Microsoftâ Solutions:

The impact of EMU on Retail and Investment Banking Systems

 

 


"Virtually everything in business today is an undifferentiated commodity except how a company manages its information. How you manage information determines whether you win or lose."

 

“…the quality of an organisation's nervous system helps determine its ability to sense change and quickly respond, thus determining whether it dies, survives, or thrives.”

Bill Gates
Microsoft Chairman

 


In the digital age, the ability to manage information has become a prerequisite for success – and indeed this applies to the financial services industry. Financial institutions must react more quickly to customer needs, bring products to market with greater speed, and respond more completely to changing business conditions. To meet these demands, many organisations are developing a digital nervous system—a new approach that allows them to build on existing technology to create highly efficient, integrated systems that collect, manage, organise, and disseminate information throughout an enterprise.

 

A digital nervous system helps institutions get the right information to the right people at the right time, provides them with the tools to analyse that information, and gives them the power to act on their conclusions with speed. It also eliminates the piles of forms and layers of approvals that can make even simple day-to-day tasks time consuming and expensive.

 

Simply put, a digital nervous system is the culmination of the next stage of the information revolution. It is a powerful way to marshal the benefits of digital technologies to meet the challenges of the digital economy - and it is becoming increasingly essential. Institutions that embrace this approach are using technology to ensure that employees can collect the knowledge that resides within the organisation to respond with creativity and speed to changes in the marketplace.

 

The need for speed

During the last decade, the business landscape has undergone a fundamental transformation. The proliferation of personal computers linked together in enterprise networks and the rise of the internet have played a significant role in the creation of a true worldwide economy in which information travels around the globe in the blink of an eye.

 

With customers using the web to find out almost instantly who has the best product at the best price, mass production is giving way in many industries to mass customisation. Meanwhile, changes in the economic climate of one region can affect economies around the world.

 

In the face of these changes, speed has become essential for survival, and the ability to adapt quickly to shifting demands in the marketplace has become a prerequisite for success.

 

"In a Darwinian business world," says Microsoft Chairman, Bill Gates, "the quality of an organisation’s nervous system helps determine its ability to sense change and quickly respond, thus determining whether it dies, survives, or thrives."

 

The term digital nervous system implies that this new form of enterprise information management will enable organisations to behave more like biological organisms. This is apt and important.

 


In biological organisms, the nervous system automatically controls the basic systems - respiratory, circulatory, digestive - that make life possible. It also receives sensory stimuli, transmits them to the brain, and instantly triggers a response. In higher organisms, the nervous system makes it possible to think and plan with foresight and creativity.

 

To meet the demands of the digital economy, organisations must be able to behave more like organisms. This will give them better reflexes for reacting to stimuli, a more efficient metabolism for managing daily operations, and a sharper mind for guiding plans and actions more intelligently.

 

But what are the specific business and technology issues that act as stimuli for a digital nervous system within the financial services arena?

 

And how can technology be applied to create an efficient metabolism for the retail banking market, the corporate banking market or the financial markets?

 

This white paper takes a detailed look at the effect that the EMU has in the European banking environment.

 

 


The Impact of EMU on Retail and Investment Banking Systems........................................ 3

Management summary................................................................................................ 3

Background..................................................................................................................... 4

A new European business environment................................................................... 4

Expected benefits.......................................................................................................... 4

Potential risks................................................................................................................. 5

Major issues for retail and investment banking...................................................... 5

Capital markets............................................................................................................. 6

Corporate finance.......................................................................................................... 6

Asset management....................................................................................................... 6

Retail banking................................................................................................................ 6

Key IT systems issues for euro transition............................................................................ 8

Deployment  and integration testing................................................................................ 10

Microsoft technologies and the euro............................................................................... 11

Component services.................................................................................................. 12

Legacy integration....................................................................................................... 13

Presentation of data................................................................................................... 13

Conclusion....................................................................................................................... 14


The Impact of EMU on Retail and Investment Banking Systems

 

Management summary

On January 1st 1999, eleven core members of the European Union took a significant step towards full economic and monetary union by launching a common single currency, the euro.

 

For the finance sector, EMU presents significant medium and long term opportunities, however in the short term, there will be significant costs.

