might be enough for quick capture, the process is neither fully secured nor has it the same level of trustworthiness.

“These solutions are primarily designed to seal a document, however, they lack a clear strategy on a minimum quality for trustworthy signature capturing, which has caused a lack of trust in potential buyers” Ralph Maute PC. Over one billion signatures a year are captured using the technology we offer, with major implementations in banking, insurance, motor, consumer finance and healthcare markets. Our customers pride themselves on being at the forefront of technology and believe this offers them the chance to attract a best-of-breed workforce.

Successful implementations lead to smooth, uncomplicated and errorfree data processing. Financial institutions who have implemented eSignature solutions find customer acceptance is fast and have reported positive feedback from their customers and staff. Obviously, as mentioned earlier, the ‘green’ message cannot be ignored, and some users promote the fact their systems are more environmentally friendly.

At the customer facing level, the challenges are few for those who follow the recommendations; involve each stakeholder department, start simply, ensure staff is well trained and able to explain the system simply and easily to the end user.

RS. Manufacturers of eSignature solutions only provide the tools for companies, the question of how companies distinguish themselves from their competition depends on how the company can communicate the advantages of the solution to their customers.

The challenges lie in the adaptation of the processes and the continuous integration into all commercial transactions. There are definitely more areas for eSignature than only opening a bank account. n

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CONTENT ON DEMAND Do you know where your data is? Quick access to information has never been more important, says Hanns Kohler-Kruner.

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he current industry has changed quite considerably from when I started about 15 years ago. Back then we talked about imaging and we talked about scanning files, but we were only really starting to think about digitalizing paper, which was the main drive. While email was there, it was not considered that much of an issue – at least nowhere near as much of an issue as it is today.

15 years ago, people were working in departments with departmental solutions and information silos, and there was very little being said about integration. If you look back at the vendor landscape in those days, there were many more small or mid-sized companies across the world. The consolidation that we have seen over the last fi ve or seven years has really thinned out the herd quite significantly.

The reason for this change is really two-fold. Technology has certainly helped, but it wasn’t the main drive behind it: that was just the sheer size of the problem, and the fact that people couldn’t handle the stand-alone tools that the information was flowing through anymore. Today, email has become more and more important as a business tool, and we’ve managed to come up with a few other ones as well. These tools allow more and more collaboration. If you compare today’s markets to the markets we operated in 15 years ago I don’t think, for example, Google was of any significance – back then it was Yahoo that was the market, so the whole search market, at least on the internet, has become much, much bigger. Also today there is so much more information oline, which of course provides

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organisations with more web-based driven information, and if you look at the last couple of years particularly, there is the whole mobility drive that we have seen, where just about everybody has a laptop rather than a desktop PC.

Connectivity, 24/7 In today’s environment everybody is trying to be continuously connected. The reason for this relates to the sheer size and complexity of the information, and the speed with which both customers and consumers of the information are expecting answers back. You no longer have the time to go through the paper archive and say, ‘I’ll call you back tomorrow’; consumers expect the answer to be there right there, right now, and that permeates through a variety of different industries as well as the financial services sector.

The sheer amount of data that all companies are handling today is very important in these markets; it is just that the problems associated with size become much bigger when we’re talking about internationally operating companies. Globally operating companies often have to deal with multiple languages within their organisation, dispersed workforces, and maybe some on-

the-road workers or home workers. As a result, different systems, different legislations and different internal policies often have to follow.

All this just exacerbates the problem of handling business processes.

Nobody can afford not to look after information in an efficient manner anymore. With the current economic crisis going on, that drives even more of a need for looking after your assets and information. With all the cutbacks and layoffs that are happening, a lot of organisations are letting people go, but that doesn’t mean that

“You need to look at ECM not as a piece of technology, but as a strategy to which technology plays a part” workloads are getting any less – it’s just that people are doing the same amount of work with fewer people, which makes efficiency even higher on the list of requirements that companies ask from their people.

About AIIM AIIM represents the Information Management community as the global association for both users and suppliers of Enterprise Content Management (ECM) solutions. AIIM hopes to ensure that users and suppliers have opportunities to become better connected and have broad access to the knowledge, skills, advice and support necessary to tackle the evolving challenges of Information Management successfully.

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Justified The emphasis in ECM solutions is certainly warranted during this prolonged period of uncertainty, but if you look at the vendors, while they are all certainly feeling the pinch, IBM recently came out with some figures that said they were actually doing okay.

So what we are seeing is, that even in what seems to be a recession, there is still plenty of need for ECM solutions.

In today’s markets, everything has to be about cost cutting and efficiency gain, and that’s very important to remember when considering ECM solutions because they are proven to provide real ROI. While there remains a fundamental question about the importance of ROI, and that focus is currently much higher, I think there is a little too much emphasis put on hard figures. If you look at enterprise content management not as a piece of technology but as a strategy to which technology plays a part, then there are going to be benefits to managing your information more efficiently.

ROI very much depends on the kind of processes that you are trying to improve on, especially anything that goes from paper to electronic. What’s more, some of the things that are happening through an ECM strategy should be asked the other way around – is there a return of investment, no, but what is the total cost of ownership? What is the total cost of failure? What would be the ultimate consequence of not doing it?

The real question here is whether you can afford to tell your customer that you’ll get the information they require to them tomorrow, while your competition has the ability to say, ‘hold on a second, I’ve got it right here in front of me?’ The simple answer is, you can’t – so there are always two sides to the coin, and oftentimes the real issue of ROI is that it can’t be enough to simply justify an investment to ECM for any size organisation.

Quick access to data is today crucial to any organisation – and that’s particularly true for financial services institutions. Having a single security system across a number of ECM installations or solutions is also critical. The ease of finding information can play a role in that you then have all your information gathered in a much smaller number of systems and are working with an enterprise-wide implementation rather than departmental implementation. And then, when you do have to make decisions, all the information is within a single depository or a number of depositories under a single interface. Subsequently, on the customer service side, this presents a definite opportunity to answer questions quickly, which ties back into the necessities of quick data access and having your customer information to hand.

I actually know of one bank where unless you’ve been working there for 10 years or more you can’t actually get certain customer information out of their system. And that’s not because of seniority or security concerns, but because of the old systems and the fact that only if you’re an old-timer do you know how to operate such a system.

To me that seems a fairly ridiculous way of business effectiveness. In fact, it’s not effective at all.

With enterprise content management, if you look at the main blocks according to the AIIM road map – capture, manage, store, preserve and deliver – you can find across the board ECM functionality

Hanns Köhler-Krüner has more than 15 years of industry experience in selling and marketing content management, document management, search and workflow solutions. In the last few years, he has helped both national, as well as international, companies manage their information assets in Germany, Austria and Switzerland, as well as various Eastern European countries.

that can help any financial institution. And having everything under a single interface makes it much easier for customers to get access to their own information rather than having to ring three different departments and try to find out in three different places what their current status is.

