More than ever, banks must adapt to a rapidly changing business environment in order to remain competitive. Financial institutions need to deliver innovative products that enhance the customer experience. At the same time, they have to increase flexibility and reduce costs. However, banks' IT infrastructures are slowing them down by a lack of interoperability.

Every year, the banking industry spends billions on IT projects and proprietary platforms - analyst house Ovum predicts IT spend in financial services will increase to $90 billion by 2015. All players face the same challenges: obsolete software, high integration costs, complex IT systems and a limited choice of off-the-shelf software.

In large organisations, integration costs make or break the business case in the deployment of new applications and purchased packages. The cost level is determined by the degree of standardisation of interfaces from a technical and a definition point of view.

Typically, chief information/technology officers - who must manage squeezed IT budgets against an increasingly complex IT and business environment - view interoperability as the critical building block to greater efficiency, agility and reducing costs.

The need for interoperability comes into stark relief when banks need to upgrade or replace legacy IT systems. The majority of financial institutions are hesitant to go down the proprietary route with less than a handful of banks today building their own software. The most common approach is to purchase a commercially available point solution, with a specific piece of functionality that will support a particular business function or challenge. But often the integration costs are prohibitive or make building a business case particularly challenging. 

Some banks are side-stepping the issue by purchasing a front-to-back solution from a single IT vendor that will take on the integration headache as part of the implementation. However, this is a costly and time-consuming undertaking which many financial institutions can ill afford in the present climate. As a result, many are opting to replace specific parts of their existing IT, which have either become obsolete or are difficult to maintain, with off-the-shelf software.

Yet banks adopting this approach frequently want a best-of-breed solution that allows them to cherry-pick the most superior solution for each business functionality requirement. The end result is a multi-vendor environment that may also include some in-house applications. However, the integration costs are so high that it can be hard to draw up a positive business case for replacing old functionality with new. On average, the financial services industry spends 58% per cent of IT budgets on running the business and only 21% on growing and transforming the business. As a consequence, the CIO may opt for a lower quality or sub-optimum solution in order to meet budget constraints.

Imagine a world where integration costs were a non-issue.

While it is increasingly clear that service-oriented architecture is the best technology for internal and external interfaces, standards need to be agreed upon at industry level in order to reach this Nirvana where integration costs are a thing of the past. This is what the Banking Industry Architecture Network is striving to achieve - a flexible architectural model with consistent service definitions, levels of detail and boundaries.

The average bank has between 800 and 1,200 applications, so a standard reference model is required to provide a starting point and guidance in shaping their own landscape. In order to achieve true efficiency, it is also important that banks start striving towards business and IT ‘fusion' - alignment is not enough. Enterprise architects need to achieve a business view of the IT landscape so that the technology is actually supporting the business' needs. However, for business and IT to seamlessly work together towards the same goal, a common language and understanding of what the bank should look like needs to be agreed.

Standardisation is also the key for driving innovation. Imagine a bank has built a product engine that is aligned with the core back-office systems and provides a standard framework for designing products. Connecting the product engine with the core banking system represents a huge opportunity for product managers who can slice and dice existing elements to present new, innovative products.

It is possible that this type of functionality could ultimately be offered directly to the consumer. It is not hard to imagine today's Generation Y, who have grown up with smartphones and have integrated technology into their daily lives, assembling their own banking products on the internet in the future. This could work in a similar way to today's mobile phone contracts where customers can choose the number of text messages and minutes that go into a tailored package.

Consumers are not currently demanding this type of service but financial institutions should be ready to deliver than in the next three to five years.  Those institutions with a standardised internal IT architecture, and a product engine connected to their core banking solution achieved by adopting open services standards like BIAN, will be better prepared to deliver these types of innovations and enhanced customer service to the market.

The industry is still recovering from the biggest financial crisis of the past 80 years. As a direct result, there is an imperative need for the IT community to change. The days of unlimited IT budgets are gone and business colleagues are demanding more value for their money. The future is no longer in banks' own system development but in integrating off-the-shelf products into the existing legacy environment.

However, integration costs are often triple the purchase costs of the original software. And business partners often experience IT as a hindrance for business development in this modern era. The IT community needs to reduce integration costs to the bare minimum and instead focus any additional IT spend on value-added services enhance the customer experience.

Adopting standards for banking services will change the industry for the better by generating greater efficiency through lower integration costs and aligning IT with business objectives. Such an approach will also allow banks to respond quicker to customer needs. The result? It will be easier to seamlessly integrate package solutions into banks' existing landscape and therefore innovation can be more easily delivered to the market. But no bank or vendor can do this on its own: cross industry standardisation and collaboration is the only way forward.

Hans Tesselar is executive director of BIAN.