Why the Financial Services Industry Must Get Serious about IT Architecture

This article was originally published in VSJ, which is now part of Developer Fusion.
I happened to browse an IT career report recently that says hot IT jobs are shifting to architecture, while security also remains hot. As always, the financial services industry plays a significant role in such a shift. What is happening? – it’s time for the financial services industry to get serious about IT architecture, or they may be out of business.

Sounds serious, doesn’t it? In fact, forces from multiple angles have made IT architecture an important and even urgent matter for many financial institutions in their survival game. This article discusses some of these forces to help you understand why the financial services industry must get serious about IT architecture.

The operating model of financial services is changing

Today’s technology has made it so easy to find and compare financial services offerings, and has also caused financial services providers to face growing competition, which is even worsened by new non-traditional players, such as the Internet-only “Dot Comers”, joining the force. To stay competitive, many traditional banks and insurance companies are transforming from traditional ways of doing business to a more contemporary operating model. Yet on the other hand, many banking and insurance systems in use today were developed in 1950’s and 1960’s and are often closed structures. These systems are no longer suitable for today’s dynamic market and competition. Many financial services companies cannot wait to jump onto the wagon of renewing their old systems in order to support the new operating model demanded by the business.

Compared to 1950’s and 1960’s, technology and the construction of technology solutions have become far more complex that they require specialized talents. Realizing these challenges, financial institutions have no choice but to get serious about architecture, as it’s the only hope for them to successfully complete the expensive and complex transformation.

Mergers and acquisitions are at record high

Mergers and acquisitions are a key strategy for growth among U.S. banks, and consequently they are also a major cause of IT challenges today. There will be 5,000 fewer institutions worldwide by 2014 and 1,000 fewer commercial banks and thrifts in the United States by 2010, according to the forecast by Financial Insights of IDC. Consolidation has already created mega banks in the United States that are in excess of $1 trillion in assets, like Citigroup, JPMorgan Chase and Bank of America. Size creates enormous complexity for IT.

Using Wachovia as an example, the Charlotte, North Carolina-based bank merged with First Union in 2001, and in the following year it acquired Prudential’s retail brokerage business. In 2006, it completed another merger with South Trust Corporation, making Wachovia the fourth-largest financial services company in the United States. With such frequent mergers and acquisitions, one of the challenges Wachovia faced was how to access and work with content stored in a disparate mix of content repositories following the mergers and acquisitions. Architects at Wachovia realized the need for an enterprise wide architecture for content integration that could be implemented incrementally, and would integrate the widest range of content formats, from transactional data to unstructured content. As a result, they created Content Access Services (CAS), a content integration platform built upon the IBM WebSphere Information Integrator that provides customer service, brokerage and workflow applications with a single point of access.

“With CAS, business executives are making their decisions based on what they need to do, not on whether or not we can hook up a new system,” said one of the IT executives at Wachovia.

Online customer experience has become the key to future success

Differentiation in the financial services market has become increasingly challenging as products and services become commoditized. Customers are demanding higher and higher levels of customer service. Online service is one area that demonstrated the fastest growth in the past a few years, and it has become the key to attracting and retaining customers as well as increasing market share. The rapidly growing number of online applications, with increasing complexity and security threat, has created demand for better architecture that can produce superior and rich online customer experience and meanwhile contain cost. Using a well-known architecture as an example, whether an online application is build with MVC (Model, View and Controller) model can potentially result in big difference in future maintenance and upgrade cost. Also, a badly designed online application may have little flexibility and no interoperability, thus has to be completely redone in order to implement new features that are demanded for readiness by the business counterpart within a few weeks.

Already overwhelmed compliance requirements will only continue to grow.

The financial services industry is facing increasing pressure locally and internationally to comply with many new and varied regulations such as the US Patriot Act, Basel II, Sarbanes-Oxley, RegNMS, and now MiFID, each with its own specific reporting and record-keeping requirements. On the other hand, regulators are tightening up and applying their existing rules with increasing tenacity, including large fines and even the jailing of company executives. These compliance pressures had led to reactive, short-term focus on particular regulations. In some financial institutions, this has resulted in individual regulation silos and less-than-optimal implementations. Perhaps the fear of going to jail has led many to react quickly. Many financial company executives admit that an adequate architecture is needed.

