FT SPECIAL REPORT

The Connected Businesswww.ft.com/reports | @ftreportsWednesday September 24 2014

Inside

Digital era hitsinvestment banksHow regulatory changesand legacy IT systemsaffect older institutionsPage 2

Lenders attempt newrules of engagementBanks make hugeefforts to bolstertheir online offeringsPage 2

Traders turn fromspeed to safetyHigh-frequency marketslook to provide betterservice all-roundPage 3

How to survive thecurse of the inboxEven senior managerscan become paralysedby too many emailsPage 4

On FT.comCustomers turn tomobile banking appsft.com/connectedbusiness

Cyber criminals could turn to the finan-cial markets to make money – usingtricks such as shorting stocks beforeattacking listed companies, buyingcommodities futures before takingdown the website of a large company orbreaking into computer systems to stealconfidential mergers and acquisitionsinformationbeforeplayingthemarkets.

These are some of the ways advancedhackers could manipulate the financialmarkets, a threat security experts arewarning is justoverthehorizon.

In a paper last year, Scott Borg, chiefexecutiveof theUSCyberConsequencesUnit, an independent non-profit organi-sation that advises the US governmenton the economic consequences of possi-ble cyber attacks, warned that somecriminals are set to go beyond stealingthe financial data of customers and startprofiting fromcyberattacksbymanipu-latingmarketmovements.

“The potential scope of the newattacksisstunning.Thereisalimittotheamount of money that can be stolendirectly by diverting payments. There isnolimittotheamountofmoneythatcanbe made by manipulating markets,” hewrote.

Mr Borg told the Financial Times hehad been talking to banks privatelyabout this risk for some time, but hadbeen cautious about making publicwarnings for fear he would inadvert-entlybegiving ideastocriminals.

Now, however, he has seen signs ofsome early attacks that may be aimed atmanipulatingmarkets.“Foranumberofyears, I kept quiet, I didn’t want to putthe idea into people’s heads that this wasan enormous opportunity. But that is nolonger a good argument, as the bad guyshavecaughton,”hesaid.

Mr Borg has seen discussion of thepotential for this type of attack onthe underground forums frequentedby cyber criminals and evidence thathackers are targeting governmentorganisations that hold what could

potentially be market-moving eco-nomicdata.

These types of attacks are not yetwidespread, as many cyber criminalsfocus on the easy pickings from sellingcredit card data or clearing out bankaccounts.

Manipulating financial markets couldbe much more complex. Criminals mayhave to use advanced phishing tech-niques – where very carefully craftedemails, often based on specialist knowl-edge, are sent to executives to elicit

information, or ask them to click onlinks or downloads – or advanced mal-ware, which is especially designed to getintocustomisedsoftware.

Once an attack has been carried out,however, it could be very hard to trackdown the culprits, Mr Borg says. It is rel-atively easy to hide one’s identity in abusy marketplace and even if someone

is accused of, for example, shorting astock based on the knowledge gainedduring an attack, they could shrug it offas taking a gamble on a rumour theyheard. “It is very, very hard to prosecuteanyonefor thiskindofcrime,”hesays.

Marc Maiffret, chief technologyofficer for Beyond Trust, a security andcompliance management company,agrees with Mr Borg that markets willreceivemoreattentionfromcybercrim-inals as straightforward stealing of databecomes less lucrative.

He added that as companies put inbettermeasurestoprotectagainstcreditcard fraud, such as two-factor authenti-cation with online banking, using hard-ware devices or phones to generatecodes, or the introduction of chip-and-pin in the US, cyber criminals in easternEurope, China and even across the USwillbegintodabbleinmarketmanipula-tion.

Derek Manky, who heads the researcharm of Fortinet, a US cyber securitycompany, says he has already seen evi-dence of an infection that scanned thou-sands of his clients’ machines searchingfor trading accounts. The bug wasdesigned to issue automatic tradinginstructions if ithadsucceededintakingovertheaccounts.

“It is not happening on a regular basis,but we’re seeing indications that thetechnology is being developed to enablecriminals to manipulate the market,” hesaid.

Gary Owen, a director at Promontory,a consulting firm, used to run the threatmanagement centre at Goldman Sachs.He says that while big banks tend to runsophisticated security operations, thoselower down the food chain often have torely on third-party vendors, and thiscould pose a threat to the financial sys-tem.

“Morepressureneedstobeputonspe-cific vendors who are systemicallyimportant to a subset of the communitybecause they provide services for tier-twoortier-threeclients,”hesaid.

“Trading and data services tend to beincentivised to be cheaper or faster, butnotnecessarilymoresecure.”

Mr Owen says criminals could distortdata to siphon off cash. “What if one in10trades iscorruptedsomehow,butyoucan’t see it? Instead of 10 shares, it’s 11,instead of $9, it’s $8.50?” The integrity ofthe data available in the market is para-mount,headds,aswithout trust thesys-temcouldfallapart.

Criminals eyemarkets for abetter return on investmentSecurity

Experts are warning thatcommodities and futurestraders offer a lucrativetarget for fraudstersaround the world,reports Hannah Kuchler

Market breakers: crooks may aim toinfluence transactions

T echnology is a double-edged sword for banks.Most are focused on provid-ingthelatestdigitalbankingapplications to their cus-

tomers and investing in whizzy newtechnology, such as finger pulse scan-ners and digital cheque imaging. Butthey also face growing competition fromtech-savvyrivals.

Apple’s announcement this monththat it aims to revolutionise the world ofcredit card payments with the launch ofApple Pay, a service that allows custom-ers to make payments by waving theiriPhones over a terminal, is widely seenasawake-upcall forbanks.

