Although the financial community has been quick to embrace the Internet, two major handicaps are impeding fuller use of it – security and reliability. Most banks have moved beyond putting simple brochureware on their World Wide Web sites and are publishing their research as well. The next step in the process – about a year ago it was the source of many brave words about what could be achieved – is to use the medium for transactions.
This is where progress is beginning to hit a wall. Although the private-client groups of many banks already offer on-line share dealing and other transactional services, banks have been reticent about extending these to the corporate and institutional level. Internet security has been substantially improved in the last few months, but public perception that this is the case is still lacking. The news that the latest version of Microsoft’s Internet Explorer web browser software contained a bug that could enable an outsider to break into its user’s computer or network created the sort of headlines that tend to stick in clients’ minds.
Near enough is not good enough, particularly for banks – security needs to be absolute. The Internet is also afflicted by a large number of users who regard security measures as a challenge to their ingenuity in getting round them, not a benefit. The hackers who managed to break into the CIA’s web site and make embarrassing adjustments to the graphics were a striking example.
Since the Internet is a commonly held asset, its reliability (or otherwise) is also hard to attribute to any particular supplier of information or services. The quality and availability of its bandwidth are still extremely variable. The details of (for example) a forex transaction do not take up much of the available capacity, but they have to compete with applications that do. Who, for example, is liable for a vital trade that is squeezed out by the youth of America hogging bandwidth to play Star Wars?
Morgan Stanley has been publishing equity and fixed-income research for clients on its web site for some time. “However, we see it as a much bigger opportunity than just that,” says Nick Turner, vice-president of information technology in Morgan Stanley’s New York office. “We’ve created a firm-wide vehicle, called Client Link, which enables us to deliver an integrated range of services (both product- and application-based) to our clients on a customized basis. Though we’ve been rolling this out on a selective basis over the last year or so, we’ll be expanding it quite dramatically later this year. A key point is that clients can specify exactly what they receive, so the whole process is client-centric, rather than Morgan Stanley-centric.”
Morgan Stanley’s customized service goes well beyond providing straightforward data and research. A range of tools, from portfolio accounting to more sophisticated risk and basket portfolio analyses, will be released in the next few months. Although the bank has offered clients these types of application for some time, they have previously only been available to run on specific platforms, such as Unix. By migrating those legacy applications into a common browser-type front end and making them platform independent, the bank will be doing more than just make them readily accessible. Clients will be able to run the applications of their choice remotely while these remain resident on a Morgan Stanley server. As any processing is done remotely from the client’s machine, the amount of data being transferred across the Internet is kept to a minimum.
Smaller applications, and others that do not warrant remote processing, can be downloaded from the Morgan Stanley web site and run locally on the client’s own hardware. The Client Link interface gives the bank the flexibility to decide which route to take on a case-by-case basis. The general policy is that eventually all proprietary applications will be ported over to be available via the Client Link interface, which (apart from personal contact) will be the principal channel of information and communication between Morgan Stanley and its clients. As smaller applications that clients are likely to run locally on their own machines also tend to be more widely distributed, Client Link also makes the task of providing software upgrades to clients considerably less onerous. Rather than mailing out hundreds of diskettes, upgrades can either be e-mailed or downloaded from the web site.
The development of the Client Link software has enabled the bank to address the Internet security issue by building stepped authorization levels into the base architecture. “Depending on the sensitivity of the information that clients are accessing, they will need to go through certain steps,” says Turner. “These range from passwords for the more mundane items to security tokens that generate one-time passwords for the most critical.”
Business in real time
At Bankers Trust, while security is a key issue for the global institutional services (GIS) group, there are other principal reasons why it does not make pricing models available on its web site.
“We have a very complex set of client/server tools that our clients use to do such things as manage their defined benefits accounts and to look at global cash and custody information”, says Eric Staffin, product manager for information delivery in the GIS group. While Internet development tool kits are almost robust enough to allow for the real-time interactivity that our clients need to manage their accounts, a good number of these clients lack the bandwidth and/or level of Internet access required to conduct business properly in (or near) real time. When a client needs to reclaim a $10 million Fed trade three seconds before a deadline, the last thing they want to worry about is whether they can connect to us through their Internet service provider – they don’t have these concerns today.”
The limited client appetite for the Internet is another factor that is driving Bankers Trust’s approach. At client advisory board meetings, clients have indicated that this is not a place where they are ready to do business – yet. “While we need to be ready to offer Internet-based services when they are, we can’t afford to step back from what we have already achieved for our global clients; online, real-time, 24×7 information delivery,” says Staffin.
