Cloud Computing in Financial Services

B. Nicoletti

• Publisher: Palgrave Macmillan
• Year: 2013
• ISBN:
  9781137273642
• Topic: Business
• Subtopic: Gestione
• Index: Business

Financial institutions must become more innovative in the conduct of their business. Cloud computing helps to achieve several objectives: innovative services, re-engineered processes, business agility and value optimization. Research, consultancy practice and case studies in this book consider the opportunities and risks with vendor relationships.

1

Financial Institutions and Information and Communication Technology

1.1 Introduction

This chapter examines the fundamental transformation of financial institutions in recent decades and points out the changes in the norms, regulations, and organizations. The last part of the chapter addresses the ways in which Information and Telecommunication Technology (ICT) can support this transformation.

1.2 Financial institutions

1.2.1 Classification of financial institutions

Financial institutions are private or public organizations that act as a channel between savers and borrowers of funds. These institutions focus on dealing with financial transactions, such as investments, loans, deposits, and insurance. Financial institutions include organizations such as banks, trusts, insurance companies, and investment dealers. Anything from depositing money to taking out loans and exchanging currencies is normally done through financial institutions. In the context of the modern financial services system, finance is “the science of funds management.” Hence, the main role of financial institutions is to act as financial intermediaries. Financial institutions fulfill the task of collecting and channeling funds from those who have surplus, the fund providers, to those who do not have enough means to undertake their economic or personal activities, the users of funds¹.

There are three major types of financial institution²:

1.Deposit-taking institutions, which accept and manage deposits and provide credit. These institutions include banks, building societies, credit unions, trust companies and mortgage, and credit companies;

2.Insurance companies and pension funds, which help to protect individuals and companies by providing an insurance policy against any adverse events. They are divided into Life and Annuity Insurance and Non-Life Insurance; and

3.Brokers, promoters, underwriters, and investment funds.

This diversity has arisen as a result of historical reasons, market demands, and the continuous striving of financial institutions to supply services they perceive as desired or marketable.

The most widespread type of financial institution is known as a bank. This term encompasses a broad spectrum of institutions and services, some of which might be far from the original concept and purpose for which they were established in the first place³. A short classification of the set of business activities operated by financial institutions is the following⁴:

•Retail banking: deals directly with individuals and Small- and Medium-Size Enterprises (SME). This category includes the following types of banks: Retail banks, Community banks, Community development banks, Credit Unions, Postal Saving banks, Savings banks, Ethical banks, Direct or Online only banks. Typical products are current accounts and savings, cards, and consumer loans.

•Commercial and Business banking: provides services to larger domestic and multinational commercial clients. They support payments and cash management, trade services, and liquidity management. A slight variation is corporate banking. It is directed at very large business entities;

•Investment banking: provides funding to corporations, to other financial institutions, and public and local administrations via capital markets. Additional offerings include trading and investment services;

•Private banking: has as its main customers high net worth individuals and families, supporting them with wealth management. Typical products are portfolio management and investment services as well as financial planning and advice;

•Islamic banking: is different since its banking activities do not include interest, as the Islamic religion does not permit this type of charge. These banks earn profits (mark-up) and fees from the financial services that they charge to their customers along the course of their relationship;

•Conglomerates or universal banks (as in the traditional continental European model): are firms active in more than one sector of banking;

•Financial services: are normally corporate entities that provide credit and insurance services; and

•Central banks: are banks that issue money and have some governance, regulatory, supervisory, and inspection responsibilities.

The Consolidated Law on Banking and Credit System⁵ defines a banking activity as the collection of deposits from the public and the exercise of credit. This activity is purely business, and legally can be exercised only by banks. It is carried out through the joint exercise of the acquisition of funds and disbursement of loans. There is an obligation to repay in the form of deposit or in another form.

1.2.2 New norms and new characteristics of the market

The financial economic crisis of the last decades led to a process of convergence among all financial intermediaries. There has been a blurring of the previous sharp distinctions between the traditional sectors of the financial system. The areas where they overlap among them have grown⁶. The Second European Banking Directive of 1989 introduced a broader definition of credit institutions. They, together with insurance companies and other financial institutions, are allowed to hold each other’s unlimited shares⁷. During the 1980s, the banking system, which for a long time had been overseen by a set of protectionist style regulations, clashed in many countries with the need to increase competition. There was substantial financial innovation:

•New products were introduced; and

•New intermediaries entered the market because of the opening of the banking systems of other European Union (EU) countries.

