Over the years, financial services providers have emphasized that one key to prosperity is conducting business both faster and cheaper.But in their zeal to implement a strategy based on speed and cost-containment, many financial services providers-including insurers-watched it backfire. Rather than generating positive results, they created a series of nonintegrated applications that support separate business lines and products-a silo mentality.

The solution? Web services.

This is one of the conclusions drawn from a report titled, "The Networked Financial Institution: Connections for a Successful Business Strategy," by Needham, Mass.-based consulting firm TowerGroup.

The report delves into the current state of Internet-based networking standards and technologies-examining their relevance for financial institutions, how soon they are likely to gain traction in the industry and how they might be used to create a "networked financial services institution."

Web services is the linchpin that can "enhance connectivity within the process, across product lines and between partners outside the financial institution's own firewalls," TowerGroup reports.

Unfortunately, connectivity is still very much a work in progress. "It's clear that considerable effort is still needed to build toward standards on which multiple vendors can agree," explains Jim Eckenrode, TowerGroup group director of consumer banking, and the lead author of the report.

One of the problems that TowerGroup pinpoints is that when financial service institutions adopt a "vendor-specific" strategy, their efforts and activities within the corporate firewall are limited.

This places a great deal of strain on an internal operation, undermining its effort to succeed-particularly in the areas of new product development and customer relationship management.

For instance, by independently developing extensions to existing standards such as Extensible Markup Language (XML), "application framework vendors end up creating closed architectures-the very phenomenon that Web services seek to prevent," Eckenrode notes.

"Until common standards arrive, institutions will continue to rely on tried and true development and integration approaches," he adds.

Open Environment

Web services have the potential to alter the business environment and competitive landscape within which financial services firms operate and serve their clients, TowerGroup states.

Web services is the solution to a standards-based, open IT environment that is "technically flexible and cheaper and easier to manage," the report states.

In a classic example of the potential of fully developed Web services, a customer could use a bank's Web portal to get information about mutual funds, mortgages, insurance or any other banking or non-banking product-all in a single session.

While the customer interacts with a simple interface, the various institutions needed to fulfill the customer's requests are busy behind the scenes sending and receiving transactions based on Web services protocols.

TowerGroup has found that widespread adoption of XML has helped drive the development of other Web services protocols that further extend its capabilities.

The combination of standard telecommunications protocols (HTTP, IP) and new Web services protocols offer a powerful technology "stack"-one which many institutions hope will level the playing field among technology vendors and drive better IT products at competitive prices, Eckenrode says.

Thus far, spending on Web services by financial services institutions is dwarfed significantly by their spending on other technology initiatives. But over the next three years, interest in and spending on Web services will continue to grow.

Nevertheless, by 2005 Web services will still only represent $8 billion of the $350 billion spent by financial services institutions worldwide on IT, TowerGroup projects.

The group offers that "the vision of the networked financial services institution will not be realized until the end of this decade, at the earliest."

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