Most senior bankers knew the chal-lenge was coming. “[They] all want toeat our lunch,” Jamie Dimon, chief exec-utive of JPMorgan Chase, said in Febru-ary, referring to the big technologygroups, such as Apple, Google and Face-book. “I mean every single one of them,andthey’regoingtotry.”

Harry Nelis from Accel Partners, theventure capital firm that backs severalfinancial technology start-ups includingthe UK peer-to-peer lender FundingCircle, says: “There are certain parts ofthe financial services industry where

the big technology groups are wellpositioned to play and Apple’s latestmoveisasignof that.”

Yet responding to this challenge ishardforbanks,manyofwhichhavevastIT systems dating back to the 1960s and1970s that are prone to problems andexpensive to maintain. Furthermore, aspeople check their accounts more regu-larly on tablets and smartphones, it putsadditionalstrainonthosesystems.

A report from the British Bankers’Association and EY, the consultancy,found that in the UK alone, almost £1bn

of mobile and internet transactions arebeing processed every day. This year,more than 15,000 people a day havedownloaded banking applications in theUK. At the same time, the use of tradi-tionalbrancheshas fallensharply.

A w ave o f “ f i n t e c h” s t a r t u p shas emerged, seeking to disrupt banks’business models. They are particularlyprevalent in London and companiessuch as TransferWise, Zopa andWorldRemit have become significantactorsontheglobalstageinrecentyears.

Consultants responsible for improv-

ing banks’ systems say that merelyaccessing some archived data has been achallenge because of the obsolete for-matsused.

Also,asbankshaveexpandedthroughacquisitions, they have tended to boltnew systems on to existing ones, ratherthan undertake the more disruptive andcostly process of fully integrating them.The result is hugely complex IT net-works that it may be impossible tountangle.

Often, banks find themselves relyingon systems that are unsupported by

Upstarts target banks’ lunchNew, technologicallysavvy rivals are aimingto take business fromtraditional institutions,reportMartin ArnoldandMuradAhmed

their IT vendor or cannot be supportedby internal staff, yet which are still criti-cal to theiroperations.

For instance, after Lloyds BankingGroup acquired Halifax Bank of Scot-land in 2008, it chose to move its newcustomers on to its core system, ratherthan invest in building an entirely newplatform. In contrast, Nationwide chosethe more costly and time-consumingroute of investing in a new core systemfromSAPandAccenture.

UK banks say they are spendingcontinuedonpage3

‘Trading and data servicesare incentivised to becheaper or faster, but notnecessarilymore secure’

Illustrator:OivindHovland

2 ★ FINANCIAL TIMES Wednesday 24 September 2014

TheConnected Business

WhenTSB,aUKbank,sufferedaserioussystems failure this year, its chief execu-tive took to Twitter to apologise to cus-tomersunabletowithdrawcashormakepayments.

Conscious of how damaging a highlypublicised outage could be just monthsafter TSB’s launch as a standalone bank,Paul Pester used the site to explain thecauses of the crash and provide progressupdates, often with tweets to individualcustomers.

His efforts, which were generallyapplauded, illustrate how banks areconnecting with their customers in anera in which the once-a-week branchvisit seemstohavevanished.

Other banks’ attempts to use socialmedia channels have not been greetedsowarmly.

JPMorgan Chase, the US lender, waslast year forced to cancel a live question-and-answer session on Twitter after itsuffered criticism over the bank’s prac-ticesalongsidetoughquestionsfromdis-gruntledcustomerssuchas:“WhencanIgetmyhouseback?”

Recent research shows that manylenders are struggling to connect withcustomers in a useful way through sitessuch as Twitter and Facebook. A surveyfrom US consultancy Carlisle & Gal-lagher, for example, showed 87 per centof bank customers found lenders’ use ofsocial media “annoying, boring orunhelpful”.

Meanwhile, Capgemini’s World RetailBanking Report 2014 found that, whilealmost nine out of 10 bank customershad social media accounts, and 10 percent used them weekly to interact withbanks, few lenders had clear plans forsocialmedia.

Analysts say the risk is that these siteswill become not much more than publicplatforms for customers to air com-plaints about banks. They say lendersarehavingmoresuccessinengagingcus-

tomers via other channels, such as videoconferences and text messages. In theUK, Lloyds Banking Group, the govern-ment-backed lender, is trialling ascheme that allows customers to talk toan adviser via video if one is not availa-ble in their branch. Meanwhile, RoyalBank of Scotland sends 200,000 texts adaywarningcustomerswhoareabouttoexceed their overdraft limit or incuraccount charges. Spain’s Caixabank hasdevised a mobile application that letsprivatebankingcustomers interactwithwealthmanagersviavideocalls.

These moves are part of banks’ effortsto bolster their digital offering as theyface an onslaught from new competitorssuch as peer-to-peer lenders, technol-ogyfirmsandsupermarkets.

Some peer-to-peer lenders – whichenable individuals and small businessesto lend directly to each other – arealready using the information availableon social media sites to underwriteloans,accordingtooneof thebanks.

Meanwhile UK retailers such as Tescoand Marks and Spencer use innovativeways to reward customer loyalty thattraditionalbanksareyet toemploy.

Tesco, for example, offers its currentaccount holders points for its Clubcardloyalty scheme when they use theirdebit card. The points are turned intovouchers to use in its stores or else-

where.However, big banks – whose digital

progress has been hampered in recentyears by dysfunctional IT systems – arestartingtocatchup.

While about half of financial servicesorganisations’ IT budgets is spent onmaintainingexistingsystems,accordingtoFujitsu,anITservicesprovider,28percent isnowinvested in“innovation”.

