In terms of technological innovation many things have changed over the last five and a half years, with the rise of mobile phones and attendant applications such as mobile payments and banking, mobile remittances in the third world, and other end uses particularly prevalent, alongside other developments such as virtualisation, cloud computing and so forth. The technology world never stands still and it is this fact that has made it such fun to report on it during my time at FST. I leave it to my successor at FST, Sophie Baker, to keep you up to date with all the latest innovations. She can be reached on sophie.baker@fstech.co.uk, Tel: 0207 562 2401 from September onwards. Please join me in wishing her well and give her every assistance in her new role; over to you Sophie…

I shall be moving on to work as a deputy ed at Informa (contactable, 6 Sept onwards, at neil.ainger@informa.com, Tel: +44 (0)207 017 3498). It’s been a pleasure working with you and reporting on the sector.  

Best wishes,  
Neil Ainger 
Ex-editor of FST Magazine - Financial Sector Technology
Sixth Floor, 3 London Wall Buildings, London, EC2M 5PD.
Tel: +44 (0)20 7562 2401
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Established in 1995 FST is one of the leading audited business titles for IT decision makers in the UK  

Situated outside the EAT sandwich chain, one of the retailers trying to promote contactless, in London’s Soho Square, Peter Buffery, a musician currently studying at Kingston University and working on his debut album, attracted quite a crowd but no jingling change. Barclays and Barclaycard issued passers-by with pre-paid contactless cards loaded with £5 as they successfully sought to achieve their £2,500 total.

Commenting on the publicity stunt, Andy Harris, head of current accounts at Barclays, said: “It’s been a great success, not only in terms of how good the music’s been but also because it’s really demonstrated that there is an easier and quicker way for people to make everyday purchases. If a busker can go contactless, then anyone can.”  

Contactless technology now has over 8 million cardholders capable of using the technology from Barclays and its credit card operation alone, with more than double that number including other UK banks. Large numbers of contactless enabled cards and payment terminals in retail shops do not necessarily equate to large usage numbers though and in my personal experience, I’ve still to see anyone make a contactless transaction across the road from me at my local EAT sandwich shop… Hold on though, it’s nearly lunch time so perhaps I should go out and check again…

When you think of expenses in the financial services sector, investment bankers spending several hundreds of pounds on wine in exclusive City restaurants spring to mind. But what about the retail bankers, brokers, insurance companies and management agents, as well as back-office staff in the IT department? Not all expenses are incurred by so-called ‘casino’ bankers and everyone needs to be covered.

Financial sector employees receive more in expenses than any other business sector in the UK: 39 per cent receive more than £1,500 in total over a year, compared to the national average of 28 percent. Claims are higher value too – the average business travel claim is £55.94, compared with a UK average of £41.94; the average entertainment claim is £124.11, almost double the average claim from the next highest vertical, which is the IT industry. The average accommodation claim is £219.49, versus an average of £163.24.  Higher value claims mean that financial services companies are more exposed than other industries to unnecessary employee expenses losses. Getting control of it is vital.

Compared to the huge sums lost in the banking crisis, savings on expenses may seem like small beer. But significant amounts are being lost through poor expenses systems that lack the proper controls; leading to a failure to claim back the full amount of VAT on expenses and fraud.

Most systems fall down because users and their line managers don’t know the rules. They don’t know the spending limits for different expense categories, geographies and seniority of claimant; they don’t know what constitutes a legitimate claim according to their employer’s expenses policy (if one exists); and they don’t understand the statutory requirement for some claims to have a receipt to facilitate VAT repayment.  Even a tailored enterprise resource planning (ERP) system will fall down if the person signing-off the claim gets it wrong.

Checking expense claims by the payroll team in the finance department is often perfunctory as a result of the large volume of claims, despite workflow systems. Most companies give compliance a nod by auditing just 10 per cent of claims.  Attention is focused on updating constant changes to statutory compliance rules and nobody has the time to analyse expense trend data to improve the policy, identify serial abusers of the system, or introduce strategic cost reduction measures in a particular department.  The result is a large number of out-of-policy claims being paid and an open door to fraudulent claims.  

Acquisitions and consolidation following the banking crisis have only added to the confusion by delivering mis-matched expenses systems and incoherent policies. Investment bankers and others in ‘sales’ businesses say they are working in a different ‘work hard, play hard’ expenses culture – it is their job to incur expenses, that’s how they do deals.  But is it acceptable to use this reason to avoid all monitoring, especially at a time when bonuses have been squeezed along with salaries and some individuals must be tempted to top-up their expenses to maintain living standards, particularly if nobody is paying close attention?

It would be better to accept the different cultures and users’ needs and design an employee expenses system that’s fit for purpose, correctly monitored and with accurate PAYE and VAT treatment.  That way banks and financial services businesses can control their expenses – not necessarily to cut-back on expenses but to understand expense patterns and asses the true cost of deals and the real value of contacts. It may mean that employees are not getting out there and spending enough!