 

 
EMU, (European economic and monetary union) is an ambitious economic, political and social undertaking that will, in less than a decade, create a unified economic block, second only in size to the US. Benefits of economic union are expected in the form of lower, stable prices, increased cross border competition, reduced transaction costs and improved conditions for production and consumption.

 

EMU is an ambitious economic, political and social undertaking that will, in less than a decade, create a unified economic block, second only in size to the US.

 

 
The economic process started in earnest when the wholesale financial markets opened on January 4th 1999, and the national currencies of participating member states were locked irrevocably into the euro. Wholesale euro payments and securities settlement processes became operational, new and existing government debt denominated in euro and companies began issuing euro denominated securities.

 

For a three and a half year transitory period the euro will co-exist along side national currencies under a framework of ‘no compulsion, no prohibition’. Once euro notes and coins are issued in January 2002, and national currencies withdrawn by mid 2002 at the latest, the euro will be the only legal currency in the participating states. All business and commerce in ‘in’ countries will be denominated and conducted in the new currency.

 

It will affect all economic sectors and business functions, but the finance sector will feel the repercussions earlier and more fundamentally than most. For the finance sector, EMU presents significant medium and long term opportunities, however in the short term, there will be significant costs. It is estimated that the cost of EMU conversion will be between five and nine times the cost of Year 2000 compliance.

 

Financial institutions will bear a major share of these costs, suffering the double hit of conversion and compliance costs, as well as lost revenue from foreign exchange business. But banks will be developing a range of new euro denominated financial products and services, to meet more sophisticated market demands. New channels to market such as the internet and electronic commerce will simplify delivery of these services.

 

EMU must be seen as a strategic business issue, as it will affect which products and services are developed, how they are delivered and the markets in which they are offered. Most businesses will be affected in finance and accounting, treasury, sales and marketing, supply chain, IT, and human resources.

 

 

 

EMU will alter the environment within which European business is conducted.

 

 

Although EMU is a strategic business issue, it is one that has had a significant impact on systems.

 

 
Although EMU is a strategic business issue, it is one that has had a significant impact on systems. Around 50% of EMU conversion costs will be IT related. In addition both EMU and Year 2000 will be competing for the same scarce IT resources, driving up the costs and risks of each. Once IT resources are in place, the key issues at a financial systems level are the ability to deal with the conversion rules, triangulation, rounding and decimals, as per the directions laid down by the European Commission.

 

Background

EMU has been one of the most significant events affecting the global economy in the past century. Within the space of a decade, 11 European states will form a single trading bloc, representing 30% of global GDP, supported by what is expected to be a strong and stable single currency, the euro.

 

A new European business environment

Benefits are expected in the form of macro economic stability: stable prices, low and stable interest rates, and reduced transaction costs.

 

 
EMU will alter the environment within which European business is conducted. Europe will be transformed from a collection of relatively small, open economies into a large closed economy, comparable in size to the US. 85% of all Euroland imports and exports will be to other Euroland countries.

 

All sectors of the economy will feel the impact, in finance, all aspects of consumer retail, manufacturing, travel and tourism, and the public sector. Merchants will be selling and competing within a single expanded market, buyers will have a wider range of easily comparable products and services to select from, and purchasing decisions will be simplified and supported by new technologies such as electronic commerce. European trading decisions will not be affected by exchange rates, and there will be increased focus on the economic fundamentals of price, quality and service. At the heart of the economic union capital markets will display depth and liquidity only otherwise seen in the US.

 

Expected benefits

Benefits are expected in the form of macro economic stability: stable prices, low and stable interest rates, and reduced transaction costs. These factors are likely to result in favourable conditions for investment, production and consumption with macro economic benefits expected in 1-2% of GDP.

 

Small and medium sized companies will find it easier to export to new markets, without bearing the risk and uncertainty of currency fluctuations. Logistics and supply chain will be streamlined, as a wider range of sourcing becomes available and prices are reduced. New channels to market such as the internet will increase the geographical reach of organisations, allowing them to compete more effectively, without the costs of building up Europe-wide sales forces.

 

And smaller companies are likely to benefit from easier access to investment funds on the back of the deeper and more liquid capital markets. Consumers will benefit from increased choice and price transparency, and cross border competition is likely to drive down prices.

