Banks Adopt Technology In Response to SARS

On top of uncertainty due to global economic malaise and the recent war in Iraq, the outbreak of severe acute respiratory syndrome (SARS) in Asia presents a challenge to some leading financial players' regional businesses.

When business travel virtually halted and governments in the hard-hit regions such as Hong Kong discouraged face-to-face communications, financial institutions moved quickly to utilize technology to circumvent some of the economic downside of SARS. Barring a global pandemic, Asian banks in Hong Kong, Taiwan, Malaysia, and neighboring regions will feel the financial brunt of the SARS blow. So will foreign institutions such as UBS Warburg, Merrill Lynch, CSFB, HSBC, and Standard Chartered that have a concentration of offices and branches in the affected regions.

The immediate impact on the bottom line may manifest itself in higher non-performing loan ratios and consequent loan-loss provisions, a hiatus in deals in wholesale and investment banking, higher default rates on credit cards, and greatly reduced numbers of loan applications. Banks will adjust their technology strategies to meet these short-term challenges and mitigate their exposure to the risks presented by SARS.

TowerGroup has identified three critical areas of technology impact derived from the SARS epidemic:

* Electronic communications (Web/video-conferencing, mobile devices, laptops, and voice over Internet Protocol, or VoIP)

* Expansion of operational resilience principles to include epidemics (e.g., split operations; teleworking for business continuity)

* Internet delivery (e.g., e-banking/e-brokerage)

Electronic Communications. TowerGroup is observing a surge in the adoption of Web-conferencing or video-conferencing technologies as a result of this epidemic. In many cases, where investments in these technologies have already occurred, utilization is up and the return on investment is just now being realized. New investments are also being rushed that are radically altering the modus operandi of communications in response to the current crisis. Teleworking is garnering a great deal of attention from financial institutions forced to link up quarantined workers and protect the existing workforce by enabling at-home working environments through investments in laptops, mobile devices, networking, and communications technologies already mentioned.

Operational Resilience. SARS has put the spotlight on human beings as a critical component of any comprehensive strategy for operational resilience, and to a lesser extent, business continuity planning (BCP). Institutions are implementing rigorous new criteria for determining which are the critical employees and taking the appropriate technology measures to ensure continuity.

For example, since the SARS outbreak, many Asian banks with offices in Hong Kong have prohibited critical employees from having lunch together, let alone fly together (the latter being a prohibition that is customary in the contingency plans of large financial institutions). Using a dual-site split operations model, financial institutions would be able to migrate all business functions and IT processing activity away from affected site to a backup site in a different geographic region. Banks are placing critical teams at separate locations. To enable a mobile workforce in the event of a massive quarantine, banks have brought back-office resiliency principles into the front office.

Internet Delivery. Internet banking penetration rates have increased up to 40 percent in Hong Kong as branch traffic has been redirected to a less "risky" channel. Although compared to other world regions, Internet banking penetration is rather low in Hong Kong (8 percent), these increases show the positive potential of disruptive forces such as SARS. With branch traffic down over 50% in key Asian markets, many financial services consumers are retaining their ability to access their financial services products via the Internet.

To a lesser extent, customers of wholesale banks, insurance companies, and securities and investment firms are increasingly online as well. In the longer term, this channel shift will prompt strategic investments in associated support infrastructure. More online customers means more demand for service - whether technical support or product-specific support. Financial institutions must quickly adjust their channel staffing and service strategy to accommodate this growth or risk losing customers once convenience and value-add overtake necessity as a critical driver. The long-term benefit of increased Internet adoption rates will be measured by how many new Internet users remain active customers for an extended period of time. The impact of SARS-driven growth in Internet banking rates will be confined mostly to the affected geographies.

Although these technologies should be viewed as tactical investments in response to a current business need, they may reveal long-term strategic value once the chaos of SARS subsides.

Virginia H. Garcia is Senior Analyst, Financial Services Strategies and IT Investments, at TowerGroup, a Needham, Mass.-based research and advisory firm focused exclusively on the global financial services industry.

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