The return to profitability of the ‘big four’ UK banks is of course welcome and hopefully means that more money will become available for technology investments to take advantage of evolving new markets like mobile banking and payments, contactless, and social media marketing, plus new infrastructure developments like virtualisation and cloud computing, which could deliver further cost savings. Expect the government to cash its chips in soon as well on the state-controlled banks - RBS and LloydsBG - as it badly wants the billions that will be released by returning the banks to the private sector for its deficit reduction programme.  

One cloud on the horizon though is the fact the net lending to Britain’s small to medium-sized enterprises (SMEs) and to the economy generally - the justification for the bailouts remember - is actually falling. HSBC said it added £1.4bn in SME loans, but on a net basis however, which takes into account existing loans being paid back, its lending figures actually fell by two per cent. At LloydsBG net lending fell one per cent to £386bn and remember, like all the banks, it is charging more for that credit than it ever has before. Barclays didn’t provide a net lending figure but there is no reason to believe that it is out of step in this declining business lending trend, even despite its acquisition of Standard Life Bank and £7bn of extra lending earlier this year. RBS’ net lending was down 3 per cent on 2009 levels to £14.4bn. Lower customer demand is routinely cited for the falling net loan volumes, but higher credit prices probably account for that, forcing SMEs to look elsewhere.  

Stephen Alambritis from the Federation of Small Businesses (FSB) argued that SMEs continue to see a decline in lending from the big four banks, with it falling from a high of £900m a month in early 2008 to just £500m per month now.

This being the case why then shouldn’t the year-long banking commission set up by the new UK government to investigate the state of the sector, recommend a further break-up of UK retail banks, on top of the EU encouraged one that saw 318 RBS branches sold off to Santander this week for £1.65bn? Unless the big four improve their lending rates, the answer to this might just be ‘no reason at all’ and more sales please…

The seven banks that failed these purely speculative stress tests would need a total of 3.5bn euros (£3bn) of new capital to meet the standards required, explained CEBS. “They will have to agree with their respective national supervisors a plan, over a given time period, which will explain how this weakness can be resolved,” commented CEBS chairman, Giovanni Carosio; a process that is now underway.

Financial markets during the week reacted relatively calmly to the weekend’s stress tests, with initial fears that worries about a lack of severity in the tests could precipitate a second banking crisis, failing to materialise. 

According to Mark O’Sullivan, of foreign exchange firm Currencies Direct, the lack of a panic is because, “what seems to have occurred is a compromise amongst European banking regulators, with lots of people now questioning if the bar has been set way too low in testing the European banking sector. It seems the tests may have raised more questions than they have answered and in the coming weeks, it will be the interbank lending markets that will have the real answer as to whether confidence has returned to the European banks.”

The CEBS exercise showed that UK banks are well placed to handle further periods of economic stress, as outlined in the macro-economic parameters detailed by the European oversight body - see HERE. The EBS stress test is different but complimentary to the FSA’s own liquidity stress testing regime.

Leigh Bates, head of financial services at SAS, argues that purely focusing on capital adequacy is missing the point. “While the tests enable regulators to determine necessary capital ratios, the longer term aim is surely to help ‘futureproof’ the industry. Ultimately, banks need to see for themselves what changes are required in terms of risk management procedures [and no doubt BI technology], so that they can be confident in their own ability to deal with whatever events the future may hold.”

The lack of a panic following the stress tests means that everyone can now return to worrying about what’s in store for the industry with the so-called Basel III liquidity requirements, the rules for which central bankers tweaked on Monday - see HERE.

The purpose of the whitepaper, which draws on extensive interviews carried out by Richard Comotto with market participants, regulators and clearing system operators, was obviously to respond to the current regulatory moves that the ICMA believes may threaten the smooth functioning of the repo market; evidenced by the continual warnings for regulators to avoid the “law of unintended consequences” when seeking to overhaul the market.  

The EC put out a consultation document last Friday and intends to place a financial markets reform package before the European Parliament this Autumn, for a 2012 start date. The lack of definitive proposals at this point means nothing is set in stone yet, but the ICMA is obviously worried about a possible pre-borrowing requirement on short-selling, for example, and limits on short-selling, including uncovered or naked short-selling, where the hope is that the instrument will fail; something the Germans are especially keen to crack down on. In this case, the worry seems to be that conventional shorting and naked short-selling will be confused to the detriment of all. In the opinion of the ICMA’s ERC body “the restriction of short-selling would have unintended consequences for the securities market, increasing costs and risks for issuers and investors”.

There is also concern that regulatory initiatives should not constrain the capacity of the repo market in Europe at a time when increasing demands are being made on it, both by regulators themselves in terms of proposals for enhanced collateral management to reduce risk and by governments in terms of increased debt issuance. As Comotto said: “If you want to encourage the collateralisation of risk then don’t impair the functionality of the repo market.”  

