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E-commerce and customer relationship management

Are these the real drivers for Straight-Through Processing?


Over the last year Straight-Through Processing (STP) has been monopolising the headlines regarding IT and process issues for the wholesale and institutional banking community and we seem to agree that it is essential to the industry if it is to remain competitive. The drivers for STP are given as institutional volumes, transaction cost and accuracy coupled with speed of the transaction and shorter settlement periods. But there is a much larger driver that has not had the publicity it deserves, at least not in the board rooms of institutional firms. This driver is the growing impact of e-commerce on the downstream wholesale market and the changing expectations of new investors - the e-generation and the tidal wave of increased volumes, volatility and expectations that they will generate.

Looking at today's situation, today's volumes and today's players, it is apparent that the current methods of processing trades cannot continue. Inefficiency is built into the current procedures and the scope for improvement in cost, speed and efficiency is obvious to all in the industry, the regulators and the investors. Competition is driving fees and commissions down; reducing values of trades revenues drive up the volumes; increasing volumes are needed to cover capital investment in processes. Internal concerns and external regulations are creating a need for increasing accuracy of data and decreasing failures in trade matching and settlement. The need to minimise the time that capital is tied up plus the drive by regulators to reduce settlement times means that there is less and less time available to process trades to completion. On top of all these requirements, we are in a bullish market where every month sees an increase in volumes to the extent that many ageing processes and systems are straining and creaking in their provision of services.

Do not say that trade processing departments have been doing nothing in the past years. The problems, including regulatory requirements, of Y2K and, to a lesser extent, the launch of the euro, have meant that major change has not been possible. However awareness has been there and plans for rapid development after the Millennium are in place in most organisations. This two to three year delay has also had a benefit of recent rapid advances in technology, the falling unit costs of data processing, storage and transmission and the increase in processing and transaction capacities. There are STP teams in most of the major institutional players, partial solutions such as GSTPA being developed, and software vendors aware of the issues and with responses ready. STP programmes are being treated as major, co-ordinated and company wide initiatives and not as a collection of technical projects with a common theme. Audits of the "STP readiness" are being carried out. A wide range of studies are being prepared on needs and cost. Benefits analyses are being carried out. Evaluations of the regulatory enforced changes of settlement period are being commissioned and impacts assessed. All is looking well and the industry has got its act together.

So What are the Problems?
There is a driver that that could make all others insignificant - and which is tending to get ignored in current STP planning in the institutional investing industry. This driver is the effect that the growing market for e-commerce (and its resulting CRM or customer relationship management) is having on volumes, on expectations, on volatility and on cultural, procedural and technical changes to the institutional markets themselves.

I work on the issues of STP, the impact and the solutions and, like many others, have focussed on the problems and concerns of the institutional and cross-border investment and services community.

However, I am also an internet enthusiast and this interest in e-commerce and having observed a colleague tackling the same issues in CRM as I do in STP - it is no surprise that I have been analysing the requirements and trends of both these acronyms.

The Impact of the E-Generation
We are entering the third generation of e-commerce. The first generation 'marketing of services' has passed by, although there are still many stuck in this generation. The second, selling standard products against competition from shop fronts, telephone sales and private advisors, is with us and well established in many sectors including investments and private trading. However many of these initiatives have left a sense of disappointment and there are few successful money making operations, although this has not reduced investment. The third generation of e-commerce is now with us. This is the customisation of an ideal product, the aggregation of services (not necessarily from one firm), the targeting of the right product to the right buyer, the immediate transaction and the availability of progress information. The individuals who are driving this are the younger and affluent middle classes, who have grown up with the earlier generations of e-commerce. They are creating a new culture that has different drivers and expectations. This group, the "Net Generation" of Don Tapscott, will have significant effects on the structure of the investment banking. This young but growing community will expect all the above, nothing less and much more.

