Regulations such as Europe's Markets in Financial Instruments Directive – or MiFID – came in this year, marking a shift towards a single European financial market. Not surprisingly, the legislation drove a lot of technology investment over the course of the year.
So the sector is, among other challenges, dealing with increased competition as barriers are lifted, ever more sophisticated fraud techniques and trying to phase in new payment technologies.
Here is our pick of the top 10 financial services stories of the year:
Dutch bank ABN Amro was the hotly pursued subject of a long-running takeover battle between Barclays and Royal Bank of Scotland (RBS). An RBS-led consortium emerged the victor, paying £48bn in total for the bank. But the buyers now face the challenge of IT integration as they slice up the business. A three-way split of the bank by its new owners - RBS, Santander and Fortis – could simplify the IT integration challenge ahead, analysts have said. The new owners are set to reveal their plans in the new year.
The long-awaited legislation, nine years in the making, continues to pose a challenge for many firms that have been forced to retrain staff and overhaul technology. MiFID is intended to make financial trading across borders easier and fairer by promoting best execution for trades and improved record keeping. Industry observers predicted that firms will not be ready in time. It's early days, and so far there have not been any prominent foot-draggers, while regulators are yet to clamp down on compliance. Meanwhile, traditional exchanges, such as the London Stock Exchange, ramped up their trading platforms, as the legislation paved the way for increased competition from new multi-lateral trading facilities.
London Stock Exchange rolled out its new trading platform TradElect with much fanfare in June, and then revamped it in October. The bourse said the most recent upgrade has improved processing speed by 40% and systems capacity by 70%. LSE also acquired Borsa Italiana to boost its market presence and create a combined group built on high-speed electronic trading, and can handle 4,200 trades per second.
But the new platform couldn't prevent an outage that stopped trading for the first time in seven years. But TradElect was not the culprit, and the exchange laid the blame squarely at Infolect, the exchange's market information feed which is accessed by most of its member organisations.
One side effect of MiFID is that the legislation permits investment firms to operate multi-lateral trading facilities (MTFs). As a result, new MTFs have mushroomed, with a flurry of announcements of new consortium-led initiatives. Turquoise, formerly called 'Project Turquoise', is an example. A consortium of nine investment banks are building the new exchange to challenge the dominance of stock exchanges in trading of cash equities.
During 2007, the yet-to-be launched MTF faced delays and denied rumours of internal bickering over its technology platform choice and the CEO post. Following months of industry speculation that OMX Group would be the provider, the MTF chose Cinnober for its trading platform technology and appointed Eli Lederman from Morgan Stanley as its chief executive officer. Yann L’Huillier, CIO at the Boston Stock Exchange, has flown in to take the technology reins.
Banks across Europe are gearing up to process single European payments area (SEPA) transactions in readiness for the Eurozone clearing system, which comes into effect in January. SEPA aims to harmonise national payment systems to provide an efficient and simple way to make cross-border credit transfers, direct debits, and credit and debit card payments in Euros from any country in the EU. Under SEPA, the holder of a bank account in one euro zone country should be able to exchange payments with other euro zone countries as easily as if they had an account in the country concerned.
The impact of SEPA is far-reaching: Banks are rebuilding or duplicating many of their core systems; businesses need to update their databases and financial systems to incorporate new payment details for customers and suppliers; countries across the European Union need to introduce a common legal framework for international payments, called the Payment Services Directive. SEPA will also result in a wave of mergers and acquisitions, as the biggest banks who already dominate foreign transactions consolidate their market presence. For banks, SEPA is a step change in how they run their payment operations and many are using it as a driver to overhaul their systems.
Investment in technology looks to have paid off for HSBC. The bank saw first-half pre-tax profits of £7bn, up 13% on the same period last year, with operating income 20% higher at £19bn. HSBC said its Whirl global credit card platform in particular was cutting IT costs. The bank also worked on an improved datacentre management tool and hotdesking for a more mobile workforce.
Barclays has also taken on some ambitious projects. The bank handed out 500,000 chip and PIN readers to customers in an effort to combat fraud. It also implemented behavioural targeting software on its UK customer website to improve conversion rates for inquiries and sales of key products, and claims the tool has seen a doubling of enquiries on parts of the site.
However, it was an outage in a system outside of Barclays that forced the bank to borrow from the Bank of England's emergency reserves in August. An interface between Crest, the UK settlements house, and the real time gross settlement (RTGS) system of the Bank of England broke down for an hour.
Despite an hour-long extension for the market to manage cash and security balances, Euroclear, the owner of Crest, said no clients has reported any issues on settlement that day. Barclays may have borrowed up to £1.5bn from the service. Bank of England confirmed that the standing facility issued £1.55bn, but would not disclose the banks that used the reserves.
Mobile phone banking has become the service du jour for banks in 2007. It allows customers to keep track of their money via a mobile phone or other mobile device. Royal Bank of Scotland launched a service in August, joining the ranks of HSBC, First Direct and Alliance & Leicester.
The Faster Payments system, a service originally intended to be launched in November 2007 that will lead to faster payment transfers for bank customers, has now been put back to May 2008. Testing of the technology was slower than intended. The multi-million-pound development, which was driven by an agreement between the banking industry and the Office of Fair Trading's payment systems working group, has 13 financial institutions signed up as founding members.
The good news is that domestic card fraud has fallen by 11% at UK retailers and by 57% at UK cash machines, thanks to chip-and-PIN technology. The bad news for our European neighbours is these countries are 'now the target of criminals', according to Apacs. Fraudsters can copy the magnetic stripe data on cards to create fake cards to be used in countries that have yet to upgrade. Card fraud committed overseas on UK-issued cards has exploded by 126%. Also woeful is the flare-up in online, phone and mail order fraud, which Apacs said has grown by 122% during the same time period.
Technology change is still happening too slowly at Lloyd's, the commercial insurance market. Maybe 2008 will see things start to happen before the global competition pulls too far ahead.