The old way of managing operational risks has become insufficient.

The management of operational risks has always been part of a financial institution’s internal requirements. However, with increased industrialization of the financial value chain, operational risks have become dynamic and are interconnected. The old way of managing operational risks is not sufficient anymore. With Basel II this strong internal desire to better understand and manage operational risks becomes a regulatory necessity, which creates demand for business intelligence and analytics solutions to help improve capital allocation and provide metrics and performance indicators to better monitor how the institution is performing. These sophisticated solutions absolutely need well thought out architectures, or you will only add additional uncertainties to the already complex risk relations.

IT is challenged by itself

On the technology side, the rapidly growing data, number of applications with ever increasing complexities, and the need to integrate them locally and remotely have also put pressure on IT architecture. Using data storage as an example, a staggering 1000% increase is predicted over just five years, 2006 through 2010, according to Enterprise Strategy Group. The huge quantity of data – including risk, finance, customer and compliance information, requires rigid data warehouse architecture.

Another example, today there are so many standards that the costs of interfaces and communications support have skyrocketed. Many financial institutions have been supporting numerous and diverse types of communications between themselves, their business customers, and their partners. A well-planned architecture is urgently needed to trim and streamline the internal and external movement, integration, and processing of information before they get out of control.

Architecture provides better views in expectation management

Dissatisfaction of IT performance from the business side has reached dangerously high level at many financial institutions, due to rapid changes in business requirements and in contrast the inability of IT to meet such rapidly changing requirements. In the past several years, IT departments at many financial institutions were frustrated with a long backlog of deliverables that must be attached to their existing inadequate infrastructure. Under pressure, IT knowingly or unknowingly created silo or duplicate solutions that led to expensive unnecessary spending in addition to the already common expectation of delay, which of course was heavily criticized by the business counterpart. The solution to this disconnection lies in enterprise architecture. Enterprise architecture planning provides better views in expectation management, which is key to bridging LOB and IT in the disconnection of what is promised and what is expected. Thus, Enterprise Architecture is invaluable to any organization, especially large ones.

During the last decade, the role of enterprise architecture has expanded from a mere technical blueprint of IT systems and infrastructure to include other aspects related to business-technology alignment. In fact, enterprise architecture has become an inseparable aspect of an organization’s overall strategy. It is essential that corporate executives, business managers, and architects understand how enterprise architecture fits within the context of overall organizational strategy.

The industrialization of the financial services value chain is the future

The future of the financial services industry is an industrialized financial value chain where institutions, vendors that serve them and their customers are interconnected by an open dynamic IT infrastructure. To be part of the chain, a financial institution must be architected compatible with other stakeholders in the chain. Risks are no longer isolated within each individual organization, instead they become interconnected. One point of failure in the system can propagate a long way down the chain until someone claps. Thus to present unexpected failure, often will translate into loss, the architecture of a financial institution must be ready to react to any disruption in the chain, and every institution has a responsibility to protect the system from failure, thus to keep the financial market operational. Like constructing a huge building complex, it’s deadly dangerous to continuously add new modules to the complex. There has to be an architectural design before it is built. The same principle applies to the open IT infrastructure that supports the future financial services market.

Having discussed these forces that are coming down at multi angles onto the financial services industry, it won’t take too much imagination for one to conclude that the financial services industry must get serious about IT architecture. This is essential not only for individual institutions to stay competitive, or simply put, to survive, but also for the financial services industry to remain operational.

Charles Lee is Vice President, Enterprise Architecture at SunTrust Banks, Inc. He is responsible for the architecture strategy and roadmap of the bank's enterprise security domain. He is also president of the Atlanta chapter of the International Association of Software Architects, a not-for-profit organization that is focused on the architecture profession through the advancement of best practices and education.

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