Web services promise to change the way disparate systems communicate with each other, giving financial institutions the ability to create new products and improve customer service-internally and externally-while reducing overall IT costs. The problem? New is never easy.
While early steps have been tentative, Web services offer a lot of potential. Bank of America, Bank of New York and Nationwide are among the FIs getting ahead of the game.
As many companies in and out of finance learned during the past decade, sometimes it pays to be an early adopter of new technology. But, of course, sometimes it doesn't. For every call center, on-line banking or wireless innovation at the top of a CIO's hit list, there's a smart card lying in the dumpster.
That leads to hard questions about emerging technologies that promise to become the next big strategic tool. Will it work? Is it worth the investment? With the drum beat growing louder for faster return on investment and the recession putting increasing pressure on institutions' bottom lines, it's no surprise then that the next new thing-
Web services-is facing tough scrutiny from CIOs and their IT departments. Web services promises to simplify all the different ways that business units with disparate systems communicate with each other electronically.
But there's still a lot of concern about how secure the technology is, and how much of an advancement it actually represents. "It's more evolutionary than it is revolutionary," says Pierre Fricke, evp of Web application infrastructure at consulting firm DH Brown Associates.
For the uninitiated, Web services are business and consumer applications that use a set of shared standards and protocols allowing different systems to interact with each other, sharing data and services-without the need for manual translation. These "conversations" allow applications to bypass operating systems, programming languages and middleware. The key is Extensible Markup Language (XML), which standardizes digital content. Passwords and other information are stored in Universal User Profiles (UUPs), which give users access to multiple Web sites and services.
Nationwide Insurance is among the financial institutions grappling with Web services, and stands as a pretty good example of how the new technology is being approached. While Nationwide is enthusiastic about the technology's long-term upside, the company has reservations keeping it from widespread deployment in the near term. "It's definitely an area of a lot of interest," says Srinivas Koushik, enterprise CTO for Nationwide Insurance. "Our game plan right now is to go mostly within our enterprise."
It's a similar sentiment expressed by most firms using Web services. At first, the primary usage will be to break down siloed information and data, since Web services are as effective a tool as any to create whole views of customers by making it easier for various segments of a company's data bank to "speak" to each other.
That will allow Nationwide a more seamless path between the insurance and financial services sides of its business. But since the technology still poses more questions than answers, particularly in terms of security, most of Nationwide's work with Web services will remain internal. Down the road, Web services hold promise for the business-to-business market. "We have big plans for Web services, but most of them are likely on hold until next year," Koushik says.
McKinsey & Co. estimates Web services can cut the time and money needed for systems integration, the largest IT expense, by up to 20 percent. Further savings could come from unbundling functions and activities within organizations. McKinsey analysts say that will make it easier to outsource applications such as order fulfillment and inventory control.
For now, Web services primarily are being implemented to shore up back-office operations, which can use the technology without being bogged down in security issues, a major bug that has to be worked out. Since the technology is being used mostly by companies for internal functions such as managing pension data, the processes remain securely tucked behind a company's firewall.
However, the more advanced plans for Web services, such as using the technology for cross selling or leveraging personal information for complex customer service, will have to wait until the data can be adequately secured. "Someone is going to be doing a transaction with us and they are going to want to make sure it goes into our core systems," Koushik says.
The idea is to achieve instant links between on-line processes of different companies. If it works as anticipated, Web services could shrink IT budgets, create new interactions among businesses and make the Internet more user-friendly for consumers. "You can provide one interface to a customer, rather than having them go through multiple parts of an organization," says David Littlewood, director of worldwide financial services for Sun Microsystems, whose Web services customers include Bank of America.
Such a development could advance customer relationship management, which hasn't fully realized its potential at most institutions, and aid in channel integration. Instead of visiting different Web sites for functions such as on-line investment research, trading, mortgage pricing, taxes, etc., all of that would be available at the same place, perhaps for a fee-giving rise to business for providers of UUPs, which would control access to customers. That could place on-line financial firms at risk since access to their business could in effect be driven by another entity.
Nationwide isn't alone in its early exploration of Web services, joining a growing group that includes Bank of New York, Bank of America, Deutsche Bank and Dresdner Kleinwort & Wasserstein. These firms are taking small steps in Web services that eventually could streamline institutional operations.
