NEEDHAM, Mass. – Make way for Web services and a whole new kind of financial services institution to follow. That's the bottom line of a new study titled "TowerGroup Point of View on the Networked Financial Services Institution." Web services, of course, is the name given to that collection of technologies that businesses are using to integrate a wide range of heretofore segregated functions both inside their organizations and with each other. In the new TowerGroup report, James Eckenrode, group director of consumer banking for the financial services think firm, describes how FSI's worldwide will have to achieve a much higher level of integration to meet the emergence of what he calls "customer-centricity." That would be the growing assumption among consumers, including members of credit unions a fraction the size of big commercial banks, that their FSI should be able to do everything they need all from one place – especially on the Internet. Deregulation began this morphing of the financial services industry by allowing consolidation of services, and now each bank and credit union may have to consider whether to make the next step – to become a full-fledged networked financial services institution (NFSI) – in order to compete and succeed. The legacy of legacy systems may indeed feel the full brunt of this change. That's because to meet fast-evolving consumer expectations, generations of segregated technologies supporting separate lines of businesses and products, as well as the insularity of the organizations themselves, will have to give way to standards that break down the vertical silos of vendor-specific products and processes. Standardization under the umbrella of "Web services" is the engine of that change, Eckenrode observes. "Widespread adoption of data formats using Extensible Markup Language (XML) will make it easier to solve the Rubik's Cube of application integration," the veteran analyst says. "XML itself is being augmented by a number of other standards and communications protocols that together represent a more open way to achieve integration – within applications, across product lines and even across financial institutions," Eckenrode says. A wider variety of service options for consumers are one result, of course, but another is the economic efficiencies that open-source platforms also can offer – in other words, more competition among vendors, resulting in better products and lower prices. Overall, this trend – perhaps first evidenced on the consumer side by the widespread adoption of bill pay and account aggregation – could have a seismic impact in the once staid world of banks and credit unions. As Eckenrode says, "These technologies have the potential to yield manifold operational efficiencies in the near term and to revolutionize the very structure of the financial services industry in the long term." Investment in this sea change has already begun, although thus far it's but a trickle. Of $325 billion in global IT spending by financial institutions this year, only about $1 billion of that was on Web services, TowerGroup estimates. That number is expected to grow to $8 billion by 2004. "Web services development can be expected to build momentum as technology providers move toward true standardization and financial services firms begin to understand the significant, if not transformative, benefits that these technologies will bring to their businesses," Eckenrode says. The result will be what Eckenrode says will be a new kind of enterprise: the networked financial services institution. "The NFSI will benefit from the deployment of Web services both to enhance efficiency of internal operations and to gain access to the product and process features outside the firewall of an individual FSI," the TowerGroup analyst says. "It will be characterized by high efficiency and will focus on core products and services unique to the institution while partnering with other providers to deliver a broad ranger of financial products to its client base," he adds. And, in a conclusion that should resonate with credit unions, Eckenrode says: "The value-add of the NFSI will be as a `retailer' of financial products, focused on maintaining the client-relationship aspects while turning over the responsibility for product `manufacture' to other providers, much as SEI Investments and State Street sit behind the holders of end-client relationships today." -

[email protected]