In the coming months the important thing for organisations will continue to be focusing on greater speed, more ease of use, greater security and more compliance. We still haven’t seen the full impact of the current economic crisis, of course, in which financial institutions play a huge role. There is an awful lot of additional legislation that will be coming in over the next few months and years. This will have to be implemented in a variety of different banking sectors – and that will drive implementation needs. What we will see overall is leaner, more agile developments and we’re going to have to see quicker reactions to consumer needs. In addition, we’ll see many more delivery and collaboration channels appearing as a more business-oriented way of working develops going forward. n

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ROUNDTABLE

THE REAL VALUE OF ECM FST sits down with two industry insiders to discuss the need for document management solutions and how implementation can drive business effectiveness

Thomas S. Senger is Kofax’s Senior Vice President of Applications Software & Services EMEA. Senger oversees all customer-facing sales and services functions in alignment with the company’s newly-introduced hybrid go-to-market model, which supports both direct customer engagements and indirect sales through channel and with alliances partners.

Since the early 90’s Fredrik Ring has worked as an advisor, analyst and project manager in major ECM related IT projects, as well as being CEO and business area manager in several consulting companies. He is currently responsible for ECM in the Logica Group.

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As regulations become increasingly strict, ECM and document management solutions are ever more important for financial organisations. What are the key features that such solutions should possess?

Thomas S. Senger. Traceability of the business process that a document is following is a very important element. Capturing the paper as soon as it enters the firm at branch level allows tracking of all the steps and avoids the risk of losing, altering or mismanaging paper documents. This improves compliance and virtually eliminates the risks and the inefficiencies of paperbased business processes, usually started at branch level and completed at a central site. Additionally it establishes proper electronic tracking of the chain of custody of documents used in the banking process and is thus a key element for compliance.

Fredrik Ring. I believe that the key features of document management solutions and ECM are, for example, the use of alerting functions that combine search and workflow to locate unwanted deviations from security and risk policies, in order for them to be corrected. Presently, this is mainly a (semi-)manual process, which increases direct costs for auditing and risk management functions. Much time is spent on finding information rather than correcting and preventing security and other risks. And, as the volume and complexity of documents increases, so does the need for effective alerting and search capabilities.

Monitoring features, such as dashboards, will inform management immediately about important changes, thus speeding up reaction and driving management into a proactive role. ECM will help with restoring confidence in the financial markets, and also bring benefits such as avoiding costly redesign on current information structures, leverage current investments and encourage plans for future incremental improvements.

The financial sector is vulnerable, forced to divest non-core activities to gain cash. Using ECM tools will speed up the disentanglement and are beneficial for the financial position. Also, external reporting on compliance

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is becoming more and more important and will ultimately influence the image of the financial sector.

I am sure these are the most important parts, because it could drive future growth and customer retention, as many financial institutions still suffer from bad investments. Those who recover quicker will have an enormous competitive advantage and may use this compliance information as a marketing weapon.

Are ECM solutions as valuable to small and mid-sized organisations as they are to financial heavyweights? Can such solutions deliver demonstrable ROI? FR. At Logica we know that small organisations do not have the possibility to spend very much money on compliance. However, the numbers of documents – volumes and complexity – they are processing are increasing rapidly and their IT budgets should be spent on both innovations and compliance.

SaaS solutions, in combination with offshore and blended delivery, can bring ECM solutions to mid-sized organisations with lower costs compared to ‘traditional’ IT developments.

The financial sector can benefit from the latest technology, the best practices and professional organisation skills offered by Logica. Innovations can be implemented faster, while the service level will improve simultaneously and ROI will be positive thanks to cost effective ECM and the benefits of faster innovations and cost effective compliance.

TS. We have noticed that mid-sized FSI’s are less exposed to the trash title problems that the bigger ones experience. This means that they are used to competing in a different market, much more localised and where customer satisfaction and retention is vital. To remain competitive in this environment, the small and medium companies have to innovate at a different pace than the large ones, by being more creative and capable of providing a much better service to their customers. The adoption of intelligent capture and exchange technology is a proven strategy to increase effectiveness of all customers facing the operational value chain. Our experience shows an average payback between nine and 12 months.

How can the implementation of an effective document management solution drive productivity and business effectiveness for financial organisations?

TS. Customer churning, is the biggest enemy today. It is important to spend quality face time with the client, delegating the procedural check and functional complexities to the technology. In this way, it is possible to free valuable employee time in order to serve the client properly: IC&E and ECM with BPM are key elements in streamlining the business process, allowing the operator to focus on providing excellent customer service rather than spending time making sure that the procedure is correctly executed.

FR. We know that auditing and risk management are currently spending 50 percent or more of their time collecting information, but this can be reduced significantly by using effective document management, and a faster response to limiting risks can save large amounts of money. Furthermore, col-

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lecting management information based on content can speed up decisions significantly as information you are searching for manually often shows to be incorrect.

Using intelligent search and analysis tools, the web can be crawled to create instant reports, and, by using workflows, this can be used by management/development to take actions to enhance market offerings. In addition, the removal of old documents via a controlled disposal process leads to certain benefits such as relevancy improvements, lowering compliance costs, lowering storage and backup costs and improving response times.

Streamlining the document flow will speed up the response times and using workflow in combination with enterprise search will create information and actions around persons with significant benefits.

What do you think the next big moves in the document management space will be? Do you have any major developments on the horizon?

FR. Our vision for the future include single ECM suites to drive down IT-costs, as well as the use of SaaS. The demand for outsourcing ECM and various supported business processes will increase.

Pressure on delivering information flows between companies, customers and stakeholders, which are becoming bigger and more complex, will also increase, and to fulfil these needs companies must have access to the newest technologies, which need to be future proved and scalable.

It will be difficult to fulfil such needs for financial companies as they try to drive down ECM costs whilst profiting from the innovation offered by ECM-professionals.

Other important developments include improvements of user interfaces to create personal based views, direct access to customer specific information from various sources, business process monitoring and content analytics used to predict compliance. On demand analysis that is based on enterprise search and content analytics will also increase, along with the possibility to re-engineer critical complex documents to make them manageable.

Important future trends are also the adoption of the time and place of independent working, improved integration of ECM in other applications and the use of social networking and communities.

TS. One of the most important opportunities is the right integration of multiple channels. This means having the capability to receive the necessary information and documents via different mediums (paper, email, faxes, etransactions, mobile etc.) in different times at different steps within the process. This approach has to be bidirectional by nature: it is important to provide the right feedback to the right person, via the right medium, at the right time; for example, automatically notifying the client via email that his salary is not sufficient to qualify for the mortgage loan and that he should submit his last years tax declaration. The client could then send it via fax or bring it to the branch for scanning. After a short time he will receive the confirmation via SMS that the process is now going ahead smoothly.

We call this approach the ‘Single Pipe’ as it normalises the information fluxes, both in inbound and outbound communication, and can provide tremendous competitive advantage when properly used with ECM, BPM and BRM (Biz Rule Mgt) technologies.

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Following last December’s arrest of Bernie Madoff and the discovery of history’s largest ever Ponzi scheme, FST’s Matt Buttell looks at repercussions for the industry’s already changing landscape.

t was in 1960, at the age of just 22, that Bernie Madoff began his financial career by taking the US$5000 he had saved from summer jobs as a lifeguard and a sprinkler system installer and setting up investment firm Bernard L Madoff Investment Securities LLC. The beginning of his story reads like the perfect urban fairytale: a man realising that he has a talent for making money and applying it in a realistic and sensible fashion. Over time, Madoff went on to chair the NASDAQ stock exchange, as well as continuing his responsibilities as the chair of his own firm, gaining a glowing reputation among industry insiders and investors alike.

