18 May 2009 Features

 

Banking Technology over 25 years: Journey through the past

Words: David Bannister

For a quarter of a century, Banking Technology has followed the investments the financial services industry has made in IT and the business drivers that have been behind those investments. Looking back, it all seems terribly familiar.

For the past few years, the Out of Office page at the back of the magazine has featured a look back at headlines from issues dating back 20 years. To be honest, we have generally picked out the ones that could have been written for the current issue, but equally, that is very rarely hard to do - the concerns and activities of the industry seem to have been pretty consistent down the years: how do we harness the latest technology to be more competitive?

In the very first issue from May 1984, there is a message of encouragement from Robert Amos, president of the European Financial Marketing Association, that sums up what now might be called a ‘mission statement'. "Constant advances in technology create the need for bankers and all others involved in the financial services industry to continually review their perceptions of the market place and its potential if they are to remain competitive and capable of responding to opportunities as they arise," he wrote. "There is a very real need for reliable and up-to-date information coupled with an independent evaluation of electronic developments worldwide."

Well, it certainly got off to a start with that worldwide approach - the lead story concerns the slow but steady move towards a uniform national linkage for electronic funds transfer in New Zealand. It might sound a bit odd now, but in 1984, New Zealand was ahead in the use of debit cards. So much so, in fact, that there was pressure for manufacturers to supply ATMs that could dispense cash on a 24-hour basis - many only operated for 16 hours a day.

Meanwhile in the US, there could be heard "the first rumble of international disagreement over the smart card". The Americans wanted to move the chip 3mm lower on the card, lest it interfere with the magnetic stripe on the mixed format card that was coming into use at the time. I regret to say that I couldn't find a follow-up story, so I don't know if they got their way.

Inevitably - and another favourite for the Out of Office page - there are the over-optimistic technology predictions. Right there in the first issue is British Telecom offering a private videoconferencing service that allowed "parties hundreds of miles apart to conduct meetings". National Westminster Bank was the first customer, connecting its data centres in Aldgate, London and Kegworth, Leicestershire.

Only last month, in a feature on Unified Comms, we pointed out that environmental concerns and the credit crunch might finally give video conferencing the impetus it needs to become mainstream. Check in again in 2034 to find out the latest on that.

Equally inevitably, the technology was even then being misused: two fraudsters were jailed at the Old Bailey for attempting a $7 million fraud using what prosecuting council Colin Hart-Leverton called a "clever bogus telex message". One of the perpetrators was a telex operator at Credit Suisse First Boston in London: at a crucial stage "he removed the ribbon from the telex machine to prevent it printing out the bogus message that would defeat the miraculous computer system," said Hart-Leverton. Another cunning ruse was to "switch off the machine" while the telex was bouncing around between CSFB, Morgan Guaranty Trust in New York, Le Israel Bank (Suisse) in Geneva and the eventual extraction point at the Geneva branch of Bank Leumi.

Alas, "the computer had a memory of its own and someone at the bank brought back that memory and found the bogus telex ... it was realised that something was very wrong and there had been skulduggery afoot."

That's pretty much the same method that was used in the £229 million fraud at Sumitomo Mitsui Banking Corporation, for which "bogus peer" Hugh Rodley and associates were jailed in March of this year.

It's easy to pick up on things like this, but there are other, subtler things in that first issue that show how much things have changed and yet stayed the same. The cover story, for instance, is part of the "independent evaluation of electronic developments" set out in that letter of encouragement from EFMA.

It concerns a rush by banks to bring out rival treasury workstation packages based on what were still called microcomputers in 1984 (it's an IBM PC AT in the accompanying illustrations, but IBM didn't like people using PC as a generic term - there were more competitors than Apple back then).

The article lists 20 treasury software packages, comparing their functionality much as consumer magazines do with hi-fi systems. From this remove, it is interesting to note that 11 of the systems are from banks, with the remainder from vendors. Of the latter, ADP, Interactive Data and NCR are still around; three of the bank offerings come from Chase Bank, Chemical Bank and Manufacturers Hanover - now presumably somewhere inside JP Morgan - and others from Bank of America, Wells Fargo and Northern Trust.