The EU Banking Coordination Directive was a big push towards the reform of the banking systems in many European countries⁸. This regulation introduced more transparent regulation governing the authorization to access the banking markets. The introduction of this regulation brought about an important change of reference; the strong supervisory structure that had characterized the sector gave way to a new supervisory model based on objective and transparent parameters. Freedom to access the financial markets for new operators became subject only to their being in possession of objective requirements related to the capital base and the respectability and professionalism conditions of corporate banking officers.

The second EU directive regarding banking was introduced in the EU Member States from 1989⁹. One of its basic principles is “mutual recognition.” Based on this principle, credit institutions may engage with any other EU Member State, either through the establishment of new subsidiaries or directly from the original location. There they are entitled to exercise all activities as in the country of origin and included in the list of the same directive.

Two fundamental processes occurred within the entire banking system:

•Gradual de-specialization; and

•Disintermediation.

These changes in turn brought the need for greater competitiveness within the banking industry. Banking innovation coupled with the de-regulation process. This led the banks, and in particular the credit institutions, into a gradual expansion of services and products offered. There developed, therefore, a reduction in operational differences between the various types of financial institutions (de-specialization). New intermediaries appeared on the market, and they generated a contraction in the volume of intermediation of the banking sector to the benefit of the new non-banking sector (disintermediation). The boundaries of the banking world with those of the securities market and the insurance sector became blurred. This made it necessary to redesign the organization of these sectors according to the new evolutionary processes.

The current structure of the banking and financial systems in many EU Member States is the result of a complex process The sector has transformed over a few years, with the aim of boosting integration within the European market. The main stages of this process, which began in the early 1990s, were:

•The reform of the sector’s regulations. In Italy, for instance, this resulted in the passing of the “Consolidated Law on Banks and Finance”¹⁰. It defined clearly the purposes of the supervisory activity;

•The wave of privatizations that began at the end of 1993. This led to the transformation of state-controlled financial institutions into public limited companies; and

•A strong market consolidation trend and the gradual opening to the international system.

1.2.3 Services required from the banks

In terms of services offered by banks, it is interesting to distinguish between:

•Wholesale Banking Services; and

•Retail Banking Services.

1.2.3.1 Wholesale banking services

For large organizations, the demand for cash management services and working capital services largely derives from:

•The need to know in real time the liquidity and working capital position; and

•The awareness that liquidity in excess involves opportunity costs in terms of lost interest.

Among the services provided by wholesale banks aimed at improving efficiency for corporate customers managing their financial positions, are:

•Controlled disbursement accounts: thanks to this accounting feature, almost all payments made at a certain date can be known. The bank must notify the customer of the total amount of funds needed for the payments, and the customer can issue the bank transfer for the exact amount requested. In this way, the organization can instantly get a report of its net cash position;

•Account reconciliation: this accounting feature records which organization checks have been paid by the bank. Reconciliation is used to ensure that the money leaving an account matches the actual money spent;

•Lockbox: a centralized service for the collection and processing of organization payments, aimed at reducing the amount of time related to the collection of payments. The bank establishes a lockbox on behalf of the customer that is outside the territory. Local customers send payments by correspondence to the lockbox rather than to the organization’s headquarters;

•Fund concentration: a service through which funds are redirected from accounts of a large number of different banks and subsidiaries to a few accounts at one bank, where they are balanced;

•Check deposit services: include the encoding, endorsement and microfilm of the customer’s treatment of checks;

•Treasury management services: allow the efficient management of different currencies and securities ...

Table of contents

• Cover
• Title
• Introduction
• 1  Financial Institutions and Information and Communication Technology
• 2  Cloud Computing
• 3  Cloud Computing in Financial Institutions
• 4  Governance of Cloud Computing
• 5  The Future of ICT in Financial Institutions
• 6  Case Study: Gruppo Banca Intesa Sanpaolo
• Notes
• Glossary
• Bibliography
• Index