“Innovation, which typically took aback seat during the recent economicdifficulties, is now receiving much war-rantedattention,”saysthegroup.

Analysts say one opportunity for thebanks is to use the information they

haveoncustomerstoconnectwiththemin a more personal way. Syniverse – atechnologyfirmthatworkswithsomeofthe world’s largest banks and retailers –says smartphones present an opportu-nityforlenderstoextractvaluableinfor-mation about customers’ whereabouts,demographics and tastes. This could beused to provide tailored financial serv-ice, such as on-the-spot insurance tocustomers when they arrive at a holidaydestination, as well as offers for theirpreferredshopsandrestaurants.

Syniversehas teamedupwithMaster-Card to trial technology that links a per-son’s credit or debit card with the loca-tion of their mobile, making sure bothare in the same place. If the card and themobile are not in the same location,transactionscouldbeblocked.

Some banks are looking at customis-ing text messages to customers’ behav-iour.So, forexample, ifacustomertendsto check their bank balance every Mon-day morning, the bank could automati-cally send a message with that informa-tion.

Oneriskforbanks is fallingfoulofreg-ulatory requirements when they usesocial media, particularly to promotefinancial products. The UK’s FinancialConduct Authority last month set outguidelines for social media use, statingthat every individual communication –beitasingletweet,Facebookpostorwebpage – must comply with their rules andbe“fair, clearandnotmisleading”.

This presents difficulties regardingrisk warnings on Twitter, for example,which limits banks and other users to140 characters. With the regulator aliveto social media use, analysts say lendersmust take extra precautions to ensuretheir attempts to go digital do not lead tothenextmis-sellingscandal.

Lenders struggle toengage with customersSocial media

Institutions are making hugeefforts to bolster digitalofferings for their clients,writes Sharlene Goff

Computer error: TSB suffered ahuge systems failure this year Seven years ago, Taavet Hinrikus, the

first employee of Skype, moved to Lon-don from the free internet telephonycompany’s base in Estonia. However, hefaced a problem. Every time he trans-ferred money to his UK bank heincurred charges of 5 per cent per trans-action.

Kristo Käärmann, a fellow Estonianliving in London, had the opposite prob-lem. He wanted to transfer local cur-rency home but he was paid in pounds.In the end, the pair struck up an infor-mal deal. Mr Hinrikus would transfercash from his Estonian account to MrKäärmann’s Estonian bank account. MrKäärmann would move money from hisUKaccounttoMrHinrikus.

As the money did not cross nationalborders, they did not trigger a bank’sinternational transfer charges, savingthem some £10,000 over the two yearsthearrangement lasted.

Their experience prompted them tofound TransferWise, a “peer-to-peer”money transfer system that lets individ-uals and businesses send moneybetween countries, charging a small feeforeachtransfer.

Since launching in 2011, the companyhas raised $33m from investors includ-ing Richard Branson and Index Ven-tures,aventurecapital firm. In June, thecompany said it had processed pay-mentsworthmorethan£1bn.

Thisexampleispartofawaveoffinan-cial technology start-ups that are nib-bling at the fringes of banks’ businessmodel, the undervalued parts of a finan-cial institution’soperationsthatareinef-ficientor thatcanbeundercut.

“Banks are relying on the old inter-bank system for making internationalpayments,” said Mr Hinrikus. “Theydon’thaveanyincentives to innovate.

“Forbanks, theservice isaconvenientcash cow . . . If you think about it, mak-

ing international payments is really nodifferent from sending an internationalemail. It would be absurd if an interna-tionalemailcost5centsa letter.”

Investorsarepumpingcashintofledg-ling “fintech” companies. According toAccenture, global investment in finan-cial technology ventures has risen fromunder $930m in 2008 to $2.97bn in2013.

Fintech groups say their advantageoverbanksisanabilitytoconcentrateona small market sector and their betterunderstanding of how to use technologytotheiradvantage.

Hiroki Takeuchi is founder and chiefexecutive of GoCardless, a London-based enterprise that allows small busi-nesses and individual entrepreneurs toset up direct debit payments from cus-tomers, targeting groups that have diffi-cultiessettinguprecurringpayments.

“Banks do lots of things at once,” hesays. “Fintech companies take one areaand laser-focus on it. Banks can’t dothat.

“We also see ourselves as a tech com-pany. We’ve hired loads of engineerswho will build robust new technologies.Banks, by contrast, typically use fairlyold technologies, building systems byhiringconsultancies.”

Somebanksareattemptingtoheadoffthe threat. Barclays launched the Pingitmobile app two years ago, allowing cus-tomers from any UK bank to sendmoney to another person using only aphone number. The Payments Council,the UK industry group responsible forpayment mechanisms, has launched asimilarmobilesystemcalledPaym.

Barclays, MasterCard, Rabobank andLloyds are among older financial groupsattempting to turn into investors, help-ing to fund “accelerators” – environ-ments for would-be entrepreneurs whoexchange equity in their fledgling enter-prises for cash, mentorship and officespace.

Others have partnered with fintechcompanies, believing it may be better tocollaborate thanbetocompete.

In June, Santander announced a dealso customers it cannot serve may useFunding Circle, a UK peer-to-peerlenderspecialising incorporate loans.

In return, Funding Circle, which haslent some £290m to 5,000 businessessince it began trading in 2010, will pro-mote Santander’s current account andcashmanagementservices.

“It will by no means be our last part-nership,” says Samir Desai, chief execu-tiveofFundingCircle.

