Financial Services: Wall Street Revamps

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September 22, 1997

FINANCIAL SERVICES:
Wall Street Revamps

Securities firms' mergers with banks may lead them to develop similar IT plans
By Bruce Caldwell
IW 500 slug anks and securities firms are in the midst of merger mania, giving investors the choice of doing all their financial business with a single institution, or sticking with the older model of maintaining separate accounts in a securities firm and a bank.
"Over the next few years, banks and securities firms will look more and more alike," says Lawrence Tabb, a senior analyst with the Tower Group, a fina ncial services IT consulting firm in Newton, Mass. That means both institutions are likely to develop similar technology strategies.
At the same time that the industry is consolidating, it is also moving toward massive infrastructure upgrades. For many companies, some key IT initiatives include converting Microsoft Windows PC desktops to Windows NT, rolling out data warehouse projects, giving more customers Internet access, and completing urgent year 2000 conversions. The total IT investment is huge, growing from $11.5 billion in 1996 to an estimated $14 billion in 2000.
The pressure to use IT in business development and the consolidation process is relentless. Last year, federal regulators relaxed rules governing bank activities in investment banking, and legislation is in the works to further ease limits on combinations of banks, securities firms, and insurers. Financial services firms are angling to remove these restrictions-in place since the Depression-to take advantage of global opportunities an d to counter threats to established business.
In the first half of 1997, NationsBank moved to acquire Montgomery Securities; Bankers Trust New York declared it would buy Alex. Brown; BankAmerica launched a takeover of Robertson Stephens; Swiss Bank's SBC Warburg unit began its purchase of Dillon, Read; and investment banker Morgan Stanley completed its merger in July with the retail brokerage and consumer finance operations of Dean Witter, Discover. (Our IW 500 surveys were completed in June.)
Even those firms not involved in the merger and acquisition binge are in the throes of massive infrastructure upgrades. Merrill Lynch, for example, spent $825 million on its Trusted Global Advisor system for 14,500 financial consultants and support staff in 43 offices worldwide. That includes a massive rollout of 25,000 NT workstations to be completed in January.
The Merrill Lynch move may be prescient. NT could become the workstation operating system of choice for as many as six of 10 financial services firms by 2000, according to a joint survey of 55 firms by the New York-based Securities Industry Association and the Tower Group.
At PaineWebber, NT workstations will soon be on 11,500 broker desks. The brokerage is "rebuilding the technical infrastructure to support all our major businesses," explains CIO Scott Abbey. Why NT? Instead of locating servers at branch offices, Abbey says that the new broker workstations need horsepower to rely more heavily on centralized data.
Wall Street firms are loading the workstations of their brokers and financial advisers with custom applications aimed at keeping their clientele happy-and away from banking competitors. "We're reinventing the mainframe one desktop at a time," says an IT manager at a major brokerage that has new NT desktops. "The applications are so big, and growing with every new release." The IT manager calls these applications obeseware.
The financial services industry has shown an insatiable appetite for NT on the desktop, buying tens of tho usands of licenses throughout the world. But the NT desktops have insatiable appetites of their own, and CIOs are now sketching out new IT architectures to leverage the power of the desktop.
Whether or not a securities firm merges with a bank, brokerage houses covet the multiple channels of distribution long practiced in banking. Brokers need as much data on their desktops as their clients have online, the Tower Group's Tabb explains. They must offer full service, including the ability to conduct transactions over the Internet, seven days a week, 24 hours a day-just as banks do with automated teller machines, online banking, and call centers. So securities firms are ramping up object-oriented development to speed delivery of products and services. In many cases, they're building or expanding data warehouse and mining systems that help provide clients with access to account information and stocks.
Many financial services firms use data to help manage risk in the constantly evolving world of finance. Ri sk management is a specialty of Equifax Inc., which controls half the U.S. credit-reporting market and offers software and services based on credit-record data. Last year Equifax introduced Decision Solutions to provide credit checks as soon as a new account is opened.
Instant Information
"The moment a name and address are entered, we're pulling credit information and scoring it and posting it for financial officers to decide whether to offer a car loan, mortgage, or credit card," explains Daniel W. McGlaughlin, vice chairman and CEO at Equifax in Atlanta. Equifax also introduced Bankruptcy Navigator, a decision-support modeling system that predicts the probability of someone filing for bankruptcy.
Indeed, in the new financial services world, consumer credit and investment services will become ever more closely linked. The newly merged Morgan Stanley, Dean Witter, Discover & Co., for example, expects to leverage what it knows about some 40 million Discover card holders by offering them onl ine credit and investment services this fall. The firm will use Java technology developed by Discover Brokerage Direct, formerly the Internet trading trailblazer Lombard Brokerage Inc. Dean Witter, Discover acquired Lombard in December even as Dean Witter was merging with Morgan Stanley.
Discover Brokerage Direct represents the vanguard of Internet use by the financial services industry. Other companies will catch up soon. Spending by the securities industry on Internet technologies will grow rapidly as Wall Street firms invest heavily in intranets for market data collection and analysis. Total Internet spending will reach 17% of industry IT budget spending in 2000, up from 3% in 1996, according to the SIA-Tower Group survey.
