Recently I landed on this blog..Is manufacturing the future of banking?

The Banking world is undergoing and major shift in the way banks have to function and compete in an evironment where the regulators keep coming up with new demands on making the system more transparent not just for the supervisors but also for the customers of the banks.

This is a big challenge for an industry which is still using systems which are on mainframes with cobol based applications. The situation is further aggravated by issues related to years of unplanned application development and customer data duplication across platforms like unix, mainframe, web based apps etc.

So, does the bank really know its customer when the customer’s information is spread across 30 places and one end does not know the existence of the other. Provisions of the Patriot Act, SOX, GLBA, Basel II demand that banks are able to trace their transactions and protect customers’ privacy.

Given the above scenario, banks have started scrutinizing their existing systems and processes and the role of IT as a business enabler. Many are questioning whether IT should be a strategic investment or just a commoditized service. Why should a bank spend millions on keeping a huge set of applications, people and infrastructure which is inflexible and cannot respond to changing regulatory and competitive pressures? Several banks (esp. in Europe) are coming to the conclusion that it is best to use Software as a Service (SaaS) or a customized of the shelf (COTS) product which is owned and maintained by the service provider; the bank just uses and pays for it as a service. The infrastructure will be provided by an infrastructure provider again as a service.

This is a scenario for which most small and midsize IT service companies are neither prepared nor capable of handling. Typically, the customer will expect an IP driven vendor who will then collaborate with other vendors to provide a solution quickly and without years of customization effort. The service provider should be able to scale up or down the service or capacity on demand. The service provider should also be able to take over people of the bank on their rolls; the customer wants the vendor to have a skin in the game.

The results are visible. Banks are increasing coming out with very large (billion $) deals which they want to outsource to a select group of vendors. Smaller players like Patni, NTL are getting elbowed out by large players like Infosys, TCS, Wipro, Accenture and IBM because the annual deal size itself is sometimes more than the revenue of the smaller company!

Companies who invested in building products and IP have an edge. Even if they are small, they can become suppliers of ‘process components’ which will be then used to provide the complete service. The companies in real danger are those who are pure service providers. I foresee a scenario in which there will be three tiers in ths Banking supply chain.

Tier 1: The Banks (customer)
Tier 2: Manufactures - Large service, solutions providers providing end-to-end solutions to customers
Tier 3: Ancilliaries - Services companies that provide components/services to the manufactures

One analogy that comes to my mind is the automobile industry where companies like Ford and Suzuki make complete cars for the customers but outsource a number of components to suppliers who make components as per their specifications. Then there are those suppliers who make generic components for a range of automobiles (e.g. tyres). For example the customer knows that the tyres in his car are not made by Ford but he does not care as along as the product is good. These generic suppliers are in themselves very large and profitable, but they cannot survive on their own because their products depend on the final product i.e. the car.

I believe that this is a likely scenario in the Banking industry as well. So, the key to survival for the smaller companies and even start ups in this industry would be to build IP or become specialized in certain services which they can offer to the bigger IT companies (”the manufacturers”) instead of directly offering to the end customers (the Banks).

Cannot stop wondering how much of its going to be true. for the most part, I do agree with the author that banks might moving away from single large deals but still not sure banking (like car manufactures) can afford maintain/manage multiple vendor for multiple service (say payments, settlements,..) largely because, these had to be integrated and working for different multiple service provider (either IT or operations) will be big challenge. also privacy laws will make it very difficult to separate some of these functions.

appreciate your thoughts on this.