Given the economic weight behind the euro, the currency is also expected to assume the status of a global reserve currency, and may in time challenge the position of the US dollar.

 

Potential risks

There are already signs of structural changes in the European banking system, designed to cope with the new environment.

 

 
But there are potential risks associated with the successful implementation of EMU. A single euro interest rate may be inappropriate for all economies at any given time as national economies operate on different economic cycles. A rate set with core economies such as France and Germany in mind may be wholly inappropriate for economies such as Portugal and Italy. As a result there may be serious asymmetric shocks, resulting in high levels of regional unemployment.

 

As governments lose the ability to regulate their own economies by devaluing currency or flexing interest rates, and fiscal measures are restricted, adjustments will occur via the real economy, that is, jobs and wages. These risks are exacerbated by structural rigidities the European labour and product markets, and by the weakening of fiscal stabilisers available by the Growth and Stabilisation Pact.

 

Despite the economic, structural and political difficulties EMU will probably proceed as planned. The alternative – to abandon EMU – is at this stage highly unattractive and would cause major political and economic instability.

 

Major issues for retail and investment banking

The finance sector, wholesale and retail banking, has been leading the changes relating to EMU. In the medium and long term, EMU will present significant opportunities for the finance sector, but, in the short term, banks will bear heavy costs and devote a large amount of resources to achieve conversion.

 

A single euro interest rate may be inappropriate for all economies at any given time as national economies operate on different economic cycles.

 

 
There are already signs of structural changes in the European banking system, designed to cope with the new environment. Europe is notoriously over-banked, particularly in Germany, and in the last twelve months there have been a spate of mergers between leading European banks. There have also been some significant structural changes. For example, the London stock exchange linking up with the Deutsche Börse, and other exchanges which are considering joining the alliance.

 

The success of EMU will, to a large extent, depend on the success with which the European finance sector prepares. Some of the key issues for financial institutions, before and after conversion, are outlined below.

 

 

 

 

 

 

 

 

Capital markets

Europe’s capital markets are relatively small, fragmented and under developed. The corporate bond market in the EMU countries is half the size of that in the US, and stock market capitalisation for the 11 member economies stands at 58% of GDP, compared with 120% in the USA. For smaller European companies, equity or corporate debt finance has not been a viable way to raise capital. As a result, around 80% of corporate borrowing has been from banks and financial institutions.

 

As the securities markets develop, banks may lose their role as primary financiers of industry.

 

 
One of the most immediate effects of EMU will be felt in the changing supply and demand structure of European capital markets, for bonds, equities and in corporate finance. As of January 1st 1999, markets for wholesale euro payments and securities settlement will be established. From that date, most new and existing government debt will be denominated in euro, and companies will begin issuing euro denominated securities.

 

One of the most immediate effects of EMU will be felt in the changing supply and demand structure of European capital markets, for bonds, equities and in corporate finance.

 

 
These events will encourage the euro capital markets to become more coherent, better financed and more liquid, all of which should make financing cheaper, more flexible and more widely available.

 

Corporate finance

The retail banks will lead the development of new euro denominated financial products.

 

 
As the securities markets develop, banks may lose their role as primary financiers of industry. The threat to European banks is that the tendency of 70-80% of continental European companies to source finance from banks, may move towards the US model of only 25%. Such moves would represent a significant change in the profile of investment banks’ business.

 

Asset management

In asset management, asset managers in Europe have historically concentrated on country-based portfolio management due to the effects of exchange rate fluctuations. The arrival of the euro will remove the exchange rate risk, leading to a move from the country allocation approach, to sector allocation for both equity and fixed income. This will result in major re-allocation of funds and portfolio diversification across Europe.

 

Retail banking

Discussions about the impact of EMU on the financial sector have tended to focus on investment banking, the capital and currency markets. But there will be a significant impact on retail banking. It is the retail banks that must manage and handle the dual currency period, communicate with personal and business customers, meet their needs and help them through transition, as well as bear the costs of transition. 

 

In addition, the retail banks will lead the development of new euro denominated financial products, without having to deal with cross border exchange costs or currency risks, all of which will enable movement into new markets.