A new part of Bankers Trust’s business that has started from day one with its own web site is the inflation-linked capital markets group, headed by Brad Prout. In view of the comparative novelty of the medium in the US, a considerable part of the site’s content is educational, with copious commentary, research and analysis. More interestingly, the group was one of the first in the market to make a calculator available on its site for US inflation-linked bonds. Additional calculators for Australian, Canadian and UK bonds are due to be added in the next few weeks. Further analytical tools, now under development, will enable users to include inflation projections and sensitivity analysis around the duration and risk measures of inflation-linked securities compared with conventional fixed-income securities.
Given the size and nature of its clients, the sophistication and complexity of Bankers Trust’s foreign exchange business web site offering has taken an out-of-the-ordinary tack. The approach has been to maximize the visual possibilities of the web in delivering solutions that are tailored closely to the individual client. Multimedia will be a part of this – clients will ultimately be able to watch video clips of analysis prepared specifically for them. However, unlike many of its competitors, the foreign exchange group does not envisage putting pricing models on the site as part of its strategy, preferring to focus instead on suggesting specific customized client solutions. It also remains lukewarm about the potential for online trading as a concept for large institutional clients.
Although security and the paucity of available bandwidth are commonly regarded as major obstacles to conducting large-scale financial transactions on the Internet, Steven Hargreaves, vice-president of Internet services at Bankers Trust, believes they are not the core issue. “The main problem is liability. If one sends a message via the Internet, one doesn’t know who’s carrying it. It could be traced, but that’s a major technical job. By the time a message arrives, it’s hard to determine the responsibility for delivering it and that is clearly a problem if the message is time- sensitive. Digital certificates and encryption addresses many of the security concerns but the industry has not agreed upon a liability framework for when things break down.”
Behind double-locked doors
Technical issues aside, Hargreaves is struck by the Internet’s potential to fundamentally change the way in which the investment banking industry does business. “At present, vast sums of money are spent on building information assets that are then put behind double-locked doors in a data centre surrounded by customer service personnel. These personnel then respond to client requests for that information. What the Internet enables us to do is to put those information assets on the outside of the business – they are the things that our customers connect to – and concentrate more on the heart of the business where people are adding value. That connectivity to our core systems is what the Internet is all about, putting the bank on-line. Ultimately creating the “plug ‘n’ play’ bank.”
In general, CSFB has reached the brochureware/research stage in its strategy but certain groups within the bank have already moved beyond that. The equity group is using its web site to advise institutional buy-side investors of its inventory level, while the equity research arm has deployed earnings models in spreadsheet form that clients can use to test the impact of changing model assumptions.
CSFB, like Bankers Trust, is likely to be taking advantage of the visual possibilities of the Internet by releasing multimedia applications. The bank has already deployed video clips for internal information on its intranet and the corporate and investment banking group in particular is now preparing to extend this to provide client advice on its section of the web site. CS Financial Products has made a determined push for the Japanese market by producing a Japanese-language mirror version of its US/European site. The US/European site allows clients secure access to prices of fixed-income products updated every 10 minutes. A new portfolio access system should also appear soon.
Apart from security, another factor slowing investment bank activity on the web is a general reluctance among banks’ clients to provide their staff with Internet access. This was remarked upon by several banks and broadly divides into two aspects. One is still security, but not in the transactional sense. The worry is more general, relating to such things as e-mail and the inability to retrieve messages quickly that have been sent in error. The other common concern is that staff will misuse access and use it to view or download “unsuitable” material. Those institutions that have given staff Internet access often couple it with draconian security policies. Apart from physical security measures, such as proxy servers, these include close “over the shoulder”, pain of dismissal surveillance.
One of the largest institutional clients in the business to allow staff Internet access without such heavy-handed supervision is Fannie Mae. Access is allocated on a “need to use” basis but security measures are watchful rather than paranoid.
“We make people aware that their access, time and traffic is tracked, so it that if it ever became an issue, that information would be available”, says Roger Conley, vice-president of technology, sales and marketing.
Fannie Mae has made extensive use of the Internet for marketing since it established its web site less than two years ago, recording more than 6 million hits in that time. Like investment banks, it has the opportunity to reduce communication costs substantially by using the Internet, but its biggest potential project is still in the pipeline. Fannie Mae currently supports its own proprietary network called Mornet, which provides secure communication and transaction processing to some 6,000 participants – typically mortgage lenders or their agents.
