Firstly, it is important to understand the lay of the land within the IT world. As IT departments have striven to meet increasing business demands, a wide variety of technologies have been deployed; huge mainframes, desktop PCs, software packages from the likes of SAP and many more. In the finance area, in particular, this multi-technology mix has been exacerbated by a high level of M&A activity. Sadly, these different technologies are rarely designed to work together and, as a result, IT landscapes often look like a disparate collection of independent islands, unable to interrelate without a high degree of complexity and customization.
At a technical level, it is this problem that integration technologies are designed to address, making it much easier to link different business applications and environments together. So this is the ‘what’ of integration, but not the ‘why’. The questions remain. What are the business reasons why integration makes sense to financial services companies? Why the current escalation of interest?
The major drivers for integration in the finance industry are:
• Reduced cost per transaction.
• Increased return on assets.
• Improved customer retention.
• More effective compliance management.
• Stronger levels of governance.
• Lower business risk.
Of these drivers, the first two were perhaps the original source of integration initiatives, focusing on harmonization activities following M&A activity, improving straight-through processing (STP) levels and removing human involvement in the financial process. Of course these initiatives also feed through to the other areas of benefit to some extent. So, for instance, a higher STP rate reduces risk by removing potential human error and the time-span of any financial exposure.
Perhaps the most topical areas to benefit from integration are the final three in this list. With regulation changes coming thick and fast across the world, particularly for financial firms, compliance has become a major issue. Linked to this area, an unpleasant history of corporate misdeeds irregularities has put the whole area of governance under the spotlight. And finally, bringing the whole picture together, there is a strong desire to lower overall business risk within the financial sector, not just at the internal company level but also within national governments. Legislation such as Sarbannes-Oxley and the US Patriot Act in the US and the Risk-Based Capital and Market in Financial Instruments directives in Europe has placed a heavy demand on IT systems within the finance sector. Penalties for not taking these initiatives seriously are severe, potentially endangering both corporate survival and the liberty of those executives deemed accountable.
So how can integration technology help with addressing these requirements? The answer lies in the ability for improved IT integration to deliver a much higher degree of visibility of business process execution and corporate information. Previously, with the islands of IT assets mentioned earlier, it was virtually impossible to see the entirety of business activity across the enterprise. In addition, it is not just the business activity that spans these different environments, but information relating to the customer. Take, for example, the need to gain a complete view of a particular party and related activities. In the pre-integration world, different business applications and their associated information would run in their own environments, isolated from all others. So loans activity, securities trades, investments and insurance portfolios where all distinct, unconnected areas. In this scenario it is extremely difficult to gain a corporate-wide view of the party and related activities. The only way is to analyze records from each system and cross-reference by the party concerned.
Integration technology breaks down the barriers between the different IT technologies, and hence builds bridges between the different business disciplines, services and information sources. Using integration technology, it is much easier to gain a real-time, enterprise-wide view of business activities. This increase in visibility makes it easier to spot compliance exceptions and identify inappropriate or hostile activities. And of course, this visibility coupled with a real-time perspective has a major effect on risk management, making it possible to reduce risk from a number of different aspects including financial exposure, avoidance of penalties and resilience to fraudulent activities.
This last point is appropriately illustrated by the complex area of money laundering, for example. It is generally accepted that in today’s electronic financial environment, one of the only ways to detect money laundering is to assess a wide range of financial activities looking for suspicious patterns. This is a truly daunting task, but at least it is made more achievable by the delivery of a wider, deeper, real-time visibility of business activity across the enterprise and beyond.
However, there is one further benefit of improved IT integration that addresses these last three drivers. Modern integration solutions such as the use of a service-oriented architecture (SOA) and business process management (BPM) tools transform a company’s IT assets into a reusable collection of ‘building blocks’, capable of being quickly and easily assembled in a variety of different ways. This has the effect of making IT systems far more flexible and agile in responding to changing business needs, not to mention greatly reducing the costs of such changes. This increased flexibility and responsiveness positions companies to be able to address changing conditions quickly, effectively and more cheaply, a powerful benefit in a market with a high degree of regulation against a constantly changing political backdrop.
This benefit can be demonstrated in a number of areas, regardless of geography. In the US, for example, the intense focus on homeland security following the rise in global terrorism has spawned the US Patriot Act. This has hit the industry at the same time as Sarbannes-Oxley, one of the responses to a spate of headline cases of corporate financial mismanagement and executive fraud. Companies have been forced to comply with these new pieces of legislations, regardless of the IT impacts that they represent. In both cases, a greater degree of visibility of business activities and their underpinning IT activity is required throughout the enterprise, driving the need for integration. But only a total optimist would suggest that this will be the end of this round of regulatory activity. Public pressure if nothing else will keep the legislative feet to the fire, and a steady stream of changes and new initiatives can be expected. It is therefore imperative that companies can respond quickly and effectively to each new wave of requirements without breaking the bank each time.
From a European perspective, a similar story surrounds MiFID (Market in Financial Instruments Directive). The purpose of this legislation is to break down the barriers inhibiting the operation of a single European financial market, and therefore this is a highly political piece of legislation with mandated implementation deadlines. But the various financial regulators are scrambling to define exactly what MiFID requires, and financial services companies are faced with a rapidly approaching deadline of April 2007 combined with a lack of clarity and stability regarding the details of the directive. By implementing an integration strategy, these companies can ensure that, however the details finally crystallize, they can respond swiftly and non-disruptively without undue financial impact.
In conclusion, then, integration is not just an area of investment being demanded by IT departments to make their own lives easier. The presence of so many disparate technologies and applications that have difficulty communicating is a historical fact, and cannot be changed without massive reinvestment beyond the scope of any company. Also, given the pace of technological advancement and the continuance of corporate mergers and acquisitions, this situation is not a one-off occurrence but rather a continuing challenge. But integrating these assets is vital in order to provide the visibility of operations and corporate information that makes it possible to really get a grip on IT-driven business performance, controlling and managing operations while managing risk down to a minimum. Integrated IT systems result in responsive, agile business systems that form a window into business operations on an enterprise-wide level and beyond.