Vertical Markets ? Finance: Floored Logic
Despite big vendors? dominance of trading floors,there are still opportunities for niche players in the lucrative financial market. Sean Hallahan reports
Financial services is an ideal hunting ground for hungry value-added resellers. Companies in the finance and insurance sectors are some of the most powerful commercial organisations in the UK, and some of the largest users of IT products and services.
In general, no two projects are the same and a Var uses a core product, such as Oracle Financial, to build a customised solution. Last year 80 per cent of Oracle Financial sales went through the company?s partners as opposed to 60 per cent of Oracle?s other products.
In the City, the market for financial services products is running at an all-time high. All the main vendors have the City trading floors in their sights as potential customers. In the past, Unix suppliers such as Sun have successfully penetrated the dealing rooms of the large City institutions. But Compaq, with its commitment to NT, is becoming a more powerful force on the desktop and as a server provider.
The financial sector has always been an early adopter of IT developments, from the mainframe through to distributed minicomputers and networked PCs. Now it is embracing the latest innovations, such as Java and the network computer (NC) or thin client. But according to Sun, which is pushing both Java and the NC, while IT has revolutionised the trading floor, some problems remain.
In a white paper, Java: Strategic Applications for the Trading Floor, Sun highlights some of the problems: ?Nevertheless, these important technological innovations have not yet fully enabled companies to integrate in a seamless fashion, as evidenced by the stack of boxes on the trader desktop. Rather they have left companies with a morass of heterogeneous, unconnected platforms.
?In financial services, each of these IT islands (separate trading, risk management and back office systems) contains information which, if integrated, processed and delivered to the dealing room desktop in malleable ways, can unlock this competitive advantage in at least five important ways.?
The five key areas outlined by Sun are faster product development; enabling more customised products to be built; focusing employee attention on value-added tasks by automating administrative tasks and low-margin transactions; faster back office processing and more responsive risk management; and delivering lower cost and better customer service.
But Sun will face stiff competition, not least from IBM and Compaq. The latest models of the AS/400, released by IBM earlier this year, have been optimised for e-commerce. Robin Bloor, chairman and CEO of analyst Bloor Research, believes that the financial community will find the machine extremely attractive for a number of reasons.
?It is almost a no-brainer decision for them. The big issue for the financial community is security, not cost of ownership, and the AS/400 is a very secure box,? Bloor says. He believes security issues will attract the financial institutions to the NC and that IBM will take the lion?s share of the market.
IBM is positioning the AS/ 400 as a prime platform for the financial sector in the expectation that e-commerce will eventually take off. According to Paul Fryer, marcoms manager at the AS/400 division, IBM can offer solutions to customers ranging from two to 10,000 users. From the first quarter of next year, the AS/400 will provide both a Java virtual machine and Lotus Domino as standard offerings.
?Our business partners are key to the AS/400 because they bring us 28,000 applications and we can internet-enable any of those applications,? says Fryer. ?Security, which is a key issue for the financial sector, we have always had with the AS/400.?
Fryer claims that the new AS/400s offer greater power than before ? up to a 50 per cent improvement in performance. The smallest AS/400, including operating system and integrated database and tools, is more powerful than the original top-of-the-range system, the B70, when it was launched in 1988 and costs #4,885, scarcely more than a powerful PC.
IBM is not alone in attacking the financial sector. Digital reseller CSF, which claims to be the company?s largest end-user dealer, is also focusing on the market. CSF sales and marketing director Mike Cohen confesses that most sales go to existing Digital users.
?We are not champing at the IBM, Sun and Hewlett Packard markets,? he says. But the firm has just beat Sun to win a deal to provide a major bank with Alpha boxes for an internet banking service. The order, initially for 10 systems, is likely to be extended as the bank moves further into international internet banking.
Although Cohen maintains that the City institutions drive a hard bargain, he claims that what really matters is the underlying technology. ?My experience of dealing with the City now is no different from when I was working for Digital. You have to prove that the technology works, then money becomes a secondary issue,? he says.
Although it is the major suppliers and resellers that deal with the larger institutions, there are also opportunities for smaller dealers to operate in the market. One way for them to do this is to find a niche market that is not fully covered by other vendors.
Intercede, which was founded in 1992, is one such company. It sells a range of internet security products purchased from developers world wide.