In the US, San Francisco-based UnionBank announced a similar deal to sellsome personal loans via Lending Club,anonlinemarketplace.

Mr Desai says that, although fintechcompaniesaretakingabiteoutofbanks’revenue streams, they are also helpingexpandthefinancial servicessector.

He says about a third of his customershave told him they would not have beenable to raise finance without FundingCircle, socreatingcustomersoutside theorbitof traditionalbanking.

Though fintech companies expect towork with banks, their efforts will leadto a more fragmented financial servicesmarketplace.

Mr Hinrikus comments: “We may seethataone-size-fits-alluniversalbanknolongerworks.”

Nimble groupsmove into establishedfinancial institutions’ territoryStart-ups

Some older banking groupshave decided the bestresponse is to work withnewer tech companies,reports Murad Ahmed

87 per cent of customersfound lenders’ use of socialmedia ‘annoying or boring’

Y et another threat to invest-ment banks’ business mod-els looms on the horizon.While having to cope with ahost of stricter rules, a

tougher capital regime and a sharp dropin revenues, trading firms also face anuphill struggle to transform themselvesintotechnologycompanies.

The digital challenge has hit invest-ment banks in several ways. More andmore trading is moving into the elec-tronic realm, inefficient back office ITsystems need urgent reform, and multi-ple trading platforms have to be unified.At the same time, competition from IT-focusednicheplayers is increasing.

Executives, distracted by all the otherserious problems in their industry, havehad little scope to come up with a proac-tive ITagenda.

Bob Gach, global managing directorof Accenture’s capital markets practice,says: “The industry has been slowand inconsistent in adopting digitaltechnologies, particularly because thelarger investment banks have beenfocused on other huge issues, such asregulatory changes, conduct, litigation

and cost-cutting. Such issues are eatingup all the IT budget, so there is littleroomleft fordisruptivetechnologies.”

Yet there is a sense of urgency amongexecutive boards, as they realise thattrading houses will in future primarilybe technology firms. The top executiveof a large European bank says: “Weshould have revolutionised the way weapproach our clients. But instead, wehave not moved anything like as rapidlyas other industries. Banks have fallenbehind.”

One of the most pressing issues is totackle the bloated technology infra-structure built up in the boom years.Regulatory demands on conduct moni-toring and risk management is inflatingIT costs at a time when return on equitylanguishesatanaverage11percent,saystheBostonConsultingGroup.

Market leaders, such as JPMorgan andDeutsche Bank, spend billions of dollarson technology each year and most ofthem have moved some IT centresto low-cost countries and slashedstaff numbers. But this has not beenenough to contain costs. Global bank ITspending grew more than 4 per cent to

$188bn this year alone, according toCelent,aresearchfirm.

Consultants say the sector needs aradical approach to rid itself of a legacywhere each business unit has its own ITdepartment,tradingplatformsandbackoffice infrastructure. Advisors sayinvestmentbanksneedtomoveonfromsuch a “mushroom strategy” to createcentralisedITdepartments.

Ultimately, this will mean going fromacobwebofdozensormoretradingplat-forms to a unified solution. Consultantsat McKinsey said in a report last year:“The end-game may see firms merging[fixed income, currencies and commod-ities] and equities franchises to createexecutionfactories.”

Investment banks outside the top fivehave already outsourced crucial parts oftheir trading infrastructure. UBS thisyear struck two deals to replace itspatchwork of multiple trading plat-forms with standardised solutions fromMurex and Ion Trading, while France’sSociétéGénérale lastyearoutsourced itspost-trade processing to a partnershipbetweenAccentureandBroadridge.

Nonetheless, larger banks retain

technologies they have developed in-house, while initiatives to share costsbetween rivals through joint ventures,partnerships and open-source projectshavemostly failed.

Seniorbankerssaytoptierbanksneedto become technology leaders ratherthan merely cutting costs. One areawherethis isclearlyvisible is in thetrad-ing of fixed income and currencies,which is rapidly becoming more likeequities trading, where transactions areexecuted electronically for a fee insteadof banks acting as market makers andchargingaspreadfor therisks theytake.

“If the bid/offer spread is zero, youhaveto findotherwaystomakemoney,”says Colin Fan, co-head of DeutscheBank’s investmentbank.“Soyouhavetobe more tech-focused than ever before.Where trading is dominated by technol-ogy, the heads of businesses better alsobetechguys.”

Inforeignexchangetrading,acocktailof regulatory investigations into allegedmarket rigging, mixed with a decline inrevenues, has this year prompted ashakeout among once-powerful foreignexchange voice traders – who work over

thephoneandexecutedealspersonally–while electronic trading heads become adominant force.

“The head of etrading used to be atoken position, but now is a force to bereckoned with,” says Sassan Danesh,managing partner at Etrading Software,aconsultancygroup.

Trading automation is also a competi-tive threat for investment banks. “Theelectronification of trading will make iteasier for technology firms to step intothebusiness,”MrFanwarns.

The digital revolution means thatlongstanding barriers to entry havecrumbled. The need for a largebalance sheet has waned; the advent ofthe agency model brings more pricetransparency; and online trading plat-formshaveopenedmoresaleschannels.

So far, investment banks have heldtheirown.“Therearelotsofupstartsanddisruptive technology firms in variousareas of investment banking,” Accen-ture’sMrGachsays.“Buttheyaremostlyvery small and on the fringes. What wehaven’tseenyetistheWalmartofinvest-ment banking that completely changesthemodel.”