The Effect of 3rd generation
E-Investment Volumes of retail trades are increasing as the investor community grows, as pensions move to the private sector and as more individuals take advantage of hedging instruments. These trends increase trade volumes at the lower value end but, traditionally, many could be consolidated leaving only major institutional trades as stand-alone.

The effect of the e-generation is that investors are not willing to accept, for example, end of day prices, and demand spot quotes and immediate processing, i.e. what the institutional trades demand and get. The effect is a growing number of trades at lower values and, even for institutional players such as global custodians, this directly effects their own volumes. E-generation trades cannot be easily netted and, as these clients are regular buyers and sellers, volumes are increasing in excess of the capitalisation of the market. The number of persons trading will increase, the number of trades will increase, the speed within which they buy and sell will increase but the overall value of cash in the market will remain much the same.

Increased volumes, immediacy of response and greater access to data also increases volatility in the retail markets. It could be anticipated that the e-generation will create a scenario with the concerns of computer trading with massive surges in volumes, but without its logic a careful (or carelessly) worded web site could create major buy or sell situations and resultant share volatility. It is no surprise that some of the biggest movers on NASDAQ are on-line brokerage stocks themselves and that their volatility is greatly in excess of their profitability.

A further feature of the e-generation is the increased demand on services. They want comprehensive, tailored services, as do institutional players; they want competitive prices and fees, as do institutional players; they want access to funds, prices and stock ownership, as do institutional players; they want to change their minds and reverse transactions, as do institutional players. They now want everything that, to date, has been only for institutional players, even if this means their financial service supplier is acting as a concentrator for other, possibly more competitive services. Retail investors and brokers will attempt to satisfy the wishes of this new generation of customers and will expect their suppliers to facilitate this. An example is Schwab, allowing customers access to investment road shows over the internet, hitherto only available to institutional investors. There is continued debate about the growth of execution only brokerages and the future for the full service broker. The number of firms transparently outsourcing their services to other institutions is growing. The very concept of a firm or a large institution able to offer comprehensive services through volume savings, is being questioned and e-firms with little more than a web site with links to other services, are now becoming common.

Can we discount the e-generation as the imagination of semi-academic gurus or as the far-fetched prophecies of technical futurists? So usage is low and confined to a small, technical but relatively low net worth community. True of the past years; possibly true today but not of the future. This is the growth area of today and is influenced demographically by a community whose average age is increasing, whose wealth is increasing, whose numbers are increasing and whose expectations are also increasing.

Volume, enhanced service and volatility are all changes that will effect the processes and systems of all organisations in the chain from trade information through settlement to custody and corporate actions. However the younger generation, with its internet and technological skills, is still developing and these are now present as brokers, investment fund managers, operating and information officers in institutional firms. They bring the business-to-customer inventiveness of the e-generation to the business-to-business institutional finance and are driving their culture into the professional investment area. It is no surprise that, at SIBOS last year, S.W.I.F.T., the ultimate institutional payments and bank-to-bank transmission organisation, closed the show with the banner - "All Aboard The E-Train". If they see the wave of e-commerce volumes effecting them (or being fuelled by them), can we doubt that all institutional players will be effected?

What Are The Implications Of This?
The major thrust will be to extend the common STP model (Indication of Interest through to Settlement) at the front end, by adding the e-commerce component. This extension needs to be an integral part of STP, to have all its "pipeline" characteristics, and to include the flexibility to allow new instruments and services, and to build complex offerings from base products. The standard customer orientated e-commerce relationship management (CRM) model of "Know Target,Sell Service" now comes into play. The STP chain has just become longer at the front end but the principles remain the same. The CRM paradigm has just had its "Service" box extended and complicated by the inclusion of the STP chain. In the CRM parlance, such "Service" terminologies, are already STP components.The underlying data principles are common to both:

n Data is only entered once

n Data can be tracked through the system

n Common transaction data - master file data - comes from a common source.

