Can we bank on Jim?

Contracts have been awarded for the IT infrastructure of the proposed NZ Post-run "people's bank". If you were starting afresh with a new bank, as the government is doing, how would you "future-proof" it? Claire Matthews, acting director of the centre for banking studies at Massey University, and computer consultant Allan Smee take a good look.

Contracts have been awarded for the IT infrastructure of the proposed NZ Post-run “people’s bank”. If you were starting afresh with a new bank, as the government is doing, how would you “future-proof” it? Would you use off-the-shelf software or roll your own? How far would you take electronic banking? What are the possibilities for open source and thin-client technologies? And how does this state-of-the-art wonder-bank compare with what is actually planned by NZ Post? Claire Matthews, acting director of the centre for banking studies at Massey University, and computer consultant Allan Smee take a good look.

In establishing “Kiwibank” (or whatever it is to be called) and selecting the information technology to be used, New Zealand Post had the opportunity to obtain state-of-the-art technology with which to run the banking operation.

It had the advantage over existing financial institutions of not having a need to deal with any legacy banking systems, although interconnectivity with New Zealand Post’s existing computing system would obviously be in its interests. In addition, it could obtain the newest technology available, which is an important consideration given the speed with which technology changes and the reliance that a banking operation must place on its IT.

In making its selection of hardware and software, New Zealand Post had a number of issues to be taken into account. One of the most important was the demand by banking customers today for “anywhere, anytime, anyhow” banking. The large network of branches is another important issue, as its network of 321 Post Shops will give Kiwibank a branch network approximately 45% larger than the current largest bank branch network in New Zealand. The time frame associated with this project is also a significant factor, particularly with respect to the choice between an existing software package or a tailor-made package.

Post recognised the advantages that it had in respect of IT. When announcing the level of response to its request for proposal (RFP) in March this year, Tony Hood from the banking project team claimed that “as a start-up operation with no existing customers, no processes and no data or information to migrate, we have an opportunity to introduce 21st century banking to New Zealand”.

How well did it choose?

As New Zealand Post has now announced its preferred IT suppliers, there is an opportunity to consider how well its choice has taken advantage of this opportunity. The systems are to be housed and managed by Datacom Systems (a company in which New Zealand Post has a 27% shareholding) while Ultradata Australia is to provide the banking software. The NZ Post implementation will run on IBM Unix-based p-series and RS/6000 platforms, at Datacom’s Wellington office. Terminals connected to the system from PostShop outlets will be of a generic workstation type, and bought from one or more of Post’s several existing workstation suppliers, says Post spokesman Alan Dempster.

Arguably, the first decision made by New Zealand Post with respect to the software was not the best choice, but perhaps the most suitable given other constraints. In an ideal world, the software choice would have been for a custom-designed system that allowed the Kiwibank to have exactly what it needed, given its specific plans regarding products, locations and distribution channels, all of which affect IT requirements. A customised system would also allow the Kiwibank’s banking software to fit perfectly with New Zealand Post’s existing IT infrastructure. No matter how good an off-the shelf system may be, it would need to be adapted to meet the specific requirements of the Kiwibank, which may be similar to but will not be identical to those of any other financial institution in New Zealand, let alone in another country.

The time to launch is an important issue, as New Zealand Post has been considering a banking option since 1998, and is keen to progress the launch now that approval to proceed has been given by its shareholder, the New Zealand government. At the same time, there is a strong political element and Kiwibank’s political backers are also keen to see it in operation. Building its own system would likely have delayed the planned launch date of February 2002 by several months and possibly by more than a year given New Zealand Post’s reluctance to launch such a significant venture between September and January.

A related issue would be the cost involved in developing customised software, which would be significant. The complexities of the varied components, and the interconnections, required to provide the range of products and distribution channels planned for the Kiwibank would mean thousands of man hours being needed to develop and test the software. One of New Zealand Post’s underlying philosophies with the Kiwibank is the provision of low cost banking, and the cost of developing customised software would have a negative impact on their ability to do so.

Together these issues mean that the custom-made option is not a viable alternative for the Kiwibank, despite being the ideal.

Some of the problems associated with the purchase of an off-the-shelf system can be found in New Zealand Post’s choice. Reports have indicated that the Australian software selected requires refinement in order to operate correctly in the New Zealand environment. Ultradata marketing manager Tracey Dean told Computerworld in June that its Ultracs software had not been used in a bank before, but had been sold to other kinds of financial institutions such as building societies. Banks in Australia do use other Ultracs software — “our funds management and investment products, for example”.

