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Tracking Innovation in Financial Services

The idea of innovation has been on a conceptual roller coaster in recent years.

The idea of innovation has been on a conceptual roller coaster in recent years. In the mid- to late-'90s, with dot-com mania giving credibility to even the most off-the-wall business plans, innovation was an end in itself, and many banks scrambled to compete with the glamorous dot-coms. But, when the boom came to an end - and IT budgets got squeezed - innovation was not viewed so enthusiastically, and financial institutions in general have been taking a more conservative approach to their businesses.

Today, that roller coaster appears to be hovering in neutral. The wild praise for innovation is held in check, yet, with a renewed business focus on growth and revenue generation, it is accepted that there is a critical need for banks and other financial institutions to quickly identify and develop new products, new channels and markets, and new ways to process and support the business activities associated with them. Still, the recently acquired discipline of balancing business caution with aggressive use of technology to achieve operational efficiencies is being viewed as a competitive advantage.

That trend is reflected in an exclusive new ranking, The Financial Services 40, a listing of 40 leading institutions in banking/financial services and insurance that have a track record of innovative IT practices that result in business success. This listing, which appears in alphabetical order on page 44, is derived from the renowned InformationWeek 500, an annual survey of the nation's most innovative businesses, produced by Bank Systems & Technology's sibling publication InformationWeek (see "Methodology" box, page 47, for details about how this information was obtained and analyzed). In addition to ranking innovative companies, InformationWeek also tracked best practices and IT spending trends within banking/financial services and insurance.


The results of this year's research underscore that the firms that are able to deploy technology in innovative, customer-focused ways - and are able to do so in a cost-effective, ROI-concentrated manner - consistently have a competitive advantage generating profits and building market share.

The IT spending trends uncovered by the Financial Services 40 research also reinforce that banks are among the most aggressive investors in technology (see "Industry Snapshots," page 47). According to InformationWeek, about 9 percent of worldwide annual sales revenues are reportedly earmarked to the IT budget in banking/financial services, compared to about 3.1 percent in insurance. However, there is not much difference between industries in terms of how those budgets are divvied up.

Drilling down further, it appears that for both insurers and bankers, resources are pretty evenly divided between maintaining old applications and building new ones, with a significant amount of funds also going toward integrating those systems.

Reg Regime

Regulatory compliance has become one of the most critical areas of focus for those who manage these resources. All of the banking/financial services study participants reported that their firms are taking steps to comply with Sarbanes-Oxley (compared to 83 percent of insurance respondents), closely followed by compliance with the USA PATRIOT Act, HIPAA and Gramm-Leach-Bliley (Financial Modernization Act).

The requirements - some might say drains - on IT resources imposed by the tighter regulatory environment are paralleled by the growing demands for beefed up security capabilities, and the Financial Services 40 organizations are acting accordingly. Among the most widely deployed technologies/products in insurance and financial services are intrusion-detection software (100 percent of banks, 94 percent of insurers) and content filtering/anti-spam software (94 percent of banks, 100 percent of insurers). At the same time, other widely used technologies - such as data warehousing (97 percent of banks, 84 percent of insurers), networked storage/SANs (88 percent of banks, 100 percent of insurers), business intelligence tools (88 percent of banks, 84 percent of insurers), Web services (88 percent and 81 percent of banks and insurers, respectively) and content management software (73 percent of banks and 81 percent of insurers) - are critical, not only to compliance and security efforts, but also to revenue-generating initiatives, such as enhanced distribution, product development and cross-selling.

Finally, there's the still-controversial practice of outsourcing and offshoring. While the jury remains out as to whether or not such a strategy marks an organization as an innovator, it appears from the InformationWeek research that global sourcing is a significant but not all-encompassing part of the competitive arsenal (see chart, page 46). Roughly half of all respondents say they hire offshore talent, including outsourcers, and about the same number augment IT staff with H-1B or L1 workers. But only about a quarter of all respondents are conducting business process outsourcing offshore, according to the study.