 

 

A scenario could emerge where consumers pick and choose retail financial products from across the European market, based not on geographic location but on the best deal in terms of price and quality. Customers could select current accounts in Germany, insurance in France and savings products in the Netherlands.

 

But this will place demands on existing IT systems. Even where systems do have multi-currency capability, they will probably require alteration to cope with euro conversion, triangulation, rounding and accounting requirements, and the conversion of historical data.

 


Key IT systems issues for euro transition

Despite being a strategic business issue, with wide ranging impact for the finance sector, EMU’s effect on financial systems will be significant. These issues relate not only to the conversion weekend, but must be seen in the context of the overall business strategy to be followed once the euro is in place. The key issues that need to be considered when preparing information systems for euro transition are:

 

Redenomination of securities

Redenomination of securities will be one of the most resource intensive and complex aspects of euro conversion.

 

 

Basic conversion is one of the most significant affects for financial systems as many legacy systems will be unable to apply the rules of the Maastricht treaty correctly.

 

 
Redenomination of securities will be one of the most resource intensive and complex aspects of euro conversion. Redenomination involves changing the nominal amount of a security from national currency into euro. Almost all existing issues of marketable government debt in participating national currencies will be redenominated over the conversion weekend. All participating governments propose to redenominate to the nearest euro cent except for France, (which will round down to the nearest euro cent and cash out the residual) and the Netherlands (which will round up to the nearest euro). In all cases, redenomination will take place at the level of the investor holding, except for Austria, (at individual bond level), and Italy (at minimum nominal denomination level). The detailed redenomination plans of the EU member states are covered in the Bank of England’s Practical issues arising from the introduction of the euro, Issue 9.

 

Basic conversion

The conversion and rounding rules relating to triangulation, six significant figures, and 2 decimal places, as laid down in the Maastricht treaty must be applied precisely and consistently when converting national currencies to euro/other national currencies to prevent discrepancies. This is one of the most significant affects for financial systems as many legacy systems will be unable to apply the rules correctly. 

 

Dual currency display

Businesses must decide how the dual currency period will be managed. During a dual currency period, the impact of displaying both euro and legacy currency will place considerable demands on systems capacity, but this may be necessary to provide levels of customer service.

 

Dual display and reporting up to and during transition will typically make up 40% of total IT costs of euro transition. Dual display also represents expenditure that will be discarded at the end of the period, having added no sustainable business benefit.

 

External dependencies

Organisations that take key strategic decisions early will be best placed to manage the conversion weekend and beyond.

 

 

EMU may provide an opportunity to review the scope and nature of third party relationships.

 

 
Financial institutions are dependent on external software providers, information service providers and custodians, both in their euro preparations and in operations after January 1st 1999. It is critical that communications with providers of key systems and services are maintained in order to manage and minimise risks. EMU may provide an opportunity to review the scope and nature of third party relationships.

 

Flexibility

One of the major problems relating to systems’ changes is the need for flexibility. Systems changes must be reversible to take account of individual currencies being forced out of EMU, to cater for different entry dates and to deal with variable requirements.

 

Non-decimal currencies

For those currencies which do not use decimal places, such as the Spanish Peseta and the Italian Lira, wholesale systems modifications will be required to deal with euro cents.

 

Thresholds

Threshold values frequently trigger systems actions. These will need to be converted and adjusted appropriately.

 

Converting historical data

Historical data must be converted at a consistent rate and the process must be auditable.

 


Deployment  and integration testing

EMU conversion will take place in a complex multi-database environment where the consistency of changes between systems is critical. Interfaces between internal and external systems must also be managed to ensure that euro and legacy currency data is not combined.

 

Addressing the challenges of EMU requires a structured approach. This will insure that the corporate approach to EMU is consistent, and that costs and risks are managed and minimised. Organisations that take key strategic decisions early will be best placed to manage the conversion weekend and beyond. As EMU is primarily a business issue, organisations should take a top-down business led approach. 

 

Addressing the issues of EMU preparation will be a complex, multi functional business task. It will require a high level of business commitment and involvement from all key business areas as well as significant resources.

 


Microsoft technologies and the euro.

Microsoft have created a framework called Windows® Distributed interNet Applications Architecture (DNA) which enables businesses to build key IT systems for euro introduction.