Then, on the 11 December 2008, Madoff was charged with perpetrating the largest investor fraud ever committed by a single individual and his urban fairytale exploded into global news. A few months later, on April 2 2009, Madoff pleaded guilty to charges that he carried out an epic fraud that robbed investors around the world of billions of dollars, admitting he began operating a giant Ponzi scheme in the early 1990s in response to the recession.

Back in December, Madoff’s assets and those of the firm had been frozen and, according to federal charges, Madoff admitted that his firm had “liabilities of approximately US$50 billion.” Since the case came to light victims, including prominent celebrities, seasoned investors and many banks, including several from outside the US, have reported that they have lost billions in US dollars as a result of fraudulent activities.

What’s more, the mess couldn’t have come at a worse time. During a period when stock markets are falling, it does beg the question of why so many wealthy and sophisticated savers were conned into believing that Madoff had come up with an investment strategy that allowed him to pay such handsome returns? After all, if something in this world sounds too good to be true, that’s usually because it is too good to be true. One unnamed senior regulator, who has been involved in formulating public policy for many years, was quoted in the New York Times as saying the reason these people were conned is depressingly simple: “People are prone to believe what they want to believe,” he said. “In rising markets, a kind of irrational euphoria takes hold in which we are not inclined to ask ourselves difficult questions.”

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Scrutiny The massive bailout of the American financial system in October last year underlined the concept that our banks are ‘too big to fail.’ In other words, banks are of such importance to the world’s financial system that governments would rather prop them up with public money than allow them to suffer the consequences of their own greed or incompetence and – in his own way – Madoff is the same as these banks: an investment advisor too respectable to scrutinise.

So now, as if the housing crisis, liquidity freeze, deepening recession and a prospect of deflation weren’t enough for the world’s financial system to deal with, we also have the Madoff affair pulling at the strings of the economy.

Hedge funds for example have been in a downward spiral for months, as, in response to the worrying economy, investors have been pulling money out fast. Even supposedly untouchable portfolios such as those at Chicago based Citadel Investment Group have lost half their value over the past 12 months. Despite this, Wall Street had remained optimistic that investors would stick by hedge funds if the markets stabilised, thereby buoying the industry’s fortunes. But as the list of victims affected by the Madoff scandal continues to grow, hopes for the future of hedge funds looks increasingly bleak.

Reports now indicate that investor confidence has sunk to an all-time low, and it could take years for managers to regain the trust they once had. Economists have gone on to predict that the industry that emerges from the other side of this crisis will most likely be considerably smaller, humbler and cheaper than the one that began 2008, with near US$2 trillion in assets. Claude Le Ber, CEO of Geneva-based Banque Safdie SA, who

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“During a period when stock markets are falling, it does beg the question of why so many wealthy and sophisticated savers were conned into believing that Madoff had come up with an investment strategy that allowed him to pay such handsome returns?”

three years ago withdrew money invested with Madoff, has said that the scandal will likely mean considerably more hedge fund regulation.

“What Madoff has done is highlight the lack of regulation,” Le Ber said during a press conference in Geneva back in February. “Even before Madoff, the hedge fund industry was seeing redemptions and wasn’t producing absolute returns.” Safdie, with €4.6 billion under management at the end of 2007, was the second Swiss bank after Credit Suisse Group AG to disclose withdrawals of money from Madoff before he confessed to swindling investors. “A lot of Swiss private banks were hurt,” Le Ber continued. “He was able to cultivate a circuit and put people in a position where they felt that opening an account was doing them a favour.” Le Ber even added that Bank Safdie withdrew money that it had placed with Madoff back in 2005 because it wasn’t getting enough information about the investment.

Global ramifications On December 15 last year, three days after Madoff’s arrest, a number of Europe’s largest financial companies revealed their exposure to the fraud. Most notably were Spain’s Banco Santander, Iberian rival Banco Bilbao Vizcaya Argentaria and France’s BNP Paribas, who all confirmed losses to address the growing concerns of their investors. Later, troubled Benelux bank Fortis said that its Dutch subsidiary had indirect exposure of somewhere between €900 million and €1 billion to Madoff’s investments, while French insurance giant Axa also revealed potential losses in the range of €108 million.

What’s more, even those who pulled out of Madoff’s funds before the blow-up happened could be forced to return their proceeds and principal.

Just a few months before Madoff’s arrest, Texan company the Fort Worth Employees’ Retirement Fund pulled US$10 million out of a hedge fund that invested exclusively with Madoff. But now the managers face the possibility of having to give back the money – a sum that includes all of the pension’s purported gains over the years, plus its initial investment.

The consequences of the Madoff scandal seem to be running far and wide. At the beginning of January this year, at the first hearing of the Financial Services Committee on the alleged fraud, both Republican and Democratic House members said the debacle surrounding Madoff reflected deep, systemic problems of the US Securities and Exchange Commission.

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16 years of investigation For over a decade and a half, regulators from the SEC and other agencies conducted numerous examinations at Madoff’s offices, but failed to uncover fraud.

1992: NY SEC sues four individuals for illegally raising US$440 million in what was thought to be a massive Ponzi scheme apparently unrelated to Madoff. The money, however, is managed by Madoff, and is both intact and redistributed back to investors.

1999: SEC in Washington DC opens limited examinations into Madoff and two other firms to review trading practices. SEC finds violations in trade executions and Madoff says he will address them.

2004: SEC in Washington DC open a limited exam looking into whether Madoff is front-running his market-making trades to benefit hedge fund clients. SEC finds no violations and refers the case to its New York office.

2005: NY SEC opens a limited examination looking into suspicious emails found during the review of a hedge fund as well as news stories that raised questions about Madoff’s consistent returns. The SEC issues a delinquency letter citing execution and trading violations.

Nov. 2005: SEC investigators in New York meet with Harry Markopolos, a former executive of Madoff’s who, in a 21-page presentation, suggests Madoff is running the world’s largest Ponzi scheme 2006: SEC NT staff opens an enforcement investigation. The SEC finds that Madoff and one of his clients misled the agency about investors in the past about its money-management business. Madoff agrees to register as an adviser and the SEC closes the investigation 22 months later.

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“Clearly our regulatory system has failed miserably and we must now rebuild it,” said Representative Paul Kanjorski, a Democrat who chaired the hearing, adding that the scandal “fell through the cracks” of the regulatory system. “It now appears that regulators should have detected the Madoff wrongdoing earlier because of the red flags raised by others.”

And now Madoff has pleaded guilty to his crimes. “I am actually very grateful for this opportunity to publicly comment about my crimes, for which I am deeply sorry and ashamed,” he had told US District Judge Denny Chin when he appeared in court in April this year.

He also commented that when he started the fraud he believed it would be short and he could extricate himself. “As the years went by,” he continued, “I realised my risk, and knew that this day would inevitably come. I cannot adequately express how sorry I am for my crimes.”