If all goes as hoped, Web services could give rise to new products and services, create faster, more efficient processes between various businesses and divisions of institutions and perhaps even crack the long-disappointing and far too expensive CRM nut.
Or it might not. Time will tell.
But most technology gurus are placing bets on Web services as the thing to drive the next chapter of innovation in financial services. Even so, evangelists acknowledge things won't pop overnight. "It's not a magic wand. It doesn't change the need for a bank to reorganize and streamline it's operations," Littlewood says. "If banks don't streamline, they can't reap the benefits of Web services."
Bank of America is using Sun Microsystem's Sun Open Net Environment-based Application Services Reference Architecture. Sun ONE is designed to reduce complexity, time constraints and other deployment issues by providing pre-designed, deployed, tested, tuned and documented Web services. In short, it's a blueprint for what this technology represents-today and tomorrow. "Many corporations are interested in gaining the benefits of Web services, but need guidance in how to implement a Web service-based architecture," Fricke says.
The Sun ONE package includes the Sun ONE application server, which enables Bank of America to integrate Web services with legacy applications and data. Based on open standards, the Sun ONE platform allows businesses to leverage existing systems, platforms and environments, and plays a critical role in securing investment protection and lowering the total cost of ownership. It includes the integration of other Sun products such as the Solaris Operating Environment. The Application Services Reference Architecture features Sun's scalable SPARC and Solaris binary-compatible Sun Fire servers, providing a base to add future services. Like many players in the Web services game, Sun is being deliberate, actually running free tests for customers prior to implementation. "We've eliminated the guesswork on our customers' side," says Gary Beck, vp of Sun's integrated products group.
Littlewood says the move is partly a measure of helping institutions build a business case for implementing Web services in a time when IT budgets are strained as never before. In such an environment, the mettle of any new product has to at least be partially demonstrated before there's a green light, something Littlewood says the third-party segment of the financial technology world should be more sensitive to. "Tech companies have been focused on simply selling things," he says. "One of the things we're looking to do in a nonthreatening environment (is) come up with a justification for doing this-to help the bank build its business case."
Bank of America has implemented Sun ONE to streamline its mortgage operation, according to Littlewood. It's the sort of data and record traffic clean-up that's proven to be one of the most effective ways of using Web services. As new and existing customer data and transaction records move from one silo to another, the new technology makes such movements almost seamless, removing the need for a more laborious process. "It's the sort of thing that might have previously been done on back-end legacy environments," Littlewood says.
Bank of America sources declined comment for this article.
At Bank of New York, Microsoft's .Net, one of Sun ONE's rivals, is being deployed in the bank's retail fund servicing platform, RUFUS. It's being used for shareholder record keeping across different European tax domiciles. "We're moving from the pan-European transfer agency platform to a platform that can service multiple products," says Andy Sloan, vp of European Communications for BONY.
While BONY has not ruled out using Web services for additional functions or giving it a go in the United States, its usage is admittedly limited at this point.
Security measures are said to be in the works at the firms investing in Web services, but widespread protections are not expected until 2003, Fricke says. "Security is definitely an issue for us," Littlewood says, adding that Sun is looking to develop a network identity for users that would protect them as they navigate the Web inside and outside the company's firewalls. "You authenticate yourself in a manner that's appropriate to your transaction. It can be a PIN and a password, and we can go right from that to digital certificates."
The security issue has also spawned two consortia to discuss issues like standardizing authentication. One, called Web Services Interoperability Organization, is being operated by Microsoft and IBM, while Sun Microsystems' efforts are part of a broader consortium called the Liberty Alliance. The idea is to have some sort of security protocol in place by year-end, providing a clearer picture of what the Web services market will look like in the process. "It will probably take a year before we really know what path this is going to take," Koushik says. "Though there are ideas that we can take from both consortia."
With heavy hitters like Sun Microsystems, Microsoft and IBM making big investments, financial IT executives can expect Web services to hit the mainstream. The real question is how effective institutions will be in using the technology to its fullest potential. In the interim, McKinsey says firms would be best served by considering how much cost and delivery time can be reduced via Web services. "The simple stuff will start to ramp up soon, but anything where multiple parties are involved probably won't get going until 2003 or 2004," Fricke says.
