Investing In Infrastructure For Financial Investing In Infrastructure For Financial InstitutionsInstitutionsWorld Bank ConferenceWorld Bank ConferenceDecember 4 – 6, 2002, Washington, D.C.December 4 – 6, 2002, Washington, D.C.

Investing In Infrastructure For Financial Investing In Infrastructure For Financial InstitutionsInstitutionsWorld Bank ConferenceWorld Bank ConferenceDecember 4 – 6, 2002, Washington, D.C.December 4 – 6, 2002, Washington, D.C.

Gabriel S David

Managing Director, Global Financial Industry Group

Gabriel S David

Managing Director, Global Financial Industry Group

Global Financial Industry Trends..Global Financial Industry Trends..

Globalization• Increasing inter-dependence of major

economies due to greater integration

• Increasing exposure and focus towards new emerging economies

Demographics• Changing demographics in developed and

emerging economies

Regulations

• Harmonization of country regulations towards “Industry Best Practices” and emergence of “Global Standards”

• Increasing regulatory pressures

• Increasing focus on use and integration of risk management activities

Technology• Increasing / critical impact of IT on

operations and performance of financial institutions

• Increasing rationalization and optimization of IT investments

• Increasing interest in Managed Services / Outsourcing

• Increasing cooperation in Industry-wide initiatives and emergence of standards

Consolidation• Increasing importance of economies

of scale

• Increasing and rapid consolidation in the financial services industry

Where Are The Major Investments Required?Where Are The Major Investments Required?

• Credit analysis / risk management systems

• Shared services (such as credit bureaus for SMEs)

• Asset Securitization infrastructure and systems

• Payments infrastructure– Cash handling

– Non-cash (such as POS, credit cards, ACH)

• Internal bank systems – Core banking, lending, CRM

– Fraud and money laundering

• National infrastructures for information exchange and sharing

Potential Sources of InvestmentsPotential Sources of Investments

• Internal funds from the bank

• Government sponsored and funded common infrastructure components

• Third party service providers who can invest and charge on a transaction basis

• Industry cooperatives

• Venture capitalists

Major ChallengesMajor Challenges

• Cooperation between local institutions

• Governance models

• Government control and regulation

• Fragmented / inadequate regulatory frameworks

• Competitive pressures from international institutions

• Other requirements for capital

SME Information Infrastructure – Major IssuesSME Information Infrastructure – Major Issues

• Global financial institutions entering the emerging markets typically have better application systems and IT infrastructures

• Common shared services infrastructure is lacking for many areas such as

– Credit rating / credit checks

– Fraud and money laundering

– Industry specific statistical data for analysis

• Common standards for sharing credit data between financial institutions does not exist in many countries

– Many look at data they have as proprietary

• Core banking systems are not compatible and still focused on accounting

– More information is required to manage the SME credit and clients

…and their significant impact on financial institutions ability to service SMEs…and their significant impact on financial institutions ability to service SMEs

• Delivery channels usage and leverage (particularly the “e” channels) are sub-optimal

• Core banking application systems need to be replaced

• Focus on the branch contacts and networks for client acquisition / servicing and retention rather that more effective use of IT

• Increasing consolidation amongst financial service institutions – reluctance to share credit / fraud information

• New emerging requirements such as the The New Basel Accord will also require additional IT investments

• New competitors better capitalized and financed

– Leveraging existing investments in IT and operations,

– Focusing on risk adjusted ROI and impact on financial performance

IT InfrastructureIT Infrastructure

Core Banking Core Banking ApplicationsApplications

StandardsStandards

Shared ServicesShared ServicesInfrastructureInfrastructure

Risk Management Risk Management Basel IIBasel II

Capital AvailabilityCapital Availability

IT InfrastructureIT Infrastructure

Core Banking Core Banking ApplicationsApplications

StandardsStandards

Shared ServicesShared ServicesInfrastructureInfrastructure

Risk Management Risk Management Basel IIBasel II

Capital AvailabilityCapital Availability

Given the pressures in the context of today’s environment………Given the pressures in the context of today’s environment………

• Enterprise wide risk management

• Cross-border management of risks

• Regulatory issues, Basel II and WTO

• Transformation of operations

• Rationalization of global scale and operations

• New products and market segments

Battle forMarket Share

Declining Margins& Volumes

Commoditization Of Products

Uncertainty inMajor Economies

Pressures on RevenueGrowth & Profitability

Each issue poses a unique set of challenges to the IT and back office operations management areas……….