For 16 years, the InformationWeek 500 (IW500) has tracked the IT practices of the nation's most innovative IT organizations. The InformationWeek 500 report examines the best IT and business practices of these organizations across core areas of operations, including IT budgets, technology deployment, business and technology strategies, and staffing practices.

The charts and analysis used in this report are based upon InformationWeek Research's 2004 InformationWeek 500 qualifying study, which was fielded online and by telephone from April to August 2004. The editorial study was authored by InformationWeek editors, as was the criteria used in the selection process. The InformationWeek 500 survey was fielded on the Web by CIC Research.

To qualify for the list, a company must demonstrate a pattern of technological, procedural and organizational innovation. The ranking methodology is based upon a proprietary weighting system created by InformationWeek editors. IT organizations that completely filled out the questionnaire scored consistently higher than others that did not.

Although InformationWeek 500 candidates reveal key elements of spending plans and budgets during the research process, the data is aggregated by industry (for benchmarking purposes). Individual responses are never disclosed. To view the complete 2004 InformationWeek 500, visit

Research prepared by Helen D'Antoni, InformationWeek Research

IT Digs Deeper Into Business

Financial firms are employing technologies to improve service and increase revenue.

By: Steven Marlin

The U.S. financial services industry will spend about $60 billion on IT this year, split among banks, securities firms and insurance companies. In an industry whose only tangible product is information, IT is being called upon to supply more of it in support of new customer-service and revenue-producing opportunities.

Innovative firms such as investment house Vanguard Group (Valley Forge, Pa.) use IT to stay ahead of the competition. Unscathed by the scandals that have rocked the mutual-fund industry the past 12 months, the company experienced record business growth earlier this year. Canny decisions made several years earlier to off-load as many customer-service inquiries as possible from the call center to the Web enabled Vanguard to handily absorb this increase.

In January 2003, when the company experienced cash inflows of $4 billion, its call centers handled an average of 48,000 calls per day and its Web site received 170,000 log-ons per day. The next January, after the scandals broke, cash inflow more than doubled to $9.5 billion. Vanguard's Web site easily handled an increased load of 300,000 customer-service inquiries a day, 75 percent more than the year-earlier figure; call volume, meanwhile, held steady at 48,000.

Today, more than 40 percent of all new accounts are opened online and 65 percent of all fund exchanges are processed through Because of attrition, fewer client-service associates are on staff to handle phone calls. But the company has made investments in technology that will improve the ability of its live customer-service reps to help clients - and ultimately make those clients more comfortable using the Web site. Vanguard is in the third and final stage of implementing its Wave client-service desktop, an easy-to-use version of

But Vanguard is faced with the same vexing problem as its competitors, namely changing demographics. The mutual fund industry's growth has followed that of the baby-boom generation, to the point where mutual funds manage $3 trillion in retirement assets, a quarter of the nation's total. As baby boomers begin to retire, those assets, which began as a trickle and swelled into a river of cash, are about to be tapped.

Aware that individual investors become more conservative with their 401(k) portfolios as they near retirement, Vanguard created a system called One Step that aims to keep individual investors increasing their contributions - say, by 1 percent a year - to those savings as long as possible. The premise is to make it easy for people to increase their savings without even thinking about it, Vanguard CIO Tim Buckley says. Nearly 11,000 clients have enrolled in just six months. Changes to enable this feature were easily facilitated across applications such as Vanguard's Web site and its customer relationship management desktop and payroll software, and through the reuse of Web-based objects.

An Education in Lending

Operating at the other end of the demographic spectrum, Reston, Va.-based SLM Corp., better known as Sallie Mae, owns or manages a third of the $75 billion in federally funded student loans granted annually, taking on administrative and collection tasks on behalf of educational institutions and the guarantee agencies that insure loans against default. Behind the idyllic scenes of academic life is the scut work of obtaining a school's fair share of the lending pie; that's the province of financial aid officers, and making their lives easier is Sallie Mae's raison d'etre. It does that by acting as intermediary with the semiprivate agencies that guarantee loans against default and by making it easier for colleges to submit loans electronically to Sallie Mae.