CRM, which is not just colourful front ends, feeds straight into the STP model, which is not just re-engineering and automating the mid to back office. Both are about new (to this market) concepts such as supply chain management and enterprise resource planning, phrases from manufacturing and retailing which we can expect to become normal techniques in the back offices of the institutional firms of the future.

Both E-commerce and STP co-exist in a real-time environment where all the "doors" in the institutional processing "house" are open to traffic all the time, this is called a continuous loop in engineering. One cannot call a pause or a time out, there is no time-lapse door to close on a transaction, downstream effect will be continuous and variable and there will be no opportunities to "close the doors for a breather whilst we take stock of where we are".

The impact of all this is that the major programme influencers - future services, benefits, expected volumes, market positioning, partners, etc.. for STP and CRM cannot be treated in isolation and must be firmly integrated in their articulation.

What Should Be Done?
STP and e-commerce/CRM programmes within organisations should not be allowed to exist independently of each other. They are both either dependent on, or influenced by, the success of the other. STP must cater for the higher volumes generated by e-commerce, by the increased customer expectations and by the need to seamlessly interface to the new front-ends. This is true even if the STP developer in question has no retail outlet, in this case he has the harder task of being dependent on his clients new processes and systems.

E-commerce in turn is dependent of the success of the new STP programmes in their back office or in the back-offices of their suppliers. Failure to link with successful high volume, low error, flexible systems will compromise the success of the retail front ends and result in poor customer relationships, a commercial recipe for failure. E-commerce and STP alone are major initiatives for any organisation. Combining the two into the necessary co-ordinated whole will require all the skills and experiences from across the industry.

Know your facts before you start and decide what your future position will be. Benefits are usually proportional to what you know when you make your decisions This initiative is 'enterprise-wide' and will affect most or all systems to varying degrees across the whole organisation. An enterprise-wide initiative is very different from a departmental change or a new system implementation, however complex. Requirements will not have been defined by the time the work will need to have commenced. Therefore flexibility will be key. Success or failure will also depend on work done by its partners, counterparties, suppliers and service providers. 3Talk to them.

The manufacturing and distribution industries have, for years, had to cope with the introduction of new processes that affected every facet of the business. Banking tended to be different with individual departments and product lines operating as stand-alone P&Ls and with little requirement for connectivity. This is changing as we move into the e-generation world. Major programmes have to be put into place where change is planned, managed, tested and delivered across the whole organisation. It is no surprise that many of the major programme managers responsible for these changes are coming from the manufacturing or logistics industries. An enterprise-wide solution requires the disciplines of Integrated Change Management which co-ordinates the four major threads of organisation, technology, processes and people into a coherent programme.

Prepare For The Wave
A number of market watchers have been referring to the third generation of e-commerce as the Tsunami. My dictionary gives the definition of this as "a great sea wave caused by submarine earth movement or volcanic eruption". If we take this as a very large wave approaching us, one which has very little regard for who or what it effects, and one which came from an apparently calm sea - then the picture is not a good one.

The growth of the e-commerce business is the wave that could swamp your current systems and which makes the capacity planning for new STP developments difficult. It will effect all players in the market, retail brokers as would be expected, but also institutional players effected by the knock-on effect of volumes, volatility and customer expectations. Finally, this wave comes from an area which, to date, has had very little impact on institutional financial organisations. To put it another way, somewhere out there, is a programme manager working on producing new e-commerce/customer relationship management systems that will:

~ increase your overall and peak volumes beyond the forecast growth patterns,

~ create a market where prices and demands can change rapidly in a real time environ- ment, and will cause you to have to start considering customer facilities that were not previously thought of, except for very large players.

This is why it is necessary to bring these persons into a controlled environment where change is managed, volumes controlled and services anticipated in a planned environment. Ignore the impact of e-commerce and the increased expectations of the CRM service users and you are in a world where your carefully planned STP programme could be hit by the Tsunami!

David Millar



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