 

 

The introduction of the euro raises many IT issues for the financial industry and change needs to be made with as little impact as possible.

 

 
The introduction of the euro raises many IT issues for the financial industry. Of particular concern is the integration and migration of legacy software systems running on mainframes and mini computers. Because this legacy code works, and usually works well, IT managers are reluctant to change. 

 

This change needs to be made with as little impact on the enterprise legacy systems as possible. Microsoft is supplying technologies and tools that will allow organisations to develop solutions that address these issues as well as providing:

·         Reduced time to market for euro solutions enabling organisations to gain competitive advantage;

·         Effective reuse and flexibility in application development, allowing any solutions to be easily tailored without incurring high maintenance costs;

·         Systems that recognise the euro symbol and how to display and print it.

 

To complement the technologies Microsoft has created a framework called Windows® Distributed interNet Applications Architecture (DNA). It allows businesses to build new systems that take advantage of the capabilities of the personal computer and the opportunities presented by the internet whilst integrating with existing systems. This is key to IT systems in the introduction of the euro.

 

Windows DNA integrates the personal computer standard, the internet and legacy infrastructures by enabling computers to interoperate and cooperate equally well across both corporate and public networks. Windows DNA provides an interoperability framework based on open protocols and published interfaces that allow customers to extend existing systems with new functionality. This same open model provides extensibility “hooks,” so that financial institutions can realise new business opportunities by creating compatible products that extend the architecture.

 

Windows DNA applications use a standard set of Windows-based services that address the requirements of all tiers of modern distributed applications – user interface and navigation, business processes, and data storage. The heart of Windows DNA is the integration of the internet and client/server application development models through a common object model – the Microsoft® Component Object Model (COM). Windows DNA provides a common set of services that are exposed in a unified way at all tiers of a distributed application.

 

By taking advantage of standard implementations of networked services and modern, component-based development methods, developers can deliver innovative applications much faster and more cost effectively than before.

 

 
By taking advantage of the capabilities in Windows DNA, developers can build entirely new categories of applications, including new service delivery channels, electronic banking and other euro aware interpersonal and intercorporate communication applications.

 

Because they are taking advantage of standard implementations of networked services and modern, component-based development methods, developers can deliver these innovative applications much faster and more cost effectively than before.

Corporate developers will still have to develop the applications but Microsoft is delivering the infrastructure that will enable euro solutions. Key to this infrastructure is the use of a three-tier application development environment, the presentation layer, the business component layer and the storage layer. All these layers communicate via standard protocols using existing corporate networks and the internet.

During the duality period of the euro introduction it is important that systems are developed which display and report in both the euro currency and the national currency.

 

 
 


As mentioned previously financial institutions have a vast amount of legacy data and during the duality period of the euro introduction it is important that systems are developed which display and report in both the euro currency and the national currency. In addition it is important that all new transactions are recorded in a euro-compliant way. Microsoft technologies can provide an infrastructure to an effective solution.

 

Component services

Microsoft® Transaction Server (MTS) is designed to enable quicker and easier development using COM components that are written to provide business level functionality.

 

 
Microsoft® Transaction Server (MTS) is a distributed transaction co-ordinator and an object request broker. It is designed to enable quicker and easier development of high performance scaleable and reliable distributed applications while removing the difficulties traditionally associated with this type of development.

 

MTS applications are composed of collections of COM components that are written to provide business level functionality. As COM is language agnostic these components can be written using any development language that supports the generation of COM objects. This includes Microsoftâ Visual Basicâ, Java and Microsoftâ Visual C++â amongst others.

 

MTS itself provides a server framework in which COM components can run. It handles server registration, process and thread management, context and lock management, management and synchronisation of shared resources, and component-based security.

 

MTS can manage transactions with disparate databases on various platforms but with its close integration with Microsoft® SQL Server™ 7.0, COM objects running under MTS provide an ideal platform for developing euro solutions. By developing COM components that act as business wrappers to legacy data, financial institutions can develop new euro-compliant reporting tools and end-user systems, required for the duality period, without having to reimplement existing legacy systems.

MTS allows developers to concentrate on the business level issues that are so crucial to the correct and successful migration of systems to the euro.