Digital erosionthreatensinvestmentbanks’ business

Electronic challenge Regulatory changes and oldIT systems add to sector’s woes, saysDaniel Schäfer

The way we livedthen: manybanks havecomputersystems thatdate from the1970s – Getty

‘Wheretrading istechnology-dominated,the heads ofbusinessesbetter betech guys’

The Connected Business section ofthe Financial Times is devoted todelivering in-depth news andfeatures about how technology isaffecting business in all its forms –from banking to retail, fromeducation to logistics, andeverything in between.

We are keen to have feedbackfrom readers about what they wantto see in print and online. Whatsectors, industries or topics wouldyou like to see featured? How doesthe current mix of a three-pagefocus on a specific industry andone page on more general andtopical features in the print editionwork? Would you like more generalfeatures about IT and technology?Is the content too geeky?

To have your say, emailreports@ft.com with the wordsConnected Business Readers Viewsin the subject line.

Readers’ views

Wednesday 24 September 2014 ★ FINANCIAL TIMES 3

TheConnected Business

ContributorsMartin ArnoldBanking editor

Murad AhmedEuropean technologycorrespondent

Hannah KuchlerSan Franciscocorrespondent

Nicole BullockCapital markets correspondent

Philip StaffordTrading Room editor

Maija PalmerSocial media journalist

Stephen PritchardFreelance technology journalist

Jessica TwentymanFreelance technology journalist

Adam JezardCommissioning editor

Steven BirdDesign

Andy MearsPicture editor

For advertising details, contact:James Aylott, tel+44 (0)20 7873 3392, emailjames.aylott@ft.com

billions of pounds on IT each year.State-backed Royal Bank of Scot-landandLloydsseemtofacethebiggest IT problems. Theysay they invest about £2bnayear.

The Financial ConductAuthority, the PrudentialRegulation Authority andthe Bank of England areconducting a joint reviewinto the resilience of lenders’ systemsand how bank boards are dealing withtherisksof failures.

The review, which is expected to takeabout a year, follows a number of high-profile glitches, including a shutdown atRBS in 2012 that meant millions of cus-tomers could not access their accountsforweeks.

After the outage, RBS admitted it hadunderinvested in its IT systems and saidit would spend an additional £450mover the next three years. Technicalglitchescanbeverydamagingforbanks’reputations.Evennewsofasmall failurethat lasts only minutes can be spreadquickly to millions of people via socialmedia.

Figures from Celent, the researchcompany, show that less than a quarterof the$180bnthatbanksspentonIT lastyear was for new investment – the restwasdevotedtomaintainingexistingsys-tems. Asian banks devoted the highestproportion of all IT spending to newinvestments at 30 per cent, followed byUS banks at 24 per cent, while Europeanbanks had the lowest proportion at 13percent.

As the banking behemoths areweighed down by creaking legacy sys-tems, it leaves them vulnerable to com-petitionfromhigh-techupstarts.

As Antony Jenkins, Barclays chiefexecutive, admitted in a recent speech:“Weareonthe leadingedgeofa technol-ogy revolution in financial services. We

continued frompage1

can see opportunities and threats allacrossourbusiness.”

Financial technology start-ups in theUKandIrelandraisedmorethan$700mfrom investors between 2008 and 2013,accordingtoresearchfromAccenture.

The founders of these firms see banksas slow-moving and complacent. Theysay financial institutions have failed tounderstand that, while the mainstays oftheir businesses – such as currentaccounts and investment services – arenot under threat, other less lucrativesectorsareunderattack.

One founder described the process as“death by a thousand cuts”, with eachfintech company taking a small slice of abank’s business, adding up to a signifi-cantproportionof itsoverall revenues.

However, fintech companies haveslowly changed their attitudes to thebanks.Whereasbankswereonceseenasthe enemy, the fledgling groupshavecometorealise that thetwoneedtoworktogether.

For example, Samir Desai, chief exec-utive of Funding Circle, a peer-to-peerlender, was behind a landmark partner-ship with Santander, the Spanish bankthat has agreed to send the London-based start-up some customer leads inreturnforpromotionalwork.

“Evolution has taken place,” he says.“Our early messaging was anti-bank,and banks were a bit dismissive of whatwe’re doing. There’s been growing up on

bothsides.”Hiroki Takeuchi, chief executive of

GoCardless, a UK start-up that helpssmall business set up direct debit pay-ments, says: “It may end up with a situa-tion where banks providing core busi-ness infrastructure. I don’t think thecurrent account is going away soon. Butby partnering with fintech companies,banks can offer provide better servicesoverall.”

Mr Takeuchi adds: “If you believe thatpeoplewillkeepmoneyinbanks,fintechcompanies will have to go through thebanks rails. You have to work within thebankingsystem.That is frustrating.

“EvenwithBitcoin,whereyou’vegotacurrency outside the banking system,you need a way to load up real currencyintothatBitcoinaccount.”

Mike Ward, head of OzForex inEurope and North America, says theAustralia-basedonlineforeignexchangedealer has grown rapidly by selling cur-rencies at cheaper prices than mostbanks.

The company, 51 per cent ownedby Macquarie, the global investmentcompany, handled A$13.6bn ($12.2bn)of foreign exchange transactions lastyear. “It’s easy for us to undercut thebanks,” says Mr Ward. “But online forexproviders have only a 5 to 10 per centshare of the market. So, we have a longrunway before the banks start respond-ingtoourchallenge.”

M ore than 150 years ago,P a u l J u l i u s R e u t e r ,founder of what is nowthe Thomson Reutersnews agency, used carrier

pigeons to transmit news and stockinformationspeedilyandgainacompet-itiveadvantage.

Thebeatofwingshasnowgivenwaytotheflashof lightdownfibre-opticcables.But speed remains the name of thegame.