IT Infrastructure

New Products and Market Segments….New Products and Market Segments….

• Assist in product development, packaging and management efforts

• Develop new settlement & reconciliation processes to support the introduction of new products and services

• Provide information / value-added services to support the delivery of customer relationship management activities – including money laundering and fraud prevention

• Provide up-to-date / real-time information necessary to track risk and business performance

• Incorporating IT and BPO involvement and expertise into front office activities

• Developing and harmonizing common business processes to support varied products

• Enabling direct access to back office data repositories

• Increasing integration with front office applications and systems

• Increasing interfaces with customers IT and infrastructure

• Undertaking straight through processing initiatives

• Requiring subject matter experience and expertise from outsourcers and suppliers

Increasingly IT and Back Office Processing Areas Are Called Upon To:

IT and Back Office Processing Areas Have Responded By:

Cross-Border Management of Business & RisksCross-Border Management of Business & Risks

• Shifting of businesses in targeted markets and economies

• Shift of traditional country specific activities towards regional / global management models

• Continuously re-assemble / readjust the complete supply chain based on least cost, least risk, best quality

• Integrate their operations with those of merged and acquired businesses

• Increasing controls, continuous improvement (particularly Six Sigma) and undertaking more reporting activities

• Creating centralized support centers or shared servcei centers to support shifting markets

• Conducting fundamental reviews and re-delineation / re-alignment of roles and responsibilities

• Developing and rolling out new processes , procedures and systems to support centralization initiatives

• Undertaking painful “ right sizing” to reduce duplication and increase optimization of resources

• Outsourcing of IT and back office processing areas where it makes sense and where the supplier has the financial strength, subject matter expertise, tools, methods, processes and metrics that are “best in class”

Increasingly IT and Back Office Processing areas are called upon to:

IT and Back Office Processing Areas have responded by:

IT Infrastructure IT Infrastructure

• Provide more accurate and timely data, near real-time

• Shift towards on-line banking and decision making information systems

• Continuously reduce IT infrastructure budgets and operating costs

• Integrate their infrastructure with those of merged and acquired businesses

• Increasing controls, continuous improvement (particularly Six Sigma) and undertaking more reporting activities

• Creating centralized support centers or shared service centers to support shifting markets

• Conducting fundamental reviews and re-delineation / re-alignment of roles and responsibilities

• Developing and rolling out new processes, procedures and systems to support centralization initiatives

• Undertaking painful “ right sizing” to reduce duplication and increase optimization of resources

• Outsourcing of IT infrastructure and processing areas where it makes sense and where the supplier has the financial strength, subject matter expertise, tools, methods, processes and metrics that are “best in class”

Increasingly IT and Back Office Processing Areas Are Called Upon To:

IT and Back Office Processing Areas Have Responded By:

Core Banking Applications Core Banking Applications

• Provide more accurate and timely data

• Shift towards decision making information systems:

– Client focused information systems

– Client behavior scoring / monitoring systems in the credit and payments areas

– Money laundering / fraud prevention systems

• Provide seam less information access and in many cases integration across all banking distribution/delivery channels

• Continuously reduce budgets and operating costs

• Integrate external data with internal operating data

• Increasing controls, continuous improvement (particularly Six Sigma) and undertaking more reporting activities

• Implementing new core banking application systems that have the data required for

– Client relationship management

– Client behavior scoring / monitoring

– Early warning capabilities (alerts/alarms)

• Re-engineering the supply chain of back office operations to be compatible with the new systems

• Focusing on minimum customization, increased standardization across the enterprise

• Undertaking painful “ right sizing” and re-aligning of application systems architectures

• Leveraging third party suppliers where it makes sense on a ”partnership” basis

Increasingly IT and Back Office Processing Areas Are Called Upon To:

IT and Back Office Processing Areas Have Responded By:

Risk Management Initiatives…..Risk Management Initiatives…..

