SEPA: The Time is Right to Transform the Plumbing
In addition to SEPA, both TARGET2 and developments to SWIFTNet will be making major changes to the operational infrastructure of Europe’s financial institutions in the coming years. Meanwhile, Basel II and Sarbanes Oxley are regulating business practices and processes more closely with MiFID (Markets in Financial Instrument Directive) promising to increase this burden in 2006/2007. Although technology is not the focus area of these initiatives, IT departments are among the first to be affected by them as they provide the systems that support regulated business processes.
All these initiatives are putting increasing pressure on the physical communication networks that underpin financial institutions. As banks will be required to carry and store increasingly vast quantities of data, the resilience, performance and cost of their communications networks will be called into question. Today’s networks are simply not designed to handle this quantity of traffic. How should financial institutions balance the need for more powerful communications with an overriding pressure to reduce costs? In short, this is a perfect time for banks to review their communications strategy and the technologies they are adopting.
Today many banks operate in departmental silos and have complicated communications set-ups – potentially consisting of 20-30 networks and multiple supplier relationships across the business. This can be complex, time-consuming and expensive to manage. According to US research company, Meta Group, financial services firms spend over 60 per cent of their resources just running IT systems, leaving limited time and funds for developing new products and offerings.
Having multiple networks also affects the resilience and security of the infrastructure – the more networks you operate, the more potential points of failure and incursion there are.
Finally, at a technology level, traditional communication networks tend to be inflexible, making it difficult to adapt them as banks merge, consolidate and change requirements. For example, each time you make a modification, such as the introduction of new security initiatives or file formats in the payments sector, there are substantial costs involved.
The latest developments in the payments area, such as the introduction of SEPA and the imminent uptake of TARGET2, will add to this pressure on network infrastructure by requiring real-time, secure delivery of European payments. For the first time, financial institutions have the opportunity to consolidate their payments on to SWIFT’s IP platform, which is predominantly used for inter-bank messaging at present. This should deliver cost savings at both an infrastructure and operational level, as well as meeting the regulatory requirements of the various European directives.
The challenge is that the majority of SWIFT infrastructure in place today is not capable of handling any major growth in traffic – they are designed to handle the inter-bank messaging volumes of 2003. In many cases, banks run the risk of requiring upgrades for each additional payments system, which defeats the object of a single, shared infrastructure for multiple payments.
Banks should focus on building a coherent communications strategy for their entire business, which rationalises the number of networks they have and suppliers they work with. This should also take advantage of new technologies. Institutions should map out the business requirements for the next five to 10 years and put in place a corresponding roadmap for the communication capabilities of the business. This will ensure that banks can more easily meet the demands of industry changes such as SEPA and TARGET2 at the same time as making communications easier to control and more efficient.
It is worth noting that ‘you get what you pay for’ with communications services – banks should identify mission-critical communication systems that carry a high risk to the business if disrupted, and separate high risk services from those that carry a medium or low risk. In this way they can prioritise traffic and apportion the appropriate levels of security, performance (and investment) to different types of traffic, whilst still benefiting from consolidation.
Financial institutions should consider rationalising and simplifying their communications by reducing both the number of suppliers they work with and by adopting new technologies. Managed services, whereby a business communications company takes away the hassle (and some of the cost) of day-to-day network management, is a key trend in simplifying communications. With managed services, the company’s IT team can focus their efforts on the strategic development of their IT rather than just reactive upkeep.
In terms of new technologies, IP-based networks, which merge voice and data traffic onto a single, flexible network, will be a key factor in helping banks simplify their infrastructure and reduce costs in the next few years. Now that voice over IP (VoIP) is proven technology, the business case for consolidating separate telephone networks will become increasingly compelling.
Business continuity and security are two of the most important priorities for any business evaluating their communication infrastructure. Traditionally, it is assumed that having multiple providers guarantees network resiliency – the ability to maintain service in the event of an outage. Unfortunately, the events of 9/11 have demonstrated that this is not necessarily so – many providers simply buy services from the same cable owner and then resell them, meaning that their respective networks run in close proximity to each other – or even in the same duct.
This is of the utmost importance when we consider time-critical payments and the financial implications of service outages, both in late payment charges and liquidity risk. Although a dual-supplier model for SWIFT connectivity is in place at the majority of larger institutions, very few have actually checked under the bonnet to ensure that there is no single point of failure. Aside from good business practice, many banks also need to comply with national regulations for circuit separation when connecting to the national settlement systems.
To achieve true business continuity in the event of an outage or disaster, physical diversity of networks is more important than multiple carriers. Amongst other things, banks should be asking their suppliers questions such as:
These questions will help gain a clearer understanding of the infrastructure that their service providers are using and ensure that the different underlying fibre routes are physically separate.
The introduction of new initiatives such as SEPA presents the perfect opportunity for banks to transform the infrastructure underpinning their business. Banks should take an overall view of their infrastructure requirements for the next five to 10 years, consider rationalising suppliers and taking advantage of newer, more flexible technologies, as well as getting a better understanding of the communications infrastructure on which they depend. Change is imperative if banks are to adapt to industry changes and maintain their competitive edge.