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Report
ICT and Finance: a Perfect Match
The Luxembourg financial center is not only the most important fund hub in Europe (worldwide second only to the US), but also the most significant asset management center in the Eurozone , hosting more than 150 banks, employing 25,000 employees, from 25 countries. It offers stability, a modern legal (regulatory) framework, a highly cosmopolitan environment, versatile products and services and highly specialized service providers in many areas of banking. This sector is of vital importance to Luxembourg’s economy and has a considerable indirect impact on many other sectors, as it has fostered a large range of related professions. Since 2004, IT service providers have been directly affected to the point of requiring the status “Support – PFS” (for Support – Professionals of the Financial Sector) to be able to work for the financial sector. This status works like « open sesame » on the doors of the otherwise closed world of finance. The « Commission de Surveillance du Secteur Financier » (CSSF) (Commission for the Surveillance of the Financial Sector) deals with all such applications. Needless to say all major stakeholders in the IT branch, constructors and integrators have already acquired this title. The Luxembourg market may be small, but it offers the chance of developing greater expertise and of testing solutions before launching them onto wider markets, you just need PFS status to start off with.
The existence of leading ICT companies in Luxembourg as well as its positive innovation climate, especially when it comes to the implementation of IT projects, significantly contribute to the high-ranking positioning of the banking sector.
IT systems, the modern backbone of financial institutions
A bank’s computer system, the famously called “core banking systems”, appears to be the equivalent of a nerve center mobilizing highly qualified staff and accounting for large percentages of the annual budgets for maintenance and replacement. Banks require flexible, growth-oriented systems to maintain their high service standards and comply with current legislation.
The main challenge for banks is indeed to ensure the evolution of their information systems, which is on average installed for a duration of 11 years or more, and to align it with business demands and market trends. The only practicable solution is to install external modules, which may upgrade the system, but in turn require the installation of interfaces to make the whole constellation viable. Consequently, it becomes essential to migrate the old platforms often representing projects of tens of thousands of working hours.
In this regard, Luxembourg’s small size makes it attractive in the context of pilot projects: an application is tested at a local level before being implemented on an international scale. This has resulted in the creation of specialized centers, such as the competence center for private banking set up in Luxembourg by BNP Paribas, a group with branches in 85 countries and more than 150,000 employees, with a mandate to develop solutions for all on-shore European sites.
As the head of the Nord Europe Private Bank puts it, IT activities have become an “indispensable necessity” in the world of banking. The IT department has become one of the most important support departments of a bank as CIOs are closely involved in all strategic business decisions. Some banks engage in thriving partnerships with IT to improve anticipation and interpretation of customer requirements.
At ING, the IT department employs 110 people, which represents 15% of the total workforce, and IT costs account for 18% of the bank’s total costs.
At Clearstream, whose IT activity is at the heart of the system, a third of the workforce comprises IT specialists (500 computer specialists out of a total of 1,400 employees).
In some cases the banks even become service providers for other banks, take for example Deutsche Börse, which developed internal competencies and then made them available to the IT departments of other companies. Clearstream has adopted the same approach and has already won over thirteen other banks, half of which are based outside of Luxembourg, in the space of two years.
Legal regulation and corporate governance frameworks
It is becoming increasingly important for the banking sector to solve technological challenges such as data and information management, which exert considerable influence on the capacity to innovate and the respect of supervisory regulation. Legal regulation and corporate governance frameworks, such as the Basel II financial agreements and the Sarbanes-Oxley Act, demand different requirements for financial accounting as well as for equity and risk calculation, requirements that have to be faced by the banking sector and solved through technological adaptations. Highly sophisticated financial markets are expected to be particularly affected and will only be able to master the challenges by implementing supporting technology.
IT is now commonly considered as one of the most important support activities for any business. IT Service Management (ITSM) and the connected roles, responsibilities, and best practices can no longer be ignored as key components of IT Governance. The ITIL® best practices reflect a global consensus on what should be implemented by organizations wishing to perform business-oriented IT service management. Assessing those best practices through standard process assessment (thanks to the ISO/IEC 15504 standard) obliges to provide a high-level definition of those processes.
Indeed, the evolution of regulation necessitates a means of checking that regulations are being observed. The credibility of these controls will determine the level of confidence in the system as a whole. The Public Research Center Henri Tudor, with its research program INNOFinance (Banking SPICE ) and the TIPA project, is cooperating with other intermediaries in the financial sector (CSSF, professional associations, banks, insurance companies, auditors and consulting companies, …) to define evaluation tools concerning processes and risk management, particularly with respect to the “Support – PFS”. Once again such initiatives show that Luxembourg more than any other country makes use of close contacts between decision-makers in the public and private sector.
Today the language used to exchange financial data xBRL (extensible Business Reporting Language), developed in the US by key players in the industry and adopted by many countries, is in wide use in Luxembourg. The association xBRL Luxembourg was created in 2007, under the auspices of intermediaries like the Luxembourg Bankers’ Association (ABBL), the CSSF, the Central Bank, the Luxembourg stock exchange, etc. to contribute to the further development of the standard and its promotion. In 2009, xBRL will be applied to investment funds, a sector of excellence in Luxembourg. Numerous funds are in fact distributed from Luxembourg to Asia and Latin America, and generalizing the application of xBRL during these transfers contributes to greater information transparency of such funds.
Projects
One of the most prestigious projects was the project SEPA, which was accompanied and implemented by the ABBL, the Luxembourg Bankers’ Association - the professional organization representing the majority of banks and other financial intermediaries in Luxembourg. SEPA, meaning the establishment of the Single Euro Payments Area, is considered to be as important as the introduction of the Euro in 1999. SEPA makes it possible to carry out rapid, secure and cost-efficient cross-border Euro transactions. In this way, the terms and conditions governing financial transactions and the rights and obligations of over 450 million people and companies were standardized.
Such projects mean that financial services providers are forced to look into the acquisition of new technologies and to adapt their existing IT systems to new standards. The alignment of existing systems with new payment standards primarily meant integrating SEPA-formats, migrating to EBICS, the electronic banking Internet communication standard, as well as the provision of secure authentication. These changes also affected subsequent technologies relating to Business Process Automation (BPA) and Document Management Systems (DMS), which have to be embedded seamlessly into front-office systems. The amalgamation of several sovereign state financial markets into a large single European market and the consequently increased competition between the individual financial operators makes it all the more indispensable to adopt new technologies, for instance in the fields of DMS and BPA.