According to Intercede, the global market for security products will grow from $6 billion in 1996 to $13 billion in 2000. What is fuelling the demand for internet security is the growth of e-commerce. Analysts predict that electronic commerce will grow from the $6 billion it stands at today to more than $300 billion by 2001.
Richard Parris, MD of Intercede, believes that the opportunities for resellers operating in the security market are expanding as more and more small companies need to access a secure database. Intercede?s products include firewalls, user authentication, encryption and certification. Some of these are areas where resellers may have limited knowledge, but Parris says that should not prevent them selling into the financial market, because Intercede offers technical support.
?We view ourselves as channel managers rather than a distributor. Some of our Vars are quite small, but have their own niche markets. What we have done is go out and find products that cross the whole security market and we can assist Vars by offering them training, finding distributors and giving them case studies. They do not have to be experts in security,? says Parris.
Intercede has deliberately priced its products to appeal to a wide market. ?Security is no longer a luxury. We have designed and priced our products to appeal to a mass market,? says Parris.
?We have done the hard work and found a complementary set of products.? But he still believes that the financial sector, particularly banks, is reluctant to pay the premium required for good security.
The financial markets have changed radically during the past 10 years and are set to continue to change. In many ways the applications have become more complex, but power has devolved from the once all-powerful IT department to the user. There may be opportunities for resellers, but they will need to understand the financial sector.
Mint Communications Systems provides a middleware financial messaging system specifically for the market. The software is a client/server-based system running under NT or Unix on the server side and Windows on the client side.
Mint MD Graham Tweddle believes that it is essential for resellers to understand the finer points of banking and finance if they are to make any headway. The company sells its products direct, but it used to use a distributor.
?We were not satisfied that our distributor had sufficient knowledge of the sector, so we now sell through our direct salesforce. If the resellers want to get into this market they need to take on expertise,? Tweddle says.
Applications and products have become more complex over the years, but have become easier to use. ?We used to sell a simple gateway. You would send us #10 and we would de- liver, but now the products are more complex.
?If bank A wants to send $10,000 to bank B in Colombia then the Bank of England will want to know about it. Our product automatically faxes the Bank of England when it reaches a certain trigger, but it may also automatically generate a message to the risk management or foreign exchange department,? says Tweddle.
The other thing that has changed is the growing involvement of users and end-user departments. Although IT departments are still involved, says Tweddle, most business is done with the users.
It is not just the technology that is changing. The whole nature of the financial institutions themselves ? banks, insurance firms, security houses, clearing houses, asset management companies and financial information providers ? is under pressure. The recent trend for insurance companies to turn themselves into banks and for banks to trespass into the areas formerly occupied by the insurance firms is just the tip of the iceberg.
While all the main institutions are moving toward e-commerce as a means to increase their competitiveness, they face challenges from outside the financial community.
The main challenge to the financial status quo comes not from rivals within the field but from those outside it. The retail sector, the supermarkets and large high street stores in particular, are challenging the banks on their own turf. Some are offering insurance while many supermarkets offer cash back facilities and have automated telling machines (ATM) installed in their stores. The banking sector was so concerned about this trend that three years ago it coined its own term to describe the process: disintermediation.
The principle behind this peculiar piece of jargon is that the banks are the intermediaries between the purchaser and the seller. Remove the need for the customer to withdraw money from the bank to make a purchase by using an in-store or external credit card and to get a cash balance in addition to the cost of the purchase and there is less of a need for intermediaries.
The retail sector also has the advantage that, like the financial sector, it is geographically well dispersed and is a heavy user of both centralised and distributed IT systems.
Small wonder, then, that the banks are anxious to spend vast amounts of money on their IT systems to increase their competitiveness; smaller wonder that every IT supplier from IBM to the small niche market players are desperate to provide systems to aid that competitiveness.
The Sun white paper emphasises the need for greater reliance on IT in the trading rooms: ?Financial market professionals are under more pressure than ever to innovate and respond quickly to clients? needs in the face of such phenomena as exchange disintermediation (party-to-party trading) faster (often same day) settlement, regulatory changes, globalisation and complex transactions.
?In the view of these trends, information technology must be deployed to meet the challenges of fostering greater efficiency and innovation to produce maximum value in the dealing room.?
In all its forms, the financial sector remains a big target for IT vendors. Niche market players can often ride the coat-tails of the large companies, which despite their clout often require products as add-ons to their systems. With the financial market set to grow even larger, even small resellers can profit ? providing they have the right product set and a knowledge of the market.