In modern markets, a group known ashigh-frequency traders relies on thetransfer of data in microseconds to dartacross markets and trade at lightningspeeds.Theymaketheirmoneybyearn-ing very small amounts on a hugenumberof trades.

Minimising “latency”, a term used todescribe the delay it takes before a tradeto be executed, has been an industrypreoccupation for much of the past fiveyears.

Potentially, any physical factor canaffect the speed of a trade, from thehardware used to the distance thesignalhastotravel.

In an effort to be fastest , high-frequency traders have been exploringevermoreambitiousideas,suchasusingmicrowaves and even weather balloonstotransmitdata.Butistheraceforspeedreaching its limits?

Kevin McPartland, head of researchfor market structure and technology atGreenwich Associates, a financial serv-ices company, says: “Certainly, there area handful of people out there who con-tinue to look for microseconds. For thebroader market, we have almost hit thethreshold. To get beyond where we arecomes down to amazing innovations intechnology.”

It also means higher costs. Dwindlinginterest in eking out a microsecondmore than competitors on routesbetween big financial centres such asNew York and Chicago has come as prof-its for high-frequency traders have beensqueezedbymarketconditions.

The opt imal environment forhigh-frequency trading is one of

extreme volatility and large volumes:2008 was a boom time. But the post-cri-sis period has been one of increasinglylowvolatilityandsmallvolumes.

Regulatory scrutiny is also raisingcosts for all financial groups. The publi-cation of Michael Lewis’s book FlashBoys: AWall Street Revolt, which placedhigh-frequencytradingat thecentreofamodern market structure that theauthor slammed as “rigged”, has only

intensifiedthefocus.Toremaincompet-itive, high-frequency traders will alwaysneed to worry about latency, but thereare notable shifts in how they are seek-ing–andinvesting–togainanedge.

“Speedcontinuestobeimportant,butit is just one of many factors,” says oneexecutive. “Markets are extremely com-petitive,soyouneedtobeexcellent inallaspectsofyourbusinesstobesuccessful.Themeansnotjustfastbutsmartinyour

decision-making and in how you man-agecosts.”

Being smarter in decision-makingrequires a whole set of skills beyondparsingsoftwarecodeandhardware.

Thomas Burrell of Chicago-basedObjectiveParadigm,arecruiterforhigh-frequency trading firms, says there hasbeen increasing demand for people whospecialise in risk management andquantitative trading strategies, and

“big data types” who can undertakeanalysis thatpredicts tradingpatterns.

Ari Rubenstein, co-founder and chiefexecutive officer of Global Trading Sys-tems, a market maker and highfrequency trader, says his company isworking on ways to store and quicklyaccess the “oceans” of financial data cre-atedbyelectronic trading.

This, he says, is important now thatthere are more risk and compliancechecks on every order. Vigorous compe-titionamongsuchfirmscreatesanenor-mousamountofelectronicorder flow.

“Speed is important, it gets you in thegame, but responsible risk and compli-ance management allow you to win,” hesays. “What makes a Porsche great, forexample, is thebrakesandhandling,nottheunbridledspeed.”

For Chris Concannon, president andchief operating officer of Virtu Finan-cial, it is about looking at the whole lifecycleof theorder.

“You cannot ignore any single stop onthat life cycle,” he says. “That is not new,but there has been a refocusing ofresources in terms of where to find waysto reduce speeds. A lot of time is beingburned on the consumption of the dataand what to do in response to that data.While you care about whether informa-tion is received in a timely manner, youalso need to focus on how quickly youcanrespondto it.”

Latency cannot be ignored, no matterhow far it has progressed. Some routesare saturated, others are inefficient, andcompanies will always need to worryaboutrivals findingfasterpathways.

Jock Percy, chief executive of PerseusTelecom, a US trading technologycompany, says: “Firms are happy beingin the fast lane, but if a car pulls out andpasses, theyhavetogowith it.”

He adds: “A lot of market participantsdonotwanttomakethatmove,butifthetrading opportunity is there, someoneinevitablywill.”

The focus moves from speed to safetyHigh-frequency trading Companies are finding they need to demonstrate excellence in all departments in order to thrive, sayNicole Bullock and Philip Stafford

‘Firms are happy in the fastlane, but if a car passes,they have to gowith it’

Catch me if you can: is the raceto be able to trade at ever-fasterrates over? – Bloomberg

Tech upstarts plan to eat banks’ lunch

4 ★ FINANCIAL TIMES Wednesday 24 September 2014

TheConnected Business

In 2011, Thierry Breton, chief executiveat Atos, the information technologyservices provider, set an ambitious goalfor his staff: to give up internal email forgoodbytheendof2013.

Critics said his efforts were doomed tofail – and, to a certain extent, they wereright. Atos did not manage to eliminateinternalemailbytheendoflastyear.Butitdidcutvolumesby60percent.

More importantly, the “zero email”initiative has got the company’s 76,000-plus employees working together inmore effective ways, according to a June2014 report on the project by AnthonyBradley and Samantha Searle, analystsatGartner, theITmarketresearchfirm.

Overcoming big barriers to changesometimesrequiresdrasticactions,theysay. Despite the Atos campaign’s contro-versialname,eliminating internalemailwas never the real goal. That, say MrBradleyandMsSearle,wasto“movecol-laboration activities out of email andintoamoresuitableenvironment”.

In that sense, “zero email” has been aresoundingsuccess.Aswellasthereduc-tion in internal email traffic, Atos nowhas more than 74,000 staff registered onthe social networking platform it owns,blueKiwi. Every month, they createaround 300,000 posts on the internalsiteandviewalmost2mpages.