Sallie Mae is in the process of becoming privatized, and competitors such as Citigroup are breathing down its neck, says Daniel Park, VP of IT strategy and solutions. To fend them off, Sallie Mae implemented OpenNet, a Web services platform that lets schools transmit documents to Sallie Mae in a variety of formats. To date, more than 700 schools have connected their systems to OpenNet. In 2003, Sallie Mae experienced a 23 percent jump in new loans and double-digit earnings per share growth. The flexible platform also is expected to help SLM quickly introduce customized services.

Supporting that growth is an IT budget consisting of $92 million for application development and $102 million for operations and infrastructure; included are 800 app developers (65 percent of whom are Sallie Mae employees and 35 percent contract workers) and 250 operations and infrastructure workers (80 percent employees and 20 percent contract workers). Additionally, Sallie Mae instituted an IT charge-back plan to remove the perception that IT services are free and to form tighter links between business and IT pros, including the joint building of IT spending plans for projects.

With successes like OpenNet and an e-borrowing initiative, which produced $11 million in savings the first year by increasing self-service opportunities on the Web for loan holders, "The IT budget pays for itself," Park says.

Lifting the Bottom Line

At Calabasas, Calif.-based Countrywide Financial Corp., a main focus is on cost savings. One of the heavy-hitters in the mortgage industry, the company has replaced a proprietary voice response system with a standards-based speech platform employing voice XML and Web services. This year Countrywide will deploy more than 20 speech-based self-service apps; three were deployed during the past 12 months for mortgage payments, delinquencies and insurance applications. The use of speech-recognition technology has resulted in dramatic cost reductions; the mortgage-payment systems eliminated more than 80,000 customer-service calls per month.

Using knowledge management software from InstantASP, Countrywide has created an online messaging forum for its software developers and has revamped its help desk- and PC-support functions. Knowledge management techniques have enabled the company to shift 60,000 monthly PC-support calls at a cost of $45 a call to help desk calls at $7 a call.

In the past 12 months, Countrywide has also created a portfolio management office that receives monthly project information representing 75 percent of the company's technology efforts. The information enhances decision-making abilities and improves executives' visibility into IT projects. Fundamental to this process is communication, says Jeff Caldwell, senior VP of enterprise technology. To be truly aligned requires a huge amount of face-to-face dialogue, including team-building exercises, summits, task forces, committees, executive briefings and "good old-fashioned discussions over a few beers."

For innovative financial institutions such as Vanguard, Countrywide and Sallie Mae, the lines separating IT and core businesses keep getting finer.

This article originally appeared in InformationWeek, a sibling publication of Bank Systems & Technology.

Size Matters

Smaller banks may have the upper hand in executing innovative technologies.

By: Cynthia Ramsaran

Good things come to those who wait. But good things also come in small packages. These cliches present a choice to small banks: follow the lead of large banks in adopting proven technology, or seize a competitive edge by embracing technology innovation.

Though the 2004 Financial Services 40 highlights the major players in the financial services industry, according to industry experts, smaller banks may have the upper hand in technology innovation because these institutions have less monetary and architectural risk than large banks with multiple channels and larger systems to upgrade. "With credit unions and the smaller community banks, there is a lot of technology innovation happening," says Wim Geurden, Seattle-based associate partner, financial services technology architecture group, Accenture. "These banks have a large advantage because everything they do is a lot smaller."

Big banks sometimes delay adopting innovative technologies or platforms because a significant ROI might not result from the investment, Geurden explains. "For large banks, it is just economically not feasible to be a rapid adopter of anything," he says. "They need to see that the scale is industrialized and repeatable." The smaller the bank, the easier it is to implement a new system, adds Geurden, who says small banks can more easily implement a new technology such as check truncation, for example.

Smaller Staff, More Hats

Although large financial institutions have the resources to roll out an innovative technology, it is often easier for a small bank - with fewer employees and systems - to succeed in implementing a new system, according to Jane Pitts, senior vice president, chief technology officer, Stephens Federal Bank (Toccoa, Ga.; $180 million in assets). "We try to get the [new] product viewed by a cross section of employees to find out if it is going to work for all of them," Pitts says. "That gives us a broader view and, because we are a smaller shop, people wear different hats."

