FINANCIAL SERVICES VERTICALS

Financial services represent a diverse collection of businesses, including banking, brokerage and securities, and insurance companies. Each of these industries have their own particular nuances, such as their overall industry pressures and business drivers, tolerance for risk, and IT investment patterns. Banks, for example, have been relatively aggressive in introducing technology to facilitate customer service, improve internal productivity, and support the introduction of new products and services. Insurance organizations, however, have tended to be more conservative with their IT investments, maintaining a late adopter stance toward technology investments and seeking to extend the lifespan of legacy systems and technologies. These legacy systems can often create back-end integration problems when attempting to implement e-Business capabilities such as customer and broker portals, online applications, payment processing, and so on.

Selected Financial Services Verticals

The following section reviews the banking and insurance industries within the financial service vertical, examining how Web services might impact these organizations based on the industry adoption framework described earlier.

Banking Banking, both wholesale and retail, is characterized by a diversity of systems required to support the various products and services offered to customers. Customers of wholesale banks include other banks, primarily retail banks, while the customers of retail banks are individual consumers and businesses. Mid-sized banks can have well over a hundred application systems running simultaneously to support their business needs, while large banks typically have many hundreds, if not thousands, of applications running at any given time. Lines of business for banking include loan origination, cash management, risk management, global trading services, payment processes, and online banking. Each line of business is supported by dedicated internal systems for reporting, billing statements, and online bill presentment. The array of financial products and services is supported by a host of applications and systems running on multiple hardware platforms and software systems provided by a plethora of vendors. Integration between these numerous systems has been built over many years and tends to be implemented as hard-wired, inflexible, point-to-point connections.

As banks add new customers, they must build additional hard-wired connections to these trading partners as they come online. Smaller banks, which do not receive the same levels of service, are not linked electronically to the extent that larger institutions are.

In general, the banking industry can be summarized as follows:

• Legacy systems dominate the application portfolio.

• A mixture of legacy, homegrown, and commercial applications require significant, on-going integration effort.

• Completing electronic transactions requires complex integration across multiple systems.

• Manual processing of transactions with complex, paper-intensive internal processes complicates the business workflow. Migration to electronic transactions over the next three to five years will make backend system integration a high priority.

• Providing consolidated customer reporting across multiple channels requires the integration of systems, customer information, and identity management across all applications (retail banking only).

• There is an inability to obtain real-time views of banking transactions and investment and brokerage services and add new lines of business such as insurance.

Web services in banking can provide compelling benefits. A summary for the banking industry, based on adoption of Web services during the integration and collaboration phases, is detailed below:

• Integration —Banks, due to the complexity of their back-end systems and mixture of homegrown and commercial applications, will initially use Web services to integrate customer information from multiple back-end systems to CRM systems and portal applications. Retail banks differ from wholesale banks in their multi-channel interaction with their customers via ATMs, online banking, call centers, and inperson bank visits. The emergence of e-Business forced many retail banks to integrate their back-end systems in support of online banking, billing statements, and real-time balances. Web services will provide similar benefits for retail banks except that integration will be based on open Web services standards, and over time the services created will be reusable to support the introduction of new products and services. These Web services will be reused across multiple channels. For example, completing a funds transfer via an ATM will likely use the same Web service as an Electronic Funds Transfer (EFT) from an internal banking system. The reuse of services will significantly reduce application development costs as well as improve time-to-market for new financial products through reduced systems development time.

• Collaboration —Collaboration in the banking industry is less mature than in many other industries, such as high-tech manufacturing. However, as integration issues are tackled both internally and externally, collaboration via Web services will begin to gain traction. Before Web services collaboration can become a reality in the banking industry, security, reliability, and transactional consistency standards will need to stabilize and mature, creating the foundation upon which collaboration initiatives can be built.

Insurance Insurance organizations have generally been late adopters of technology, and their mixture of homegrown and commercial systems reflects this pattern. Many insurance carriers are only now implementing CRM initiatives to provide a single view of the customer across product lines. This is a challenging task as the systems for each particular line of business (for example, homeowners insurance and automobile insurance) will often have separate systems for quoting, underwriting, claims management, and renewals. This means that in order to provide a single, coherent customer experience, insurance companies will likely need to use Web services to integrate their disparate back-end systems into CRM and portal applications. Internal integration projects will be a primary theme for some time to come in the insurance industry.

In general, insurance organizations face the following issues:

• Multitude of front-end and back-end systems.

• New products and services are difficult to create and market.

• Combination coverage and bundles of coverage rely on connecting back-end systems.

• Claims processing is transaction-intensive, and systems do not link to CRM and other customer systems.

• Linking with online insurance marketplaces is difficult with legacy back-end systems.

• Integrating agents and brokers into carrier systems is a critical need to drive new business and maintain sales channels.

From this list of issues it is clear that the insurance industry is fertile for the adoption of Web services. The combination of complex legacy systems, high transaction volumes for claims processing, renewals, and new policy issuance, combined with interaction across numerous customer acquisition channels (agents, brokers, exchanges, Web sites, and so on), provides opportunities for the implementation of Web services. A summary of the insurance industry, based on adoption of Web services during the integration and collaboration phases, is detailed below:

• Integration —Insurance organizations face similar issues to banks in their need to integrate multiple back-end systems. This is especially true for the integration of front-end quoting and underwriting systems with back-end claims processing systems, as well as integrating these systems to a CRM solution that provides a single view of, and point of reference for, its customers. It is common for insurance carriers to offer multiple products, for example, workers compensation, commercial automobile, liability, and property coverage, and yet they have separate systems for the front-end and back-end processing activities for each of these products. This results in a very complex IT environment. Web services can be leveraged as the basis for integration of these systems to portals, Web sites, CRM systems, and more. Further, Web services will be used to connect these diverse systems to insurance exchanges and other e-Markets to support new distribution channels for products and services. Because of the proliferation of legacy systems, Web services will likely be leveraged in solving diverse integration needs in support of new customer service demands.

• Collaboration — Web services can offer a range of benefits to insurance companies in the collaboration phase of adoption. Integrating agents and brokers into their distribution model will play a critical role in reaching customers with new products and services. While there are standards for the insurance industry, for example the Association for Cooperative Operations Research and Development (ACORD) standards, back-end systems are nonetheless very different from company to company. Web services will be used to expose these backend systems to the agency management systems used by agents and brokers. After an insurance quote is shopped around to multiple insurance organizations and the customer is satisfied with a particular policy, the agent might submit the application information to the selected underwriter using a common interface mechanism enabled using Web services. This approach will streamline the quoting and policy issuance process as well as integrate the agents and brokers more tightly with insurance carriers.

Financial Services Conclusions

Financial services are fertile ground for the deployment of Web services. The structure of the industry, whether it is retail banking, insurance, or other financial services verticals, will allow Web services to provide significant improvements in processes that affect the relationships of companies to their customers and suppliers. There are real and immediate opportunities For Web services as an integration platform based on the complexity of back-end IT systems and the tendency of some financial services segments to under-invest in their infrastructure and IT application portfolio. Once these are explored and the opportunities are exhausted in the integration arena, attention will shift to collaborative opportunities, working more closely with business partners to provide new sources of value to customers and creating new sources of competitive advantage. Financial services will be a very interesting vertical to watch over the coming few years as the early adopters distance themselves from the late adopters.