While the fraud turned the respected money-lender into a global disgrace, making his name synonymous with the current economic recession, it also ate up life savings, wiped out charities and apparently pushed at least two investors to commit suicide. Prosecutors now say that the shamed financier, who spent the three months between his capture and his court hearing under house arrest at his US$7 million penthouse in Manhattan, could now face a maximum sentencing of 150 years in prison.

One thing is clear and that is the fact that ramifications of this cataclysmic event will be felt for years to come. Without the huge source of ready money, both from funds of funds and bank credit lines, hedge fund returns will suffer even after the markets eventually bounce bank. 

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CLOSE-UP: WHAT IS A PONZI SCHEME?

A Ponzi scheme is a fraudulent investment operation that pays returns to initial investors out of the money paid in by subsequent investors rather than profit.

The Ponzi scheme usually offers abnormally high short-term returns in order to entice new investors. The perpetuation of the high returns that a Ponzi scheme advertises and pays requires an ever-increasing flow of money from investors in order to keep the scheme going.

The system is destined to collapse because the earnings, if any, are less than the payments.

The scheme is named after Charles Ponzi, who became notorious for using the technique after emigrating from Italy to the United States in 1903. Though Ponzi did not invent the scheme, his operation took in so much money that it was the first to become known throughout the US. It was, in theory, based on arbitraging international reply coupons for postage stamps, but soon diverted investors’ money to support payments to earlier investors and Ponzi’s personal wealth.

PONZI’S THROUGH HISTORY FST investigates some the nastiest Ponzi schemes in history Sarah Howe (1880) Boston-based Howe promised women eight percent interest on a “Ladies Deposit.” She claimed the money she took was for women-only, selling an implicit assumption of safety. In fact, she just took the money and ran.

Enrique, Osvaldo and Freddy Villalobos (1980s) The Villalobos, three Costa Rican brothers, defrauded clients out of $400 million in a 20-year unregulated loan scheme. Its staying power had to do with the fact that margins were low, the brothers were disciplined, and the outfit just barely skirted past laws.

Lou Pearlman (1980s) Art Garfunkel’s cousin Pearlman, who was also former manager of boybands *N Sync and the Backstreet Boys, offered investors attractive returns. But his scheme was not, as he claimed, FDIC-approved and he conned investors out of nearly US$500 million.

Gerald Payne (1990s) In the 1990s the Greater Ministries International church, led by minister Payne, offered worshippers investments in gold coins. The investment plan would then “double the ‘blessings’ that people invested.” US$500 million later, the Feds caught Payne – but most investors never got their money back.

Haiti co-operatives (2001) Selling themselves as government-backed “co-operatives,” Ponzi schemes popped up all over Haiti in the early 2000’s. As a result, people felt safe investing more than 60 percent of Haiti’s 2001 GDP into the fake schemes.

Reed Slatkin (2001) Earthlink co-founder and Scientology minister Slatkin posed as a brilliant investment advisor for A-list Hollywood residents and corporate bosses.

Working out of his garage, Slatkin cheated the rich and famous out of roughly $593 million.

Michael Eugene Kelly (2006) Mexican resort owner Kelly schemed retirees and senior citizens out of US$428 million, offering them timeshare investments in Cancun hotels that he called “Universal Leases.” Kelly, meanwhile, bought himself a private jet, racetrack and four yachts.

Allen Stanford (2009) In early 2009 financier Stanford was charged with multiple violations of securities laws for alleged ongoing fraud involving US$8 billion in certificates of deposits. After raiding three of Standford’s offices, the SEC amended its complaint to describe the alleged fraud as a massive Ponzi scheme.

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EXECUTIVE INTERVIEW

PICTURE PERFECT eCopy’s Justin Bailey discusses the need for financial organisations to implement document imaging solutions and the benefits that come from using electronic workflow systems.

With a huge focus on compliance, what role can document imaging solutions play in preventing lapses and failures in compliance policies?

Justin Bailey. There is increased pressure on financial organisations to comply with stringent controls and legal requirements such as FSA regulations and data protection – and to maintain audit trails to demonstrate this. By incorporating paper documents into an electronic workflow, organisations can easily and efficiently track and present this information when needed.

To help prevent lapses and failures in compliance policies, organisations need to classify their data. Company leadership should be advised to make smart investments in solutions that are easily incorporated into an employee’s day-to-day activities as well as deliver a proven ROI. Document imaging solutions extend the capabilities of existing applications and have an ease of use that is critical to staff adoption.

When these solutions introduce paper-based data into an electronic workflow, information is classified at the point of entry, minimising possible failures to follow the business process.

Intelligent document routing, allowing scanned documents to be forwarded via email or collaboration tools, initiates this process and automatically generates an audit trail.

A huge amount of information flows into financial institutions on a daily basis. How can document imaging solutions help make sense of this huge volume of data?

JB. Document imaging is a great equaliser of today’s information explosion – transforming paper to actionable and dynamic data, levelling the playing field for organisations struggling with data overload.

Financial institutions have increased the amount of documents in electronic format, but much is still paper based and not incorporated into the company’s business processes. By incorporating paper documents into an electronic workflow, document imaging solutions allow

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Justin Bailey brought over 22 years experience in solutions sales to eCopy when he joined in 2002.

As Vice President of sales for EMEA, he heads eCopy’s extensive sales and channel management organization in these regions. Prior to joining eCopy, he built his expansive knowledge and deep experience at Canon UK Limited, having held various sales and sales management positions.

data to be managed in the same way and its value realised by employees.

Once scanned, documents can be routed directly to the right people and easily used in automated processes and business applications.

Document imaging solutions can provide a complete and controlled workflow, turning paper into data as it is scanned.

As budgets are tightened across the industry, many companies are being forced to do more with less. How can document imaging help overcome this challenge?

JB. Document imaging has a proven record of ROI. Companies unable to provide audit trails

and suffering employee inefficiencies should be asking why they have waited this long to make this type of investment.

For managers tasked with getting a higher return on current investments, eCopy provides a low-cost, easy-to-use ‘paper information’ distribution and management solution. Document capture is no longer considered as a technology running in a silo location; it is an integral part of a business process that can be leveraged and used by many business areas within an organisation.

Not only does a document imaging solution help to justify investment in existing infrastructure, it can also increase productivity by improving business processes. Automating the capture and workflow process can cut the average cost of document management by up to 80 percent by reducing manual document handling by knowledge workers, meeting compliance criteria through auditable business processes and providing fast ROI through quick deployment.

Considering the damage the loss of customer data can do, what measures exist to protect paper-based sensitive data, before it is stored on company systems?

JB. Research shows that 88 percent of IT administrators would steal sensitive company information if dismissed – so loss or theft of data is clearly an issue that organisations, particularly in the financial sector, need to address. By integrating the information into a document management solution at the point of entry to the business, the original can either be destroyed or held offsite to comply with regulatory requirements.

But even data in an electronic workflow can be lost or stolen, so security and access controls must be set at entry point, restricting permissions as to who may view, edit, print or forward the document. Document imaging solutions can generate and enforce a detailed audit trail, including authentication details to improve compliance procedures and guarantee the security of information.

