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Vendors and open IT standards: what's in it for them?

Much has been said of the benefits of open standards in banking IT. The introduction of open standards will reduce IT costs and improve banks’ flexibility to develop new and innovative products, which will generally improve bank competitiveness in an ever-changing market. It is increasingly accepted by the banking community then that banks have much to gain from a new banking IT landscape. But what about vendors? I often get asked why vendors would sign up to open standards if it’s going to result in banks spending less money on their IT systems – it’s a fair question!

The answer is complex, but can be broken down into two themes: long-term gain and industry reputation.

Intellect, an organisation representing the UK technology industry, recently released figures showing that at present 96% of total bank IT budgets are being spent on regulatory changes and upgrades. Imagine an IT landscape where regulatory and system upgrades cost a fraction of the current amounts, freeing up budget for more innovative IT projects and product development. A move to open standards doesn’t represent a cut in banking IT budgets, but more a reorganisation, with greater investment in innovation.

Critics may argue that when faced with the chance to reduce their IT spend banks will reallocate budget to different business areas. To me, this seems unlikely. The current banking environment is one of greater-than-ever competition, as traditional banks come face-to-face with new challenger banks. The fact is that young banks are focusing their IT spend on innovative and exciting new products, putting pressure on traditional banks to improve on their game. Now more than ever, the pressure is on for banks to invest in IT that makes a difference, rather than spending huge sums on patching up old systems and meeting regulatory demands.

Essentially, my point is this: short-term reductions in costly and inefficient, day-to-day piecemeal IT updates will be replaced with longer-term innovative IT projects.

The second benefit to vendors promoting open standards is less tangible, but relevant nonetheless. The future of banking services lies in collaboration – banks and vendors working together on open standards and co-created solutions.  At the moment we have a situation where some major vendors are sticking to their proprietary models, causing huge additional costs for their banking customers. This is no longer a sustainable model, and the industry is increasingly coming round to see this.

It is no secret that banking IT is a multi-vendor marketplace, with banks often working with a myriad of software vendor suppliers and home grown systems at any one time. But I believe that the vendors who are ahead of the curve in promoting open standards will then be best placed to become market leaders when this becomes the industry standard.

The truth is that when implementing a new industry standard across a number of co-dependent players – for example, banks, software vendors and service providers – there will inevitably be a ‘chicken-and-egg’ situation. We have now reached a tipping point at which open standards are increasingly accepted as the best-practice industry model, and any vendors not on board risk being left behind.

My question is this: what is actually holding vendors back from embracing open standards? 

 

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Comments: (4)

A Finextra member
A Finextra member 28 June, 2013, 08:59Be the first to give this comment the thumbs up 0 likes

I agree on the importance of adopting a collaborative model. If not their is a real risk banks go back to some inhouse development as they did in the 80s. This is already the case for some tier1 front office projects where closed source vendor systems have aged. When this happens everyone loses. Adopting an open model can actually be a defensive move.

Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 28 June, 2013, 13:17Be the first to give this comment the thumbs up 0 likes

I can walk into a store that doesn't know me from Adam in a country I've never visited before and still put thru' a commercial transaction with my credit card. There are many more examples like this. Not sure if I'm missing something here but, to me, such examples illustrate that banking is already one of the foremost users of open IT standards. 

Hans Tesselaar
Hans Tesselaar - BIAN - Amsterdam 01 July, 2013, 12:47Be the first to give this comment the thumbs up 0 likes

Just a short reaction on the comment posted by Ketharaman Swaminathan; the examples you describe can be easily expanded by ATM-usage or payments between banks using the SWIFT Standard. They are all examples of B2B connectivity / standardization. Were BIAN is focusing on is A2A standardization. It is still not possible to seamlessly integrate an “off the shelf” banking system in a multi-vendor environment. BIAN is trying to achieve that by defining a SOA standard for usage within the boundaries of a bank. By doing so the industry will be able to renew their existing IT-landscape at significant lower cost and at the same time simplify their infrastructure to avoid serious breakdowns as we have seen in the recent period at some major banks.

Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 01 July, 2013, 14:18Be the first to give this comment the thumbs up 0 likes

@HansT: Had I seen mention of BIAN in your original blog post, I'd have guessed that you were perhaps referring to open IT standards within a bank rather than across multiple banks. I remember a time about 8-10 years ago when hub-and-spoke was de rigueur for system integration in many industries but point-to-point reigned supreme in banking. Not much has changed since then but, with BIAN, maybe it will.