But why does this represent animprovement–andwhat is thebigprob-lemwithemail,anyway?

According to analysts at strategyhouse McKinsey, it is partly a matter ofproductivity. In a 2012 research study,they found that the average “knowledgeworker”spendsanestimated28percentof the working week reading andresponding to email and almost 20 percent searching for internal informationor tracking down colleagues who canhelpwithspecific tasks.

“But when companies use socialmedia internally,messagesbecomecon-tent; a searchable record of knowledgecan reduce – by as much as 35 per cent –the time employees spend searching forcompany information,” the McKinseyresearcherswrite.

Time spent dealing with email, theyadd, is typically slashed by between 25and30percent.

There are other problems, too, saysNikos Drakos, a Gartner analyst. “Froma worker’s perspective, email is proba-bly still the best mechanism for focusedconversations between small groups ofparticipants working together towards aspecific goal,” he says. “But from anorganisation’s perspective, a great dealof valuable knowledge and content canget hidden or buried in individual emailaccounts and may be lost forever whenanemployee leavesthecompany.”

Nor does email do a good job of priori-tising issues or allocating tasks, says MrDrakos, when forwarded and “carbon-copied” messages bounce backwardsand forwards between large groups ofemployees.

This can lead to chaos, says AdrianButera, director of Compton Green, areal estate company based in Mel-bourne, Australia: “For us, email hadbecome too busy, too distracting. Therewas too much clutter, too many ‘replyalls’. But the worst thing for me was thatwe were sometimes missing customeremailsamongall the internalones.”

Radical action was called for, he says.This involved a blanket ban on internalemails and the rollout of an enterprisesocial network, based on the tibbr plat-formfromTibcoSoftware.

That, Mr Butera decided, would ena-bleComptonGreen’ssalesassociatesout

in the field to work together moreeffectively on the marketing and sale ofproperties.

Persuading Compton Green’s staff ofthe benefits of this approach was not asdifficultasMrButerahadfeared.

“The average age of employee in ourfirm is 30 and there was an instantunderstanding and appreciation of theideaofa ‘Facebookforwork’,”MrButerasays.

Today, some eight months after theinternal social network went live, any-one who is even tempted to revert tointernal email to contact a colleague canexpectabacklash.

“It’s quite funny,” says Mr Butera.“You see an immediate response fromrecipients: ‘I’m not reading this. Youneedtotibbr it’.”

At Archant, a UK-based publishinghouse, meanwhile, employees havetakentheleadinsettingupgroupsonthecompany’s four-year-old Connect socialnetwork, says Chris Thompson, thecompany’s head of development. This isbased on the Socialcast platform fromVMware.

Archant’s accounts department, forexample, used email for many years tomake sure that regional sales executiveswere chasing outstanding paymentsfrom their clients. Now, there is anaccounts payable group on the Connectnetwork, where details of outstandingpaymentsareposted.

“It’s not supposed to be a name-and-shame exercise,” says Mr Thompson,“but having a product code up there andthe name of the person responsible forthat code is an incentive [for them] tomake sure that money comes in ontime.”

There are also travel groups, whereArchant employees can post reviews ofplaces where they have stayed or eatenon work trips, and a popular photogra-phy group, where keen amateur snap-perscansharetheir latest images.

Another group focuses specifically onArchant’s content management system,providing a repository of information,advice and documentation for thoseusing the publishing tool in their day-to-daywork.

“All in all, it’s more effective thanemail for the whole company to shareimportant messages with each other,whether those are work-related or moresocial innature,”saysMrThompson.

“And because employees have foundtheir own uses for the platform, they getbettervaluefromit, too.”

Social networks are one answerto information overload at workWorkplace

Some companies have foundthey can function betterwithout internal emails,writes Jessica Twentyman

Staff email ban: Compton Green

Frightening ideas often hide behindbland phrases – take “collateraldamage” or “negative patientoutcome”. Similarly chilling is thestatement “we would consider a kineticresponse to a cyber attack”, wordsbandied about at the FT Cyber SecuritySummit, held earlier this month, bytech experts discussing Nato’s changingdefence policy.

Let’s be clear, “kinetic” means bulletsand bombs. In plain English: “if youhack us, we might bomb you”.

This becomes more alarming withNato designating cyber attacks asevents that could trigger Article 5 ofthe Washington Treaty, which statesthat an attack on one member isconsidered an attack on all and calls onNato signatories to come to its aid. Inother words: “Hack one Nato memberand potentially get bombed by all (or,in practice, by the US).”

“I can’t believe no one seems morealarmed about this,” said one man atthe summit. “Shouldn’t we all beshouting about this?” He had only beenworking in cyber security for twoweeks. Everyone else was used to theidea: the US announced in 2011 it wasprepared to go “kinetic” when hacked.

Nevertheless, the prospect of Natocountries responding to electronicattacks with conventional weaponsshould give us pause. What kind ofattack would be bad enough to triggerretaliatory bombing, especially in anera of “hybrid warfare”?

Nato is leaving this ambiguous.Drawing an explicit line in the sandmight invite people to test it.

Presumably, it would be somethingcrippling, such as the shutdown of anational power grid, rather thanstealing naked photos of JenniferLawrence. But what about attackssomewhere in between? In 2007

Estonia’s banks, media outlets andministries were disrupted by cyberattacks believed to have come fromRussia, but no one died. Would this acthave warranted a “kinetic” response?

Even if Nato countries can decidewhen to act, how sure will they be theyare bombing the right people? Hackershide their tracks well, routing attacksthrough a number of countries,legitimate businesses andorganisations. Attacks are often carriedout by groups at arm’s length from thegovernment, which can claim to beindependent actors.