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China Regional Focus:21DEC

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REGIONAL FOCUS

Compared to many nations, China has been relatively spared by the current financial crisis. However, some argue that due to its rigid political system, China’s economy was suffering long before the crunch went global. FST investigates further.

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Shanghai’s skyline

T

here are a lot of good things to be said about the economy of the People’s Republic of China. For many years it has been the second largest economy in the world after that of the United States, with a GDP of €3.3 trillion in 2008, has also been the fastest-growing major nation for the past quarter of a century, and China’s per capita income has grown at an average rate of more than eight percent over the last three decades. However, this rapid growth has been accompanied by rising income inequalities, and, despite China’s size and its abundance of resources, its role in the world economy always remained relatively small.

Since the late 1970s, however, the Chinese government has reformed the economy from a Soviet-type planned economy, which was largely closed to international trade, to a more market socialist-oriented economy that has a rapidly growing private sector and is a major player in the global economy. Since being introduced, these reforms have helped lift millions of Chinese citizens out of poverty, bringing poverty rates down from 53 percent back in 1981 to just eight percent in 2001.

Furthermore, in 2009, the National Bureau of Statistics of China (NBS) published revised figures for the 2007 fiscal year, in which growth actually hit 13 percent, instead of the 11.9 percent initially stated in provisional fig-

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ures. China recorded its fastest growth since 1994 and economists now predict that there is potential for China to maintain relatively high economic growth rates for years to come. Some are forecasting that China will be the world’s largest exporter by 2010.

However, cynics suggest that urbanisation in China, along with technological progress and catch-up with developed countries still have decades left to run, and future growth is actually further threatened by both a rapidly ageing population and the costs of damage to the environment.

Of course, no matter how much growth China has experienced in recent years, there can be no getting away from the current economic crisis that is affecting countries across the globe. And though the crunch’s impact on China has been relatively small compared to the United States or countries across Europe, that hasn’t stopped the Chinese government from launching their own Economic Stimulus Plan to specifically deal with the recession.

The plan’s primary focus is on increasing affordable housing, easing credit restrictions for mortgages and SMEs, lowering taxes (such as those on real estate sales and commodities) and pumping more public investment into infrastructure development. In addition to the current global crunch, major natural disasters also impacted China last year, including winter storms, the Sichuan earthquake and the South China floods. And though these incidences only mildly affected national economic growth, they all had a massive impact on local and regional economies and infrastructures.

“There is potential for China to maintain relatively high economic growth rates for years to come, some economists forecasting that China will be the world’s largest exporter by 2010” In fact, regardless of the effects of the current recession, some economists believe that China has been plagued by an economic crisis for more than 18 months now, affecting the country’s ‘real economy’ and therefore being more potent than the financial crisis sweeping the US and Europe.

Chinese economist He Quiglan claims that the cause for China’s financial troubles arise from its economic structure and have little to do with the current crisis that started in the US. She argues that the global crisis is only responsible for reducing Chinese foreign exchange reserves, but in no way bears responsibility for China’s own economic mess. In fact, it is Quiglan’s understanding that China’s economy has driven itself into a hopeless condition, given its political and economic system, and in November last year she told Chinese newspaper The Epoch Times, “After the eruption of the financial crisis, China jumped immediately at the opportunity to blame its economic crisis on the US, but in reality this is far from the truth. The Chinese regime used every opportunity during the 2008 Beijing Olympic Games to present ‘A Strong China,’ but alas, a recession had already appeared throughout China in 2008.”

Reaching out Whatever the reason for the crisis, most economists do agree that the situation in China is not nearly as bad as that in the US or Europe. And cer-

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tainly not as bad as in neighbouring Hong Kong. In fact, this month China announced that it will issue more yuan-dominated bonds in Hong Kong to make it easier for firms there to borrow money and sell goods on the mainland and help it fight off the crisis.

Badly hit by the squeeze, Hong Kong is leadership has forecast that the economy there will shrink by three percent this year, its first full year decline since 1998 – at the height of the Asian financial crisis.

“Allowing Hong Kong banks on the mainland to issue renminbi bonds in Hong Kong will help promote the development of the local bond market and further reinforce Hong Kong’s position as an international financial centre,” the Hong Kong government said in a statement issued at the start of April. These new measures were announced after Hong Kong Chief Executive Donald Tsang met with Chinese Premier Wen Jiabao, and under the new plan, the Chinese government will facilitate borrowing by Hong Kong enterprises and be allowed to use their assets as collateral in securing loans of Hong Kong banks in China. “We believe that the implementation of this measure will help alleviate the financing problem of Hong Kong enterprises on the mainland,” the statement also read.

However, others are arguing that there are intense problems with the Chinese stimulus package and that it is destined to fail. The main issue is that it has been funded by either loans from state owned banks or by local governments, and it now appears that the bad loans on the books of China’s banks are about to get far worse. According to one report in the Financial Times, the banks already lent out Rmb4580 billion, almost equal to the Rmb5000 billion that they had planned to loan out across the entire year. And, as if to add insult to injury, these loans seem to have gone to the wrong place.

It now seems that smaller Chinese companies, particularly those in export-oriented technology and electronics manufacturing sectors, are really hurting. They have not received any of the stimulus money, which has instead gone to the large state owned industries. As credit has dried up, these sectors have been forced to increase their credit from their suppliers.

In fact, the amount of credit extended has gone up to over 90 percent and,

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FACTFILE: CHINA as might be expected with the rising problems, the cost of insuring customers defaulting has increased by 30 percent.

All this means that while huge quantities of money are going to inefficient state owned companies, smaller, more agile exporters, who are responsible for much of China’s past growth, are getting nothing. Many are now worried that the stimulus in China will only result in a temporarily stock market rally: one that will not sustain any real growth.

However, it falls to Chinese Premier Wen Jiabao to have the final world on China’s economy. He announced in a recent statement that the economy is performing better than expected this year, mainly thanks to the government’s stimulus efforts.

His speech, made at Boao Forum for Asia in China’s southern Hainan province in April, said that since Beijing implemented its stimulus policies, investment growth has speeded up, consumption has been relatively strong and domestic demand has risen. “As a result,” he continued, “economic performance has shown positive change, and the situation is better than expected.”

The speech was made before regional business and political leaders who were attending the conference, and Wen went to on to say that consumption growth has been especially fast in China’s traditionally less prosperous central and western regions. Yet, despite the resolutely bright demeanour, Wen also warned that China should be prepared for ‘prolonged difficulties’.

“We need to acknowledge that the global financial crisis is continuing to spread, and we need to be aware that the basic trend of the recession hasn’t changed either. The problems haven’t yet been solved. The deterioration of the real economy has been worse than expected, and global economic recovery could be a relatively long and complicated process.”

Pointing to discussions that had taken place at the G20 summit in London, Wen urged a larger voice for developing countries in the global financial system, and called for strengthened monitoring of the policies of economies that issue reserve currencies – an implicit reference to the US and the dollar.