Conley is keenly aware of the potential of the Internet, but also recognizes the potential risks. “It’s not into industrial strength yet in terms of delivering secure communications to our customers”, he says. “However, we are already preparing the groundwork for migrating Mornet to the Internet by developing a new range of browser-based applications that will be able to run on either network.”
A technology that Fannie Mae (among others) is watching with interest is satellite delivery. This could address both the security and capacity issues of the Internet for the financial community. It has recently gained a considerable credibility boost, with the news of the $9 billion McCaw/Microsoft/Boeing Teledesic venture. This will eventually put into orbit 288 low-level satellites that will provide global high-speed Internet coverage.
A number of existing systems give an insight into the potential of the method. A conventional Internet link is used for the up-channel, for example, delivering a client message requesting a full portfolio risk analysis by the bank. The required data are then routed via a secure ISDN or T1 link to a local network operating centre (at present typically operated by a third party) for satellite transmission directly to the client.
The bandwidth available over the satellite part of the link is enormous, so banks will not only be able to transmit large and complex transaction histories or portfolios to clients, but also real-time video clips of analysis. Security is highly sophisticated, being based on the digital encryption techniques developed and tested for digital television services. The cost of the hardware required to decode the encrypted signals is already falling, with PC cards likely to fall well below $200 over the next year or so.
DigiPass cards
Though some investment banks have had web sites up and running for three or four years, the pace of development has been surprisingly varied. A late starter in the field is BZW, which is in the throes of a major development programme. “It has to happen this year”, says Karen Stott, BZW’s manager of markets IT. “We will be making our research available to clients on our web site by the end of July, with client-specific real-time data and transactional information to follow. A number of applications are currently being tested on the bank’s own intranet prior to being deployed on the web site. Items such as pricing models will definitely be available on-line, as clients have made it clear that this is what they want. We are aware that BZW has got some ground to make up, but the bank is now beginning to make real progress”.
Though SE-Banken was one of the first banks to provide electronic transaction facilities for corporate clients and institutions and already publishes research on its web site, it has opted to start its Internet strategy from the private-client end of its operations. However, the take-up of its services in this area will stand the bank in good stead if it moves towards providing transactional services to larger clients. Part of this has been its adoption of DigiPass cards that generate one-time passwords to allow clients access to their accounts. The demographic profile of the users adopting the service has proved interesting. “It hasn’t been the student community, as you might expect,” says Anders Lindqvist, senior vice-president and head of business development. “It’s been our most affluent, generally older, clients who represent the bulk of the take-up.”
Since many of these more affluent clients also have responsibility for corporate or institutional business with SE-Banken, their experience with the private-client service is likely to make them more confident about security when they come to address it in a professional capacity. However, in the case of the largest clients, this may not happen for some time as the bank already has a large private electronic infrastructure devoted to them.
Lindqvist is relatively relaxed about the question of security. “It’s not so much the reality of the security issue, but more people’s perception of it. When we researched all the possibilities while developing our Internet strategy, we felt that the security risks were actually quite manageable, but you nevertheless have to respect clients’ concerns over this.”
Macquarie Bank in Sydney made an early start with its Internet activities. The first steps were taken in late 1994, with momentum gathering throughout early 1995. By March of last year, Macquarie was publishing its equity research on its web site.
As one of the largest futures broking operations in Australia, it has also recently launched browser-based applications in this field aimed at institutional clients. “We deliver a lot of information to futures-broking customers through a piece of software that we developed internally and supply to them free of charge,” says John Scott, divisional director for information services. “This allows them to view and download their current positions so they can build their own historical database of trades as well as clearing information, which considerably reduces the administrative overheads of position management for them.”
Rather than deploy this application across the Internet, for additional security Macquarie has provided a purpose-built extranet for its clients. In order to access their accounts, clients are provided with cards that use a digital encryption technology similar to that used by Morgan Stanley.
Although Scott indicates that the bank has a number of innovations in the pipeline, it is unclear whether moving this client extranet onto the Internet is one of them. Macquarie staff do not come across as Internet enthusiasts. “While there is considerable enthusiasm within the bank now that people have seen what the technology can do,” says Scott, “I think the decision whether to use the Internet for a particular application has to be pragmatic. If it can deliver something that we can’t deliver any other way or at a much lower cost, then it makes sense to use it. If not – we’ll use an existing system.”