The need for net

NZ Post’s intentions are now clear, as its website notes. “The focus of the new bank will be easy-to-understand, popular banking services. Initially the bank will offer savings accounts, everyday accounts with Eftpos cards and cheque books, credit cards and mortgages. It will also provide telephone and internet banking and access to ATMs. The new bank will have the largest branch network in the country and will be the only bank to offer customers the convenience of retail trading hours — including weekend banking. It will not offer corporate or business banking services.”

This broad plan clearly recognises customer demand for “anywhere, anytime, anyhow’’ banking. While Kiwibank is unlikely to have its own ATM or Eftpos network, instead having agreements for access with existing networks, the banking operating system must be able to cope with the interconnections needed.

The inclusion of internet banking among the Kiwibank’s distribution channels is vital. While New Zealand Post is emphasising the size of its branch network, and the longer “retail” hours Kiwibank will be operating, this does not mean that all its customers would be joining for the increased physical access nor that they would be content to be limited to branches to undertake their banking transactions. Similarly, while there is a widespread assumption in the community that a key market segment for the Kiwibank will be low income earners, including beneficiaries, this does not equate to a non-requirement for internet banking. Certainly this segment is likely to have a lower level of access to computing capabilities and may be less internet-literate, but that is not the same as no access and no demand. At the same time the business plan recognises that Kiwibank must also have higher income customers to be successful, and these customers will come with a higher level of access to computing capabilities and an associated higher level of demand for internet banking access, which the Kiwibank must be able to meet.

There is another reason that internet banking is important for Kiwibank, and this relates simply to cost. If Kiwibank is to meet its objective of having account fees 20% to 30% below those of the other banks, it must ensure its services are provided as cheaply as possible. Internet banking is significantly cheaper than branch banking, though the specific costs are difficult to determine, with estimates for internet transactions of 1c to 10c each against $1.70 to $2.30 for an in-branch transaction.

Making it work

Choosing the best operating system for the banking software is not a clear-cut decision, with all options having both advantages and disadvantages. While Linux offers a more stable operating system, with reports of long periods without crashing, the new Windows operating systems are generally considered to be more “future-proof”. This latter consideration is important for any bank due to the speed with which technology, and to a lesser extent the banking industry, is changing. This is particularly pertinent for New Zealand Post due to the challenges it faces in its principal business of postal services, and the need to integrate a variety of different types of business operation.

Nevertheless, the stability of Linux is also an important consideration. Kiwibank’s IT system will be operating 24 hours a day seven days a week, although demand should lessen outside branch opening hours. Having a system that can be relied upon to keep running is attractive, as banking customers tend to be relatively intolerant of banking system down-times which prevent them accessing their accounts, irrespective of their frequency or length.

Overall, there is no definitive answer to which operating system would be most desirable, although the stability of Linux probably edges out Windows’ other advantages. But the choice of back office operating systems could be tipped in favour of a Windows-based system due to the likelihood that front-line staff will be processing customer transactions on Windows-based PCs according to media reports.

While thin client technologies appear attractive, they would not seem to be an appropriate option for the Kiwibank. The Kiwibank will have a large network, which is spread throughout the country, and will be making use primarily of specialised software. This latter point would count against the use of an outside application service provider, although outsourcing of large parts of banks’ IT operations is a popular option in the banking industry. The size and spread of the network also argues against the use of thin client technology, particularly as the network will include some geographically remote locations where there are problematic telecommunications networks. In particular, a network problem would mean the complete loss of IT services, rather than simply forcing the branch to operate off-line. While the use of satellite communication could overcome this problem, this is an expensive option which would be unattractive to the cost-conscious Kiwibank.

Looking ahead

The key for the Kiwibank to future proofing its IT infrastructure is to ensure it purchases the latest technology available, both in terms of hardware and software, as well as aiming to have a significant level of spare capacity. Future-proofing is also reliant on careful and detailed research to consider likely future developments in the industry and expected customer demand in terms of both products and volume. One would hope, and assume, that this is something that Post has done in preparing the business plan for Kiwibank.

Another feature which an ideal new bank would have, and which would also assist in future-proofing Kiwibank, would