The Web services focus will remain an internal phenomenon until standards evolve to meet the transaction processing and security needs of financial institutions.
Looking to the future of Web services and coining the term "networked financial institution," new research from TowerGroup finds that while Web services is an important driver for convergence, the lack of standardization still holds back widespread adoption. The report, entitled "The Networked Financial Institution: Connections for a Successful Business Strategy," estimates that this networked institution which embodies the Web services phenomenon will not come to fruition until the end of this decade.
While the groundwork is being laid around convergence and consolidation in the industry, the Web services concept still has a long way to go, says Jim Eckenrode, group research director of the consumer banking group at TowerGroup. "When you have various types of businesses being amalgamated together such as banking, brokerage and insurance and you have consolidation in the business, this creates the need for integration and thus Web services," he says.
To address these changing needs, many players have embraced Web services as the next generation of integration technology and agreed to a variety of standards at the root level, says Eckenrode. But these standards and protocols still do not solve all of the security issues around Web-services adoption. "The problem in financial services is the security around transactions and managing the sessions in which transactions are being executed," he adds.
"We've taken standards much further than we have before, especially when we have agreement among providers that in some cases are fairly enthusiastic competitors with each other," says Eckenrode. "But we still have a ways to go before Web services can be extended to achieve the vision that Microsoft, Sun, IBM and others have." What is that vision? Eckenrode describes it as a "federation of financial institutions" that are able to exchange services back and forth with each other and partner with each other.
This concept is somewhat opposite of the initial consolidation approach to bringing banking, brokerage and insurance together which was more of a go out and buy the service provider and try to make everything fit together. Eckenrode points out that firms such as Citigroup, which bought up Salomon Smith Barney and Travelers to become a financial supermarket, are finding the integration of the various products and the delivery channels to be significant challenges.
Until the standards are sufficient around transaction processing and security, Eckenrode says that the deployment of Web services will largely be an internal phenomenon. "To really permeate the barriers of the firewall of the financial institutions and get that federations, sort of partnership model brewing, we have to get these standards in place," he adds. This federation, or partnership concept would involve firms with different products or services partnering to make them available to each of their clients without having to "spend the capital to develop the infrastructure internally," says Eckenrode.
The TowerGroup report estimates that on a global basis financial institutions spend upwards of $325 billion on technology in general. Of that, Eckenrode says that less than a billion is being spent on Web services today. By 2005 though, out of a $350 billion base technology spend; Web services spending will grow to make up about $8 billion of the total. While the total size is relatively small, Eckenrode says that the growth rate is big for Web services in the future.