Because a large institution usually is spread more thinly, with responsibilities spread across more employees - who usually have one expertise - the feedback on a new product goes from department to department, making the employees' views on the success of the implementation less effective, Pitts notes. "At a smaller bank, employees can look at it from a larger perspective, as opposed to an employee at a larger bank who can provide only one perspective."

The same is true for testing new technologies, according to Pitts. With fewer corporate layers, a smaller organization can more easily gather feedback from all types of users than its larger competitors can. When Stephens Federal Bank wanted to automate its loan origination system, it participated in a beta testing program with Fiserv Lending Solutions (Lake Mary, Fla.), Pitts says.

"We had a good experience beta testing because it gave us a lot of input," Pitts relates. She adds that because of the bank's less complicated infrastructure, "If anything went wrong, we could always fall back on our old methods." According to Pitts, the testing went so well that "As [Fiserv] starts new products, they ask if we want to be on the test group and they ask us if it is something that banks would want to use."

Think Outside (the Industry) Box

Although small banks may have an easier path to adopting innovative tools, all banks - large and small - can learn from the technology strategies of leading companies in other industries, according to Accenture's Geurden. "Companies such as e-Bay, Google and Amazon are clearly leaders in the areas of information delivery," he says. "If you look at the technology that they are using, it is very different from banking platforms."

Banks can pick up a tip or two from these companies, as well as from leading insurance companies such as Progressive, which have demonstrated innovation in streamlining processing and making their businesses more efficient, Geurden says. Even the hotel industry offers a good example for banks regarding innovative customer relationship management strategies, he notes. "There are certain hotel chains that have incredible customer info - that track preferences like what you order for room service, for example," Geurden explains. "They keep track of how you behave." This offers a valuable lesson for the banking industry, he adds.

Also regardless of size, if a financial institution wants to be an industry leader, it must take certain risks regarding technology, according to Pamela Schneider, vice president, e-business, Old National Bancorp (Evansville, Ind.; about $9.3 billion in assets). Banks need to look to leverage technology to succeed where they previously failed, she says.

"Gone are the days when a company could expect to follow a five-year plan ... or wait to realize the return on the investment in a project for five years," Schneider asserts. "Today, you can't even wait for the return to be realized for two years."

In today's competitive market, innovation is often the first step toward competitive advantage, she says. "You can use the brain trust in your own organization to take a leap ahead in an area where you previously did not compete well."


3 Strategies to Gain an Edge

According to Kaihan Krippendorff, author of The Art of the Advantage: 36 Strategies to Seize the Competitive Edge, financial Institutions can gain a competitive advantage by adopting the following tactics:

1. Move upstream into your customer's decision process. Think about what steps your customer takes as he/she moves toward a buy decision, then find a way to position yourself further upstream. By introducing a mini-card, for example, Bank of America moved its credit card from the wallet to the key chain. A customer who steps up to the counter, keys in hand, to pay for gas, may find it easier to hand the teller her key chain than to dig through her purse.

2. Exchange immediate profit for loyalty. Gillette earns profits from replacement blades, not razors, and Sony loses up to $150 on each video game console it sells but makes this up selling individual video games. In each case, the up-front loss locks in a new "loyal" customer. What can you give up to lure a customer into a codependent relationship?

3. Ask how a non-bank would approach your customer: Virgin approached the airline business as only a radio and music retailing company could and took the long-dominant incumbent, British Airways, completely by surprise. ING has similarly started approaching financial-products customers the way a coffee shop might. Before a non-banking competitor tries to take you by surprise, ask, "How would I attempt to steal customers if I were a coffee shop, a supermarket, a gas station or another non-banking firm?"

Katherine Burger is Editorial Director of Bank Systems & Technology and Insurance & Technology, members of UBM TechWeb's InformationWeek Financial Services. She assumed leadership of Bank Systems & Technology in 2003 and of Insurance & Technology in 1991. In addition to ... View Full Bio

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