An in-depth interview with Robert Willumstad, senior vice-president in charge of electronic banking developments at Chemical Bank gives an idea of the commercial drivers that had persuaded it to part with $20 million as an investment in Pronto, its "pioneering home banking service."

Not to put too fine a point on it, the predictions at the time were that over the next five years PC ownership in the US would reach 40 million households, so Chemical was betting just 50 cents a household on Pronto.

It was also betting on the relaxation of US banking laws in the face of electronic systems, particularly as they related to interstate banking. "The use of electronic banking mechanisms has proved to be one of the most important ways in which the US banks have been able to throw off the shackles of interstate banking," Willumstad said.

This would have ramifications beyond just the US, because deregulation would mean, according to the writer, "that the major banks can be expected to apply both their minds and their capital to expand their electronic networks quickly".

That they did so is a matter of history now, but fast-forwarding through the mid-1980s we find that the same concerns raise themselves again and again. That survey of treasury systems became something of an annual feature, and indeed - it has just occurred to me - the May issue remains to this day largely oriented to that side of the industry. I'd always assumed that it was to do with the co-incidence of the International Payments Summit, but perhaps it's the other way round.

Very soon, however, the emphasis shifts towards what the original founders of the paper saw as the main event - the arrival of the US investment banks in London in the wake of the deregulation of the UK markets; London's Big Bang.

By the time of the 3rd anniversary issue in 1987, the treasury software guide is truncated - the market is down to six banks and two vendors, in any case - to allow room for a body-counting piece under the headline "City Shake-Out: Who's left standing?".

In the wake of the Big Bang, competition was taking down some of the established players. In March 1987, Midland Bank subsidiary Greenwell Montagu pulled out of equities market making, having incurred losses of £6 million. Barclays de Zoete Wedd (a precursor of Barclays Capital) and Robert Fleming also withdrew from some equities sector.

The driving force behind this was exactly the same as is currently fuelling the growth of multi-lateral trading facilities - more and more entrants pushing the margins down. Membership of the London Stock Exchange had increased from 246 at the beginning of 1986 to 356 a year later, with markets makers in equities up from 13 to 35 in the same period. The LSE reported that most deals were being done net - free of commission - and spreads had narrowed by 30% to 60%.

If a similar ratio appeared in a press release - from Chi-X, or Turquoise, or Plus Markets, or the LSE itself for that matter - I wouldn't bat an eyelid. So I'm less than surprised to read that the Stock Exchange Automated Quote (SEAQ) market data system "has tended to fragment the market". Peter Quinnen, chairman of stockbroker James Capel, told Banking Technology: "It is not possible to be sure that you are getting the best prices, particularly in the less liquid stocks."

Somewhere in the bowels of HSBC whence James Capel was subsumed as part of the Big Bang shake-out, there is a market analyst poring over spreadsheets comparing the spreads on the new MTFs. (Probably they're running real-time complex event processing models against live feeds and generating three-dimensional heat maps, but the same principle applies, doesn't it?).

Many things have changed over the years, but the investment in systems and understanding the rationale behind that investment remains at the heart of what Banking Technology still aims to do - "we write about whatever it is that banks are spending money on" is as close as I'd get to a mission statement 25 years on.

Obviously, the current financial crisis and its implications for the financial system, market participants and the overall stability of the planet have no parallel in the past, so a May 1987 article by a PA Consulting analyst called Robert McDowell has nothing to tell us about our current predicament.

Which is a shame, because while it concentrates on the increasing overlap between the foreign exchange and money markets, it ponders what would happen if there was to develop an overreliance on computers and mathematical models - Chartism is the dismissive term of the day. "Any modern dealing room will regard Chartism and computer rockets - so-called because they either take off into the stratosphere or explode and fall ignominiously to earth - as merely thought-provoking toys," he wrote.

"In olden days," he continued, "the counterpart of hedging was efficient settlement by the Old Lady herself, the Bank of England. If the balances did not add up, the Old Lady would commit her reserves."