For now, firms are sticking with powerful desktops, even as they add more Internet technology. Thin clients are too new even for technology trailblazing Wall Street. While the SIA-Tower Group survey found a strong interest in thin-client hardware, "no one said they would start im plementing thin clients before 2000," says the Tower Group's Tabb.
The reason may lie in recent history. Many financial services IS executives are concerned that Internet technologies could grow as complex and unwieldy as their client-server predecessors. Both architectures, in many cases, originated in isolated, departmental pockets. Still, the lure of the Internet is irresistible, primarily because it's seen as a new channel for improving customer relationships, says Jeffrey Nickerson, director of the national Internet practice at Coopers & Lybrand. "Making better customer connections has always been of concern in the financial industry," Nickerson notes.
The growth in Internet connections between customers and banks, as well as between customers and brokerage houses, is relentless. As of June 1996, all surveyed firms with more than 4,000 employees were on the Internet, compared with 84% of medium-sized ones (between 500 and 4,000 employees), and just 8% of smaller firms (fewer than 500 workers). La rge firms also led in Internet-based trading, with 17% having such sites, and only a handful of small and medium-sized ones having them.
By year's end, the majority of big Wall Street firms will be wired for action. The survey found that 62% of the large firms, 27% of the medium-sized, and 25% of the small ones plan to have trading sites by then.
Web-Based Trading Lags
Merrill Lynch & Co. has a Web site, but it's used primarily by customers looking for information. The firm will not introduce Internet-based trading until mid-1998. Still, the site has already proven its value, says Ed Goldberg, executive VP of operations, services, and technology. Merrill Lynch OnLine, launched a year ago, counted 166,000 enrolled customers by June, with the average client logging on four times a week for 12 minutes each time to get quotes and research reports. According to Goldberg, "more people are checking their account balances" to see if they can afford new investments.
Despite the interest, In ternet technologies were cited as an IT investment priority by fewer than 10% of the 230 firms surveyed by SIA and the Tower Group. Instead, year 2000 compliance, broker workstation development, and back-office technology ranked highest. Also, large firms indicate that data warehouses, document imaging, and object-oriented development are important and will become more so over the next few years. Of these, object-oriented development is expected to increase the most by 2000.
Still, no firm can avoid the Internet. PaineWebber's push to convert broker workstations to NT will be supported by hundreds of servers at a new data center in its Manhattan headquarters. But since the goal includes lower cost and improved operations management through centralization, some applications will be accessed through browsers.
Bear, Stearns & Co. also seeks a simpler support environment. All the applications for Bear Stearns' 450 correspondent broker-dealer firms will be delivered via a secure network and Web browsers by the fall, according to Bennett Egeth, managing director of operations at Bear Stearns. The new broker workstation applications were planned as client-server applications, but now they'll be Java-based, says Egeth.
Java "makes it much easier to integrate environments," says Egeth. "That's the whole reason we are doing this," he adds. "We don't have to tell them what PC to have on their desk, we just have to tell them to use one of the browsers and get Internet connectivity."
Even though Merrill Lynch is still rolling out NT desktops, the firm already is "looking at the need to go from large client-server applications to more of a thin-client approach using Web technology," says Howard Sorgen, senior VP and chief technology officer for the private client group at Merrill Lynch. "We want a high-performance workstation with headroom," he explains. "Our original approach was client-server, but now, because of the advent of Web technology, we're balancing what we put on the client with what we put on the s erver." Why? Merrill Lynch wants to ensure scalability, says Sorgen.
Compliance To Stay In Business
While work proceeds on defining the nature of the financial services desktop, CIOs are juggling other major projects, especially those related to the year 2000. Merrill Lynch, for example, expects to spend about $200 million to fix more than 220 million lines of noncompliant mainframe and distributed code.
But the year 2000 effort, necessary just to stay in business, has given Merrill Lynch a leg up on a similar effort: preparing for the European Monetary Unit, where it sees an opportunity to beat the competition. Because the currency change-aimed at creating a single currency for the European Union-is a highly sensitive political issue, the timing of actual conversion to the new monetary unit is in doubt. But Goldberg believes that by getting ready now, Merrill Lynch may be in an advantageous position in Europe.
Year 2000 compliance and new NT workstations for retail brokers are just tw o of the major projects at PaineWebber. CIO Abbey also is rebuilding all three of the firm's trading floors at its Manhattan headquarters; overhauling the infrastructure for its capital markets group with new market data feeds, trading turrets, and workstations; and retooling batch-processing systems, starting with a new order-routing system in August.
All that work has increased PaineWebber's IS budget and staff 18% over last year. But Abbey doesn't anticipate any downsizing after the current projects are completed. "We'll already be well on to the next phase of activities," he notes, starting with new systems for the firm's correspondent brokers.
Indeed, many financial services companies have an eye on the future. With a healthy economy, there's plenty of money for both staff and technology. And that's necessary, given an uncertain and evolving competitive environment that frequently includes nontraditional players.

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