Capital: Beijing Population: 1,321,851,888 GDP: €3.348 trillion Public Debt: 18.4 percent of GDP Gross national income (per capita): €670 Wen added that all Asian nations need to work together to deal with the economic crisis: “Asian nations should take measures to reduce impediments to trade in the areas of customs, inspections, logistics and the flow of people between nations,” he said. “They should also further develop the region’s bond markets to better use regional funds to promote economic growth in Asia.” Lastly, Wen used the closing words of his speech to reiterate that China is ‘resolutely opposed to protectionism.’

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The collapse of the banking system has already rocked the small country and now economists are using Iceland as a textbook case of how to ruin a nation’s economy. FST’s Matt Buttell investigates how Iceland can save itself from truly sinking.

I

celand’s economy has always been small and subject to high volatility. It has also always been a mixed economy, with both high levels of free trade and government intervention; however, until last year, government consumption had always been less than in other Nordic countries.

Back in the 1990s, for example, Iceland began extensive free market reforms, which initially produced strong economic growth.

At the time, Iceland was rated as a having some of world’s highest

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levels of economic freedom. Then, in 2007, Iceland obtained the highest score on the Human Development Index and was considered as having one of the most egalitarian economies in the world.

However, over the last two years the economy has faced massive problems of growing infl ation and current account deficits.

In response to, and as a result of, the earlier reforms the financial system both expanded rapidly and then entirely collapsed. Iceland was forced to obtain emergency funding from both the International

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FACTFILE: ICELAND Monetary Fund (IMF) and a range of other European countries to try and stabilise the economy.

But now, having included the failings of all three of the Iceland’s major banks, the Icelandic financial crisis is the largest suffered by any country in history – at least relative to the size of its economy. So how did it happen and how will the repercussions of the crisis shape the future?

The problems began on September 29 last year when the Icelandic government stated that it intended to nationalise the Glitnir bank by acquiring a 75 percent share for €600 million. While the government had stated it did not intend to keep the ownership of the bank for a long period of time, the nationalisation never actually went ahead as the bank was taken over by the Icelandic Financial Supervisory Authority (FME) before the initial stake could be approved. On the same day, Landsbanki was also taken over by the FME, and, soon afterward, the same organisation placed Iceland’s largest bank, Kaupthing, into receivership as well. Then Prime Minister Gein Haarde remarked of the emergency measures, “There was a very real danger that the Icelandic economy could be sucked up with the banks into a whirlpool, and the result could be national bankruptcy.” In addition, he also noted how the actions that had now been taken by the government would prevent such a catastrophe from ever happening.

Yet, at the end of the second quarter of 2008, Iceland’s external debt was at €50 billion, with more than 80 percent of that being held by the banking sector. In January 2009 Haarde announced he would step down as chairman of the Independence Party at the next party congress, citing health problems as a reason for this decision. On the same day he announced that an early general election would be held on May 9th, in which he would not stand as a candidate.

Then, three days later, after weeks of widespread protests because of the banks’ collapse, he announced that he and the Social Democrats would not continue in the coalition government and Jóhanna Sigurõardóttir from the Social Democratic Alliance replaced Haarde as Prime Minister on February 1st.

“We need a strong government that works with its people,” Sigurõardóttir explained after her installation as the head of the interim coalition in February, and while doubts still remain as to whether she can retain power after May’s elections, it has to be noted that Sigurõardóttir’s approval rating sat at 73 percent back in November – marking her as the only Icelandic minister to see her popularity improve on the previous year’s score.

“It’s a question of trust,” explains analyst and political scientist Olafur Henderson. “Icelanders believe that she actually cares about people.”

Undoubtedly though, her main task will be stewarding the economy, which, following the collapse of all of Iceland’s major banks and the countries negotiation of €7.5 billion in bailout loans, is in turmoil.

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Capital: Reykjavik Population: 313, 376 GDP: €11,954,004,03 Public Debt: 27.6 percent of GDP Gross national income (per capita): €120,714 Even with the loans currently being held as foreign currency reserves and those banks that were last year nationalised now once again open and trading, Iceland still owes millions of pounds to foreign depositors.

Help needed When the IMF agreed to lend Iceland the funds to both support its falling currency and permit international money transfers, it was done on the agreement that Iceland would adopt the IMF’s recovery programme and repay the loans between 2012 and 2015.

Now, according to the IMF itself, the work to restructure the country’s economy has already been successful. In a statement made by the IMF back in March, “The crisis has led to a sharp drop in economic activity, but a late-year turnaround remains within reach.” The statement went on to detail how the króna has now stabilised, and inflation appears to have peaked – indicating that the programme is delivering the necessary results.

What’s more, reports from the G20 conference, held in London at the beginning of April, indicates that US President Barack Obama even told the Icelandic foreign minister that he [Obama] wished to come to Iceland in the near future, stating that, “although Iceland was the first country to go down, it will be one of the first countries to go up again.”

Nonetheless, the news that the IMF’s recovery programme is working has raised questions among Icelanders as to why, if it is this easy, other struggling countries have not signed on to the IMF. Some are running scared, wondering why those countries that have accepted IMF assistance in the past – such as South Korea and Argentina – remain so bitter about the experience?

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Some believe that the IMF’s entry into the country is merely a subterfuge for gaining control over the nation’s resources and John Perkins, author of The Confessions of an Economic Hit Man, bluntly announced on Icelandic television that, “the IMF is here to serve the corporatocracy and is not here to serve the Icelandic people.” He added, “In every case where countries have gone along with IMF policies, it has caused tremendous disruption.”

“At the end of the second quarter of 2008, Iceland’s external debt was at €50 billion, with more than 80 percent of that being held by the banking sector” Perkins also noted that the same people who imposed the IMF austerity programs on debtor countries are the same people that are now advising Obama to expand the money supply, to engage in new spending programs, and to increase the social safety net.

Alongside Michael Hudson, author of Super Imperialism, Perkins’ television appearance earlier this month set the Icelandic blogosphere in overdrive. Both Hudson and Perkins shared the belief that Iceland’s best course would be to default on its foreign loans (much like Argentina has done) and strongly assert control over its resources before they are taken away all together.

In response to the comments made by both Hudson and Perkins some of Iceland’s most prolific commentators have expressed shock, dismay and anger: The country’s largest paper, Fréttablaõiõ, quoted Iceland’s minister of finance, Steingrímur J. Sigfússon, as saying that revoking the IMF was “out of the question” – though he did acknowledge being released from it as soon as possible was advisable.

With such disparity, it is hard to believe that just a few years ago Iceland had much to be proud of. The good times were rolling in fast:

business was booming, society overfed and the capital was the destination for travellers, culture lovers and rich revellers alike. When Iceland topped the UN's Human Development Index for its high standard of living, literacy and life expectancy, the tiny community of 300,000 felt they had proved their educated, hard-working and resilient character on an international scale.

With the growth that came, few stopped to consider whether their swift financial ascent would end in an equally swift plunge into troubled waters. In many ways, Icelanders were too busy flying off on vacation, investing in art, buying cars and enjoying the growth too much to care – indeed Iceland soon gained a heady reputation as one of the top car-owning countries in the world.