How, suddenly, familiar it all seems. BT

Profiles: Banking Technology asked some of our readers about the changes they had seen over the last 25 years

Bob McDowall, TowerGroup

What role were you doing 25 years ago? 

Operations manager Merrill Lynch International Bank

What role are you doing now?

Research director, TowerGroup.

What was your primary task? Is it still a job? 

Managing the processing, settlement reporting of proprietary and client transactions.

What kept you awake then?

Client risk.

What keeps you awake now?

Very little as I am old and cynical.

25 years ago, did you envisage yourself in banking & finance? 

Yes.

What has been the most pivotal moment for you in the last 25 years? 

The events of the last 18 months.

What has been the biggest change?

The scale of transactions and attendant risk.

Prediction for the next 25 years?

A smaller and more sober business.

Richard Spong, Sterling Commerce

What role were you doing 25 years ago?

Bank manager - Banking Systems Analysis and Specification.

What role are you doing now?

Business process integration technology marketing manager.

What was your primary task? Is it still a job?

Defining detailed business processes and business operational requirements such that accurate, and to some degree future-proof solutions could be designed and implemented by in-house IT engineers.

If still a job, it is certainly not being done effectively, or my current role with an industry technology vendor would be addressing minimal market opportunity, rather than the multi-million dollar opportunities that plainly exist.

What kept you awake then?

The knowledge that, even then, the bank's last surviving IT guru who had the vaguest notion of ‘how it all worked' had retired some years previously.

What keeps you awake now?

The knowledge that many banks have spent many intervening years inaccurately reconstructing what their last IT guru had in his/her head nearly 30 years ago.

25 years ago, did you envisage yourself in banking & finance?

Probably yes.

What has been the most pivotal moment for you in the last 25 years?

The day that a corporate treasurer told me that his bankers would make significant and costly business process changes to keep his business. He was correct, they did. Unthinkable 25 years ago.

What has been the biggest change?

Industry down-skilling has had severe consequences in many banking disciplines. Otherwise, too much that should have changed has not.

Prediction for the next 25 years?

Retail banking as a distinct industry sector will merge completely into the world of multinational commercial enterprises. 

Guy Warren, Misys

What role were you doing then? 

Software engineer: I was working for Honeywell Information Systems which did embedded systems for the CEGB. My first big software project was a monitoring and control system for a nuclear power station.

What role are you doing now? 

Chief executive of the Banking business of Misys

What was your primary task then? Is it still a job? 

To build and design software. The role is still similar, although now it is much more focused on the business drivers and customers than solely technology focused, as it was in those days.

What kept you awake then? 

Waiting for my programmes to be compiled, and getting the listing and punch cards back ...

What keeps you awake now? 

Satisfying the market and analysts. And making sure that our customers are getting what they expect from the software and services we provide them.  Being in tune and sometimes a step ahead of both their needs and the changes occurring in the market changes is vital.

25 years ago, did you envisage yourself in banking & finance? 

Probably. It is an industry that is highly dependent on IT to function - so what we do absolutely matters. I like the demands and the pressures, and the tangible successes that IT can bring to this industry. Imagine ING Direct without IT.

What has been the most pivotal moment for you in the last 25 years? 

My company going into receivership in the early 1990s, Y2K, 9/11, the current financial crisis. I ran a large part of the IT infrastructure at UBS in the late 1990s and the Y2K programme was a huge logistical challenge.

What has been the biggest change? 

Globalisation of both financial companies and the IT industry. The growth of the Indian IT industry has changed the industry beyond recognition and the expansion of financial institutions into multiple geographies creates challenges they could never have envisioned.

Jonathan Butterfield, CLS Bank

What role were you doing 25 years ago?

In 1984, I was running sales and then the company at BankLink in New York. This was the service bureau subsidiary of Chemical Bank that provided electronic banking services to 164 banks around the world. Along with two competitors, we were way ahead of our time in terms of global connectivity, standards, service delivery etc. The, then available, processing and communications costs were shared but much higher than available now on the web. Many banks eventually migrated to their own home grown in-house services which cost many multiples more to operate, but that's progress!

What role are you doing now? 