• Incorporate new compliance and control procedures as a part of new risk management initiatives, particularly Basel II

• Subject their IT and operations to greater oversight by internal / external Auditors and regulatory agencies (increasingly from multiple jurisdictions)

• Provide up-to-date real time information necessary to support risk management activities

• Increasing controls, continuous improvement (particularly Six Sigma) and undertaking more reporting activities

• Placing a greater emphasis on supporting risk management / middle office / compliance activities

• Developing and retaining more board based operating experience and subject matter resources

• Redesigning core processing systems to incorporate the new data / reporting requirements for risk management

• Increasing integration with middle office / risk management applications and systems

• Undertaking straight through processing initiatives

• Requiring subject matter experience and expertise from outsourcers and suppliers

Increasingly IT and Back Office Processing Areas Are Called Upon To:

IT and Back Office Processing Areas Have Responded By:

Estimated Costs of Implementing The New Basel AccordEstimated Costs of Implementing The New Basel Accord

• The estimated costs for those banks that have not focused on this will be high:– Global banks: 4.5% - 6.5% of global IT and business

operations budget for 3 – 4 years

– Regional banks: 6% - 8% of IT and business operations budget for 3 – 5 years

– Small banks / local banks: 7% to 10% of IT and business operations budget for 4 – 6 years

– In developing markets: 7.5% - 11% of IT and operations budget for 4 – 6 years

– In Japan: >11% of IT and business operations budget for 5 – 7 years

• On-going maintenance and support costs: increase of 3% - 5% of total IT and business operations budget

Source: BIS – Updated September 6, 2002; EDS Analysis

In many financial institutions There is a significant economic disconnect between front office and back office which destroys value……

In many financial institutions There is a significant economic disconnect between front office and back office which destroys value……

• Silo focus

• Sales growth driven

• Rapid product extension

• Planning disconnect with back office operations

• Price discounting / Repackaging

• Re-skilling (banking versus selling)

• Increased stress (bank officer to sales officer / culture)

• Disgruntled front line

• Internal focus

• Product centric

• Production oriented

• Stress due to:– Inconsistency in volume

– Product expansion causing manual work around

– Stretch in skills

• Focus on process not value

• Lack of technology

• Check and control focus

• Lack of subject matter skills in outsourcersThe result: C/I ratios = Increase continuously

R/ Return on Equity = Decline continuously

Economic Disconnect Value Destruction

Front Office IT and Back Office

This is all about the focus on “best practice” and the industrialization of banking….This is all about the focus on “best practice” and the industrialization of banking….

HighlyCustomized

EfficientCustomization

AutomatedProduction

Lines

Manufacturing Examples

Financial Services / Banking Applicability

• Rolls Royce• Mercedes AMG• Dell

• BMW• Lexus• Harley Davidson

• Sony• McDonalds• Pizza Hut

• Structured Finance• Project Finance• Private Banking• Risk Management

• Corporate Finance• Capital Markets• Asset Management• Wealth Management

• SME Services • Payments• Credit Cards• Trade Finance• Consumer Finance• Global custody / custody• Safekeeping• Deposits• Retail lending

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The Transformation of IT and Back Office Processing Areas is Paved With Difficulties…The Transformation of IT and Back Office Processing Areas is Paved With Difficulties…

• Demands of the front office / client facing business units and unwillingness to relinquish control

• Workforce transition issues / organization culture issues

• Restrictions in centralizing operations due to foreign exchange regulations, local market and exchange rules…

• Local industry practices and governance models that re inadequate

• Difficulty in pricing / costing managed services / outsourcing contracts

• Writing off the investments in current technology as you re-tool

• Developing necessary critical mass (volume and subject matter expertise / skills) to support shared services / utility initiatives

• Upfront investment costs required

Our Vision

EDS … the recognized global leader in ensuring clients achieve

superior value in the Digital Economy

Our Vision

EDS … the recognized global leader in ensuring clients achieve

superior value in the Digital Economy

•By delivering the right strategies, solutions and services

•Through superior execution on a sustained basis

•By delivering the right strategies, solutions and services

•Through superior execution on a sustained basis