Then, almost overnight, the nation’s three main banks were nationalised and declared bankrupt, and any Icelander who had bought such status symbols or invested in luxury properties with foreign loans found the value plummeting as repayments soared. Then the króna fell to one quarter of its value before trading in it was suspended, and thousands of hard-working retirees that had placed their life savings in stocks with these banks saw every penny disappear.

“The feeling is that we are unable to look after our own affairs,” explained leading Icelandic novelist Hallgrimur Helgason after the collapse. “We were on our own for years and we went too far, too fast, in too little time. We behaved like children and the first thing we did when the stock market opened 10 years ago was go to London and buy toy stores and candy stores. Now we are bankrupt and there will be no money for years to come and we have more debts than we can ever repay.”

Helgason paints a bleak picture. Today, as work to try and stabilise the economy continues, the blame for the collapse seems to be falling on greed, corrupt politicians and a lack of financial regulation. There are even predictions that things will get much worse, as Iceland – which has in the past survived nationwide famine, volcanic eruptions and a smallpox epidemic – not only has to tackle the world’s worst man-made disaster, but also has face the fact that they are to blame for it too. 

Downtown Reykjavik, Iceland www.fsteurope.com

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AWAY ON BUSINESS Hong Kong As one of Asia’s most breathtaking destinations, Hong Kong is a hotspot for both business and pleasure. FST checks out what’s on offer.

About Hong Kong has a population of seven million people, but at only 1108 km2 it is actually one of the most densely populated areas in the world. Renowned for its expansive skyline and natural setting, Hong Kong is also one of the world’s leading financial capitals, and is a major business and cultural hub, having maintained a highly developed capitalist economy for decades.

Getting around Over 90 percent of daily travels in Hong Kong are made on public transport, making it the highest used network in the world. A tramway system covers the northern parts of Hong Kong Island, while across the Victoria Harbour, the Star Ferry service provides panoramic views of Hong Kong for its 53,000 daily passengers.

Elsewhere, the Peak Tram provides vertical rail transport between Central and Victoria Peak, and in the Central and Western districts there is an extensive system of escalators and moving pavements, providing access to Hong Kong’s steep and hilly terrains.

From the airport Hong Kong International Airport is the leading air passenger gateway and logistics hub in Asia, serving more than 47 million passengers each year. The airport is one of the most accessible in operation today, designed for maximum convenience, with moving walkways and an automated people mover allowing quick and easy movement throughout the building. The North Lantau Highway on Lantau Island connects the airport to inner Hong Kong; it can also be reached via the Airport Express, a dedicated rail link, and bus, taxi and ferry services.

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Hong Kongs’ Peak Tram

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Where to make the € Hong Kong is one of the world’s leading financial centres, with the Index for Economic Freedom ranking its highly capitalist economy as the freest in the world for 15 consecutive years. It is an important centre for international finance and trade, with one of the greatest concentration of corporate headquarters in the Asia-Pacific region.

It is also known as one of the Four Asian Tigers for its high growth rates and rapid industrialisation between the 1960s and 1990s.

The Hong Kong Stock Exchange is now the sixth largest in the world, with the second highest value of initial public offerings after London. Hong Kong is also the world’s 11th largest trading entity, with the total value of imports and exports exceeding its GDP. Hong Kong’s economy is dominated by the service sector, which accounts for over 90 percent of its GDP.

Hong Kongs financial district

Where to spend the €

Sai Yeung Choi

Shopping areas throughout Hong Kong Island, Kowloon and the New Territories feature stylish malls, department stores and open-air markets, and well-designed shopping megamalls cater to every taste and budget.

While vast emporiums combine a who’s who of international designers with boutiques that showcase local talent, clusters of hip and trendy shops feature alternative labels. Real hotspots include the fashionable Causeway Bay, designer-heavy Tsim Sha Tsui and the cutting-edge Mong Kok, and savvy shoppers will want to visit themed shopping streets like the Jade Market, Sai Yeung Choi and Goldfish Market.

Eat Tien Yu For Hong Kong’s best dim sum meal with a view, head to this multi-level contemporary restaurant on the Peak.

Dim sum €4 – €5 Yan Toh Heen One of Hong Kong’s top Cantonese eateries, this elegant restaurant offers a daily changing menu, listing two-dozen varieties of dim sum.

Dim sum €4 – €6

FAST FACTS • The saying ‘Only mad dogs and Englishmen go out in the midday sun’ originated in Hong Kong: Noel Coward wrote the words referring to the Noon Day Gun in Causeway Bay, which has been fired every day at midday since colonial times.

• With over 8000, Hong Kong has the most skyscrapers in the world. Classified as buildings with more than 14 floors, that’s almost double that of New York.

• Hong Kong’s official name is the tongue-twisting Hong Kong Special Administrative Region, or Hong Kong SAR.

Traditional dim sum

Sleep Four Seasons Hotel Hong Kong Overlooking Victoria Harbour and the financial district, this elegant property redefines luxury and excellence with exceptional accommodation that is ideal for business travellers.

399 rooms available. Deluxe harbour rooms from €720 Kowloon Shangri-La Hotel This property is conveniently situated in the Tsim Sha Tsui shopping district with easy access to the Hong Kong skyline, financial district and busy Victoria Harbour areas.

Over 700 rooms available. Double rooms from €312

www.fsteurope.com

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G20 FOCUS

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Quote/Unquote

At the recent G20 Summit in London, world leaders convened to discuss how they would tackle the global financial crisis. FST rounds up some of their choicest comments.

“I think the new world order is emerging, and with it the foundations of a new and progressive era of international co-operation” British Prime Minister Gordon Brown

“I would like to say that this is a turning point, but as a responsible man I cannot. [But] 20 or 25 years ago, one could not even imagine that such different countries with such different economies, such different mentalities and historic traditions, would sit at the table and agree in such a difficult situation on how to act, especially so quickly” Russian President Dmitri Medvedev

“It is a victory for reason that the things that got us into this crisis are not allowed to be repeated. That is what I wanted. We have succeeded, with British help, to convince everyone that such a list is possible” Angela Merkel, the Chancellor of Germany

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“Today’s agreement begins to crack down on the cowboys in financial markets that have brought global markets undone with real impact on jobs everywhere” Australian Prime Minister Kevin Rudd

“I don’t think we’re going to turn the corner on this recession tomorrow, but I do think markets can rest assured. The worst aspects of instability, I do believe, are behind us” Stephen Harper, the Prime Minister of Canada

“We have set in motion the greatest concerted plan of fiscal expansion in history. It is unprecedented. It reaches five trillion [and] this amount will contribute to facilitate a recovery of the world economy and preserve millions of jobs” Spanish Prime Minister, Jose Luis Zapatero

“I have no doubt that the steps that have been taken are critical to preventing us sliding into a depression – I think we did OK” US President Barack Obama

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IN REVIEW A good read FST takes a quick look at what some of this quarter’s best business book releases have to offer

Supercapitalism

The Battle for Democracy in an Age of Big Business, by Robert Reich (Icon Books) Supercapitalism sets out a clear argument for a vibrant capitalism and a concurrent, equally vibrant democracy in which business and politics should be kept distinct. Reich, a former US Secretary of Labour under Bill Clinton, argues how capitalism should be made to serve democracy and not the other way around.

