National Differences a Hurdle to Globalization

First of Two Parts

Financial institutions and their customers increasingly operate across national borders. Institutions as diverse as ABN Amro, Morgan Stanley, NationsBank, and AIG simply cannot grow at acceptable rates within one country.

But to operate globally, they must provide information technology support that is broader, deeper, and more flexible than is allowed by domestic IT alone.

Unfortunately, many financial institutions have encountered difficulties in globalizing their information technology. Integration of applications is problematic. The flow of customer data across borders is typically poor and may even be illegal. Common products and consistent cross-border service remains a distant goal. IT scale economies have not occurred and, in fact, global complexities have usually increased unit costs.

The problem is that financial services conditions are different around the world. Some U.S. products-like credit cards and residential mortgages- are growing in popularity everywhere. Yet almost every country has unique products, services, channels, and regulations that heavily influence IT requirements.

Take Canada. Reasonably similar in customs, regulations, and culture, Canadian banks nevertheless have not used most of the common applications and service bureaus found in the United States. The more proprietary approach has been costly. Gaining enough scale to compete globally and to afford continued investments is one of the reasons for the two large Canadian bank mergers.

In Latin America conditions are extremely different. There are few consolidated back-office operations. Home banking is relatively unimportant, due to low ownership of personal computers and high long- distance telephone costs.

Branches are heavily used-often just to make payments-and automated teller machines must be targeted at relieving branch crowds. An absence of toll-free numbers and a distrust of computer security forces localization and raises call-center costs. Securities markets are far more undeveloped, and hyperinflation accounting is a common feature.

It is not unusual today to find a Latin American bank with $1 billion of assets operating its own rather tired proprietary mainframe processing system. One Guatemalan bank even wrote its own credit card processing system on a PC.

Things are beginning to change. Banco Santander, for example, is importing for the banks it has bought the Altamira system from Spain. As telecommunications improve in the future, more branches can be on-line, additional centralized operations will become possible, and multicountry data centers may appear.

There are also opportunities. In Latin America banking is a growth business and a prestige occupation. As a result banks have some market power that U.S. banks do not. In Brazil, for example, banks have proven to be an effective channel for introducing PCs, as would not be the case in the United States.

In Europe banking has been more protected than in the United States, and the result has usually been oligopolistic conditions within each country. The result has been a historical propensity toward proprietary systems reflecting the unique regulations, habits, and cultures of each country. Banks are not restricted in equity ownership, and some have owned technology vendors. Credit Lyonnais owned the point of sale and time- sharing vendor Sligos, for example.

Payment systems are different, with only the United Kingdom having check use anywhere near that of the United States. On the continent, bank and postal giro systems are popular. Europeans also use standing orders for automatic check payments extensively.

Point of sale systems are heavily prevalent, though most cards have been deferred debit, not true revolving credit. Strong national organizations such as the French Groupement des Cartes Bancaires and the German Zentraler Kreditausschuss, both of which put chips on all bank cards in their countries, have been able to mandate technological conformity. Multicurrency systems are crucial, and foreign exchange trading, for wholesale and retail markets, is a large business.

Capital markets technology is well developed in Europe, though some aspects are different. (For example, asset-backed securities are lacking.) Private banking is more developed than in the United States, but mutual funds less so. The equity markets are less developed, and trading volumes on many bourses is much lower. Settlement, clearing, and custodian requirements vary widely from country to country.

Banking data in Europe do not flow easily from creditor to creditor as it does here. Credit bureaus and offshoots such as scoring are not well formed. Even public reporting of corporate performance and credit standards is different.

Support for national vendors has somewhat restricted banks' technological efficiency. For example, the French vendor Groupe Bull has fallen behind global standards, imposing a cost on any bank that is still a user. Partly for that reason, certain U.S. vendors, such as Unisys and NCR, have played larger roles in Europe than they do in the United States.

Certain key U.S. trends are less evident in Europe. For example, European consumers tend to have fewer bank products and use fewer providers tha U.S. consumers do. Oligopoly within each country has helped banks keep a core set of full-relationship customers.

Because consumer credit reporting is less open, having an internal customer data base is a much greater competitive advantage than in the United States. The U.S. style of extreme industry fragmentation and extensive telemarketing is less prevalent. So is U.S. banks' emphasis on customer relationship management.

Converting to the common European currency is costing banks worldwide some $18 billion. Even worse, it will introduce uncertainty about many of today's systems and features. For example, should each European Community country have its own automated clearing house system once there is a single currency? Which country's approaches and techniques should become the standard? There will be a fight, and banks will have to adjust-whoever wins-to a set of new supranational transactional systems.

Japan has unique banking technology characteristics. Very high population density and low crime rates have led to a ubiquitous bank branch and ATM network and a heavy reliance on cash. Payments can be made through the Zengin system from any ATM to any payee in the country if the account number is known.

This helps explain how Japanese consumers exist without checks or periodic transaction account statements. Standing orders are sine qua non for payroll, salaries, retirement, debts, and utility payments-except those made in cash. Transaction accounts have passbooks that the consumer must insert in an ATM periodically. Data on all previous transactions since the last insertion are then transcribed. Sumitomo Bank will provide a western- style statement only on the request of a favored customer, but it is illegal to send such a statement out of the country.

Differences go far beyond retail banking. Because overnight investment rates are about 0.25% annually, Japanese banks offer essentially no cash management services to their corporate customers within the country. Call centers are essentially unknown, both for retail and wholesale customers.

Japan's banks are less efficient than U.S. banks. The cost per banking transaction is very high because of proprietary application systems and use of low-volume mainframes. For example, some Japanese banks, like Sanwa, do not use standard software such as CICS or MVS. Even Amdahl and Hitachi do not provide their plug-compatible systems inside Japan.

Despite their great size in assets, Japanese banks spend less on technology than leading western banks. Their problems precede the current Japanese banking crisis; the banks have been slowly disinvesting in technology since about 1990.

For reprint and licensing requests for this article, click here.
MORE FROM AMERICAN BANKER