It is easy to sow doubt over the issue.Although the attacks on Estonia almostcertainly originated in Russia, theRussian government has alwaysclaimed they were the work of“patriotic” independent citizens.

It is difficult to prove who shot downMalaysia Airlines flight MH17 overUkraine. It would be even harder toprove who was behind a cyber assaultthat appeared to come from a drycleaners in Toronto.

This is why governments andsecurity agencies are worried about thesoft underbelly of the small-businesssector, internet-connected but nothugely inclined to spend money onantivirus software and firewalls.

The UK, for example, is running thecatchy awareness campaign “Ten stepsto cyber security”, but it is hard to seethis bringing about rapid change.

What might capture SME bosses’attention is to imagine returning fromlunch one day to find a military droneshooting at their company’s virus-infected server. With pledges to “gokinetic” over cyber threats, this isstarting to sound not so far-fetched.

This article appeared earlier this month onFT.com/connectedbusiness

COMMENT

INSIDE TECH

MaijaPalmer

Behind the bland phrase lies thechilling reality of ‘kinetic action’

T he growth in email use overthe past decade has, itseems, been unstoppable.For example, RadicatiGroup,atechnologymarket

research firm based in California, says182bn emails were sent and receivedeach day worldwide in 2013. That figureisexpectedtoreach207bnby2017.

Business remains the main source ofthis traffic: business users sent 100bn ofthose messages, Radicati says, while theaverage business user receives between100 and 120 messages a day. Some, ofcourse, receivemany,manymore.

Spam accounts for a large percentageof messages. According to TrendMicro,an IT security vendor, global spamvolumes ranged between 93bn and204bn messages a day in the first twoweeks of this month alone (the two setsof figures fail to correspond becauseRadicatidoesnotmeasurespam).

While software to detect and block, orat least mark, spam messages, hasimproved, there are other reasons forexecutives’ groaning inboxes. Socialmedia, lauded by some as the likelycause of the death of emails, also createsthem. The main consumer social mediasites, including Twitter, Facebook andGooglePlus,aresignificantgeneratorsofelectronic messages, unless users turnemailnotificationsoff.

Then there are business-focused sitessuch as LinkedIn, business social net-works – such as Yammer, owned byMicrosoft, Tibco’s tibbr and Jive – andemail subscriptions.

Our ability to communicate on themove also means some people hardlystop sending messages, contributing totheinformationoverload.Andtoomanyof us fall into the “cc” culture, copyingever-larger groups of colleagues intoemail trails. Senior executives can fallinto the trap of micromanagement byemail, commenting on and forwardingmessagesthatwouldbebetterdealtwithatamore junior level.

Managing this can be a challenge,especially when email tools, and specifi-cally mobile tools, are designed toattractattention.

“As you become more senior, you’recopied in on more messages. That’s thenature of things,” says Anna MarieDetert, an expert in people and technol-ogy at professional services providerKPMG.

“Executives who are successful don’tallow email to become a tool for instantmessages, because it is not. People canbe paralysed by responding to emailsand more of their time is spent on emailthan on the planning activities theyshouldbedoing.”

Dealing with email overload is a

personalandcultural issueratherthanapurelycorporateone,expertssay.

There are few general-purpose solu-tions other than using automated meth-ods such as spam filtering or messagearchiving. The way each business, andeach person, uses email is too individualfor technology to solve the challenge onitsown.

“Email is a symptom, not the rootcause,” says Mark Tonsetic, managingdirector for IT at CEB, the business advi-sory company. “The cause is informa-tionoverload.”

This, Mr Tonsetic says, touches onbroader questions of how companiesmanage information and collaboration,but it also suggests they are not makingbestuseofthetoolstheyhave.Forexam-ple, companies could encourage the useofclearsubjectlines, limitthenumberofpeople copied on messages, or even thenumberofmessagesonatopic.

“Youshouldhaveoneemailpertopic,”advisesJohnMancini,presidentofinfor-mation management body, the Associa-tionforInformationandImageManage-ment. “Email should not be a laundrylist. And you need aggressive disciplineaboutwhoiscopiedonmessages.”

One organisation Mr Tonsetic workedwith had a rule that, after three emailexchanges on a single topic, executiveshad to call or see the person instead.

“You need to have a conversation at thatpoint,” he says. “Email is not the tool forresolvingacomplexdialogue.”

Individuals can do more to managetheir email better. Microsoft’s Outlook,the most used email application, haspowerful tools for managing messages,suchas labelling,categorisation,andtheability to view emails as conversationthreads.

Google has put more message man-agement features into its Gmail soft-ware. On the mobile side, there are appssuchasMailbox,designedtomakeemaileasier tohandle.

So far, however, such tools do nottransfer well between platforms, whichlimits their usefulness for executiveswhoneedto lookatemailonaPC,onthewebandonamobiledevice.

While employees need to be encour-aged to use those tools, they must alsonot let email dominate their workingday,saysLarryCannell,aresearchdirec-torat ITanalystsGartner.

One technique is to set aside specifictimesofdaytodealwithemail–andturnoffdevicesoutsidethosetimes.

“One thing I’ve let go of is the numberof unread messages in my inbox,” saysMrCannell. “Therearepeoplewhowant‘inbox zero’ but I never look at thenumber. A lot of messages can be dealtwithfromthesubject linealone.”

Workers have tolearn how tocope with thecurse of thegroaning inboxManagement Even senior staff can be paralysedby the deluge of emails, says Stephen Pritchard Hate mail: workers can receive up to 100 electronic messages a day – Dreamstime