 

 
In addition new component services running under MTS against a SQL Server database can be developed to enable the migration of existing systems to support the single European currency.

 

All this can be achieved by the use of component services running under MTS, without the need to change any of the existing legacy systems. MTS allows developers to concentrate on the business level issues that are so crucial to the correct and successful migration of systems to the euro.

 

 

 

Legacy integration

Microsoft® SNA Server 4.0 allows integration with legacy or heritage data, key to successful migration of systems to the euro.

 

 
As mentioned previously, integration with legacy or heritage data is key to successful migration of systems to the euro. Microsoft® SNA Server 4.0 is a comprehensive gateway and application integration platform that provides the best way to embrace internet, intranet, and client/server technologies while preserving investments in existing AS/400- and mainframe-based systems.

 

SNA Server 4.0 includes:

·         COM Transaction Integrator for CICS and IMS. This makes it easy to integrate Cobol transactions running under CICS or IMS with ActiveX COM components running under MTS and allows these CICS and IMS transactions to participate in an MTS transaction;

·         An OLE DB provider for AS/400 and VSAM. This technology allows financial institutions to integrate their mainframe data sources with Microsoft® Universal Data Access strategy. This allows the development of new COM based applications that have access to legacy data stores.

 

For more information on UDA visit http://www.microsoft.com/uda

 

Presentation of data

If the look and feel of a new system is familiar to the existing user community then organisations can make significant savings in user training.

 

Windows DNA offers a broad range of presentation options for application developers when designing the best solution.

 
It is important that the look and feel of any new system is familiar to the existing user community. If this is done then organisations can make significant savings in user training. Microsoft has several environments that enable developers to produce clients that talk to the middle tier business components whilst presenting user interfaces and functionality that can easily be tailored to suit the users needs.

 

Windows DNA offers a broad range of presentation options giving the application developer the choice when designing the best solution. Windows DNA permits the developer to choose the appropriate Windows components and internet technologies to support the richest possible interface and range of client environments, from handheld wireless devices to high-end workstations. These include:

·         HTML for the widest reach of client, supported on any client browser including Microsoftâ Internet Explorer and Netscape;

·         Browser Enhanced applications written to take advantage of the technologies inherent in the browser to gain maximum functionality and richness. Within Internet Explorer 4.0 these technologies include Dynamic HTML and Scripting;

·         Bespoke Executable applications are written using the Win32 API. These applications offer the most functionality with reach limited to the application platforms that support the Win32 API.

 

 

 

 

 

 

By selecting the appropriate presentation choice, financial institutions can develop systems that offer euro enabled solutions that do not affect existing enterprise legacy systems. For instance, during the duality phase COM components accessing the legacy data can be embedded in Active Server Page (ASP) scripts that include euro conversion rules. These ASP pages running under Microsoft® Internet Information Server (IIS) generate HTML that can be designed to display financial transactions and account information in both the national currency and the euro denomination.

 

For more information on IIS and ASP visit http://www.microsoft.com/iis.

 

Conclusion

Microsoft has a set of services, tools and a strategy that are all designed to enable financial institutions to concentrate on the business issues needed to support the euro.

 
Microsoft has a set of services, tools and a strategy that are all designed with the goal of making the development and deployment of distributed applications that integrate seamlessly with the legacy systems a reality. By developing the DNA framework Microsoft have provided an infrastructure that enables financial institutions to concentrate on the business issues needed to support the euro.

 


Microsoft, Win 32, the Windows logo, Windows, Windows NT and Microsoft BackOffice are either registered trade marks of Microsoft corporation in the United States and/or other countries. AS/400 and IBM are all registered trademarks of International Business Machines Corporation. Novell and UNIX are registered trademarks of Novell, Inc. in the United States and other countries. All other trademarks are held by their respective companies.

 

The information contained in this document represents the current view of Microsoft corporation on the issues discussed as of the date of publication. Because Microsoft must respond to changing market conditions, it should not be interpreted to be a commitment on the part of Microsoft, and Microsoft cannot guarantee the accuracy of any information presented after the date of publication.

 

This document is for informational purposes only. Microsoft makes no warranties, express or implied, in this summary.

 

ã1999 Microsoft Corporation. All rights reserved.