Finance and Information technology

• Growing mutual dependency

Finance has become electronic

Information technology can no longer be considered as merely an invisible support tool for financial activities. It is now an integral part of financial services' product/services offering, delivery channels and internal management. IT impact is pervasive. It is both tactical and strategic.   

The relationship between the tactical and the strategic use are dynamic: strategic can become tactical, once a technology is widely adopted. This was the case of ATM networks. On the other hand, tactical can become strategic: this is the case when the bank card was transformed into a vector for loyalty-building services.

IT impact goes beyond competitive positioning. It has changed the nature of  financial markets and financial transactions. These have been dematerialised: what is being exchanged between financial institutions are digital representations of underlying instruments and positions. The dematerialisation had two major consequences:

• an explosive growth of transactions, requiring greater processing power

• a proliferation and greater complexity of new instruments, requiring sophisticated analytical tools and approaches to develop and manage new instruments.

Financial IT also impacts public policy. By blurring distinctions between various category of money and financial accounts (checking, saving, investment), IT has made more difficult the conduct of monetary policy and the supervision of financial institutions.

Last but not the least, IT spending represents between 5% and 20 % of financial institutions' expenditures and constitutes the fastest growing cost category. Large financial institutions spend at least 1 billion euros annually on IT.

Huge market opportunity

For IT suppliers, finance is a critical market segment. Financial services constitute the largest segment of overall IT spending, estimated at between 25 and 30% of the total.  Moreover, the importance of financial services goes beyond their quantitative weight. Financial services institutions are among the most sophisticated IT users and play a key role in deployment of key technologies such as data warehousing or  transaction processing. Financial sector is seen as critical to the large-scale take-up of electronic commerce, with Internet banking and Internet securities trading seen as "killer applications."

• Uneasy relationship

Yet, despite the growing dependency, relationship remain difficult fraught with suspicion and misunderstanding, particularly among financial institutions.  Their senior managers remain deeply ambivalent, even mistrustful, toward the technology.

This ambivalence is understandable to the extent that the relationship between IT spending, on the one hand, and the profitability and the competitive advantage on the other hand, is far from simple. Financial institutions, which are the heaviest relative spenders are not necessarily the most profitable ones. The relationship appear asymmetrical: developing profitability and a competitive advantage requires heavy IT spending (in absolute terms), but a heavy IT spending does not necessarily lead to a competitive advantage. Spending numbers tell only a part of the story. To make an impact, IT spending has to be intimately integrated into the overall product/distribution strategy.

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