FST says: Supercapitalism is both timely and authoritative, and is essential reading for anyone who has an interest in politics, business and economics.

Managing the Human Factor

How to win over staff and influence business managers, by David Lacey (Wiley) With the growth in social networking and the potential for larger and larger breaches of sensitive data, it is vital for all enterprises to ensure that computer users adhere to corporate policy and project staff design secure systems.

FST says: Written by a security expert with more than 25 years’ experience, this book examines how fundamental staff awareness is to establishing security, and addresses such challenges as containing threats, managing politics, developing programs and getting a business to buy into a security plan.

Schneier on Security

Schneier on Security (Wiley) Today, people are doing more in the name of personal security than any time in history. But is it really making a difference? Are people really safer? In this challenging book, Schneier unveils the reality behind current security practice in a collection of his most recent and important writings.

The collection features some of the most informative security issues and looks at the price people pay when security fails.

FST says: With topics that look at everything from identity theft, to the threat of unchecked presidential power, this is a book for all IT and corporate professionals and those individuals with security concerns.

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Financial Services Technology Summit 24Th-25Th November 2009 Virginia, USA The Financial Services Technology Summit is a three-day critical information gathering of C-level technology executives from the financial services industry.

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G20 FOCUS Face off The most dramatic crackdown on tax havens was unveiled at the 2009 G20 summit in London, paving the way for the naming and shaming of countries that fail to comply with internationally agreed standards. Here, FST looks at apposing views on the subject.

Nicolas Sarkozy President of France

A

t the Summit in London last month, France and Germany were unhappy with a G20 draft statement on resolving the financial crisis, and pushed leaders for more international regulation.

“In the current state of things, the projects don’t suit France, or Germany,” French President Nicolas Sarkozy had told Europe1 radio, citing a conversation he had with German Chancellor Angel Merkel the day before. “No agreement is secured,” he continued, “I know by experience that we will need to fight until the last minute.”

Sarkozy and Merkel both suggested that US President Obama’s substance could “end up playing second fiddle to his style” by the time the meeting was over; what’s more, while saying he had “confidence” in Obama, Sarkozy still warned that France and Germany would reject “false compromises” and considered concrete steps on tax havens, hedge funds and ratings agencies to be crucial.

Both France and Germany want definitive agreements on tax havens and action on other regulatory issues, and Sarkozy argued that, “without new regulation there will be no confidence.”

In fact, the French President threatened to walk out of the Summit unless participants agreed to his proposals to radically reform global financial regulation and what he termed “AngloSaxon” business practices. He said tax havens should be more transparent and accountable, adding, “we want lists of financial centres that do not co-operate and we want to draw on the consequences of that.”

Meanwhile, Merkel has said that while she and Sarkozy had both come to London in a very constructive mood, neither wanted to see results that have no impact in practice.

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Gordon Brown British Prime Minister

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he summit provided British PM Gordon Brown with the opportunity to issue a blunt warning to individuals and corporations that invest in renegade tax havens, saying that their money would be unsafe. “People will increasingly see that it is unsafe to be in a country which still wants to declare itself as a tax haven,” he had cautioned.

“There will be no guarantee about the safety of funds there,” he continued. “If tax information is exchanged on request, as these countries have agreed to do, then the benefits from being in these countries will diminish every day.”

Brown has also suggested that the G20 summit has persuaded many tax havens, such as Switzerland and Liechtenstein, to indicate that they will adopt a more open approach in the future.

What’s more, we now know that within hours of the agreement, which was only concluded in the final minutes of the summit, the OECD was issuing a list of countries that fail to comply with its guidelines. However, reaching the agreement involved a great deal of back and forth action, with Sarkozy objecting to a lack of a list and the Chinese objecting to the existence of one. According to the US version of events, it was President Obama who took Sarkozy aside, then the Chinese delegation, before bringing the two sides together to seal the deal. “We finished a very productive summit that will be, I believe, a turning point in our pursuit of global economic recovery,” said Obama.

It has since transpired that it always Brown’s intention to have Obama make the final statement at the meeting, having asked him to do so following their initial hour-long meeting when Obama first arrived in London.

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CATALOGUE PAGE FST EU:apr09 23/04/2009 15:00 Page 143

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Business Management

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SORENSEN FINAL WORD:dec08 23/04/2009 14:33 Page 144

FINAL WORD Leading by example

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Perhaps we shouldn’t be so quick to judge employees who break the rules, says Marianne Sorensen.

f you knew you were about to lose your job, what would you do? It seems that many would make the pre-emptive move of grabbing all the company data they can get their hands on so that it won’t just be the severance package they walk out with. In a survey called The Global Recession and its Effect on Work Ethics by IT Security firm CyberArk it is suggested that a surprisingly large number of employees are prepared to break the rules in times of crisis.

The figures are striking, more than half of the respondents, drawn from workers in London, Amsterdam and New York, admitted that they had already downloaded sensitive data that they planned to use as a bargaining tool in their search for a new job. Slightly surprisingly given their reputation for being laid back, the Dutch were the worst offenders. A staggering 71 percent of respondents in the Netherlands admitted that they would do this if their job was hanging in the balance.

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But this willingness to bend the rules also has some more positive impacts, at least from a business perspective. About one third of those polled said they would accept 80-hour work weeks if that was the only way to keep their jobs. Around a quarter would accept pay cuts rather than face redundancy in such a harsh climate. All this serves to demonstrate exactly how uneasy workers feel about their current prospects.

Predictably though, it is the stats about staff stealing data that will draw the strongest reactions. But perhaps we shouldn’t be so shocked by these revelations. Desperate times call for desperate measures, and there is very little a human being won’t do if it feels threatened. There’s also the uncomfortable feeling that business has to bear some responsibility for this. The reason so many workers are currently living in fear of losing their jobs is because of a crisis brought on in large part by irresponsible business practices. While few are suggesting that anything outright ille-

gal went on, it’s generally accepted that many of our current problems spring from certain companies and individuals operating at the very limits of acceptability.

Huge levels of toxic debt were racked up, while essentially worthless financial products were traded with wild abandon.

Since everything started falling apart, the standard statement has been that no one could have seen this coming. As explanations go, it’s pretty weak. The average worker in the financial industry is no idiot, so the idea that the credit crisis is one massive surprise is pretty hard to swallow. If that’s the case, then you have to accept that these business strategies were pursued even though the risks involved were understood by those who were meant to be in charge.

Now put yourself in the position of an employee who is facing the sack. Chances are it’s not your fault that your company is cutting back. The decisions that led to this predicament were likely taken way over your head. As the prospect of walking out of the front door with your possessions in a cardboard box becomes ever more likely, why wouldn’t you seek to give yourself every possible advantage? After all, many of the top people in the industry have managed to hold onto their jobs during this crisis. Even those that have walked the plank have often done so with a chunky payoff in their pockets. It hardly seems fair.

Culture is something that has recently taken on increasing importance in the business world. A company’s culture is often held up as a key differentiator in a competitive market. But culture comes from the top. If leaders bend the rules for their own short-term gain, we shouldn’t be too shocked when employees do so as well. n

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