Communications director at CLS Group.

What was your primary task? Is it still a job?

The company was sold to Fiserv, it is still running and my old job title still exists.

What kept you awake then?

My first experience as a vendor: contracts could be terminated with 90 days notice, then zero revenues. This seriously focuses the mind after coming out of commercial banking with many annuity revenue streams. Four major financial meltdowns later there may not be so much difference these days at least in parts of wholesale banking.

What keeps you awake now?

What is retirement age these days?

25 years ago, did you envisage yourself in banking & finance?

Yes, I wanted to travel: 25 years later I would say be careful what you wish for!

What has been the most pivotal moment, for you?

Probably the advent of the euro, at ABN Amro in Amsterdam for its "birth" - it was both a seismic change for European banking as well as a grand political experiment and Amsterdam New Year parties are just wild.

What has been the biggest change?

Ubiquitous telecoms - generally useful, often massively intrusive, too often large amounts of useless information in real time so it must be important, it isn't.

NG Subramaniam, TCS Financial Solutions

What role were you doing 25 years ago?

Analyst programmer with Tata Consultancy Services

What role are you doing now?

President - TCS Financial Solutions, a Strategic Business Unit of TCS, with a focus on financial services technology and solutions.

What was your primary task? Is it still a job? 

My primary task at that time was to understand business requirements and implement them as computer software programs using the most optimal methods. Computer resources such as memory and disk space were scarce, resulting in computer programs having to be written in a manner that would optimise the usage of scarce resources, alongside a significant emphasis on planning and design.

What kept you awake then?

One had to be flexible and work at times when the meagre resources allocated to projects were made available to you. Usually, the computer centre was dedicated to addressing business requirements during the day and resources were made available for software development and tests only at night. Being a part of such a scenario naturally ensured that I kept awake at night. Further, a keen desire to master new developments in software products, technology, methodologies, standards and guidelines had me working round the clock.

What keeps you awake now?

I am from the software engineering pool that grew up in India at a time when India was popular for its tea rather than IT. Even pizzas were a novelty for us at that time. Today, with globalisation and advances in technology causing a tectonic shift in the way we work, a globally distributed workforce and 24/7 business connectivity is a must. The accompanying diversity in cultures and the workforce necessitates that our organisational culture and value systems are respected and not compromised on. Growing the business, ensuring operational excellence, and understanding new business and customer paradigms keeps me awake these days.

25 years ago, did you envisage yourself in banking & finance? 

Then, as a young professional, I had the opportunity to work in many verticals and, eventually, narrowed down on banking and finance as the domain I wanted to be in. The key reason for this selection was that this is the only industry vertical where technology is updated at a dynamic pace, resulting in new and innovative solutions from the engineering team in almost every new project. This was a challenge I just could not miss.

What has been the most pivotal moment for you in the last 25 years? 

My path-breaking moment came when I was able to steer and motivate a team of people in the company to view software products as a business line in addition to IT services.

What has been the biggest change? 

One of the biggest challenges we face today lies in constantly refreshing our skills to keep pace with technological advancements to ensure scalability and time to market for our product/solutions. There used to be an 18-month delivery timeline but, today, if you are able to deploy a solution in six months, it is Christmas.

Prediction for the next 25 years?

The future will see customers becoming more discerning, connected and networked. Equipped with in-depth information about what they want and how they want it delivered, they will be able to negotiate the best deals possible. Their demands will vary, even as their behaviour will keep changing. Loyalty for the sake of loyalty will be a bygone virtue. They will not only redefine the rules of the game but change the game itself.

Digitised money will probably be the rule and virtualisation will be for real.  Computers will be ubiquitous - offering, literally, infinite storage capacities, and metamorphose into miniature, mobile, powerful, personalised and secure devices. Embedded in plastic cards, wrist watches or mobile phones, next-generation smart devices, or the human neural system, mass customisation will drive IT solutions. Perhaps, there won't be a need for ATM machines in the future. 4G technology will enable PDAs, phones, and other devices to provide services such as real-time trading in stock markets or information services triggered by the location of an individual at a particular point of time.