By the same token, you can’t just ignore the financial crisis that happened so some change is inevitable and indeed welcome. Godfried De Vidts, chair of the ICMA ERC just hopes that the report can “make an important contribution to the debate amongst policy makers, assisting them to make informed decisions”. He added: “We also welcome more in-depth, constructive discussions with all concerned and trust they will lead to a well functioning secured market that will continue to be an important brick in the establishment of a more robust financial market environment.”  

Technology-wise, the problem of settlement failures and the need for a better market infrastructure was also discussed, both at the meeting and in the report. The fact that telephone pre-matching is still going on, in Greece and other countries for instance, is ridiculous and needs to change is counterparty risk is to be reduced, or indeed if people are to be persuaded to even return to such markets - many are staying away for fears that they won’t be able to get their money out again due to poor infrastructures or political interference. On this point at least, De Vidts, has a very strong case, especially when you look at other markets with fully electronic centralised settlement systems like CLS in the FX space for example. As he quite rightly said: “We still have international and cross-border settlement issues even 10 years after I first started working on the Giovannini principles …the Greek crisis shows once again too the problem of inadequate infrastructure.” Sorting out the interconnectivity problems between the major international clearers, Euroclear and Clearstream, and national CSDs would be a good place to start. To read the Whitepaper click HERE.

The report also illustrated the cut in staff numbers post-recession, with 20,000 more jobs, mainly from High St operations downsizing after mergers, going last year, on top of the huge numbers already lost from the industry since the downturn began.

In regard to lending, the figures show that mortgage lending by High St banks is down by half compared to where it was three years ago, but Dooks contends that this is due to the quieter housing market and that building societies and other specialist lenders, typically buy-2-let operators, have retracted more with £28bn less going out from these lenders. Unsecured consumer credit lending is also, not surprisingly, nowhere near where it was during the boom years. As Dooks said of the consumer space: “debt repayment is how i’d characterise 2009.” Small business support, often a controversial subject, was to the tune of £500m gross lending per month last year, with 700,000 businesses borrowing on overdraft and 500,000 on loan terms; a small net contraction from the previous year. ”The majority of SMEs aren’t borrowing but are instead relying on their own profits or alternative funding sources,” said Dooks. The thorny issue of bank rates was not directly addressed but if other sources are being used it suggests the available loan terms are not always attractive to firms.   

In regard to technology, there were lots of interesting figures and I have highlighted a few of them here – Every day, every 10 minutes, last year: 
• 35,000 people used the internet to check their bank account balance or statement online, while paying 4,500 bills via the net or phone;
• 48,000 visits are made to bank ATMs, withdrawing £3.2m in cash;
• clearing systems process 18,000 cheques, 107,000 automated payments and 151,000 plastic card payments.
Sadly there are no figures for contactless payments yet from this source but it will be interesting to see the progression of this technology in future years. For more figures, and the full report, please see HERE

The geographic reach of BT Radianz has tripled since its inception ten years ago, and now extends to over 60 countries and developing markets, including Russia, Brazil, Korea and Taiwan, with more new markets constantly joining as the globalisation trend continues, despite the recession.

Commenting on the anniversary, Randall Hopkins, senior vice president, Nasdaq OMX global data products, said: “After 10 years the BT Radianz managed infrastructure continues to facilitate electronic trading for our mutual customers. Nasdaq has maintained a relationship with BT Radianz stretching back several years. As a result, the BT Radianz technology offerings have allowed us to reach an even wider customer base who now have access to our Euro data feed and our suite of products, such as European Last Sale, Nasdaq TotalView, Nasdaq Basic and Nordic Equity TotalView.”

Larry Tabb, founder and CEO of the Tabb Group consultancy, also commented: “BT has built the industry’s largest dedicated financial services community to facilitate business processes across multiple asset classes, across the entire trading and business cycle, around the world. [It is no mean feat].” 

Andy Nicholson, president, global banking & financial markets, at BT, said: “One community. One connection. One focus. This was the BT Radianz tag line for a long time, and the message today remains the same. The infrastructure continues to be designed, enhanced, and operated for the financial services sector by people who understand the requirements of our customers, which include amongst others DTCC, LCH.Clearnet and Chi-X.”

Future challenges

Looking to the future and the next 10 years, Alan Ward, head of corporate ICT, BT research and technology strategy, comments that cloud and community-based technology offerings can only grow: “By the end of this decade, it is estimated that there were more pieces of unique data created each year than the total sum of the previous 5,000 years. The amount of available technical data is doubling every 2 years. The nature of this data is also diversifying from text only towards images, audio clips and inputs from a wide range of devices and sensors.”  

The demand to connect to this ‘information superhighway’ – to use a phrase from over a decade ago – is therefore not likely to lessen any time soon. Who connects up the financial markets and speeds access, trades, and data sharing will though, of course, always be a matter for intense competition. The competitive landscape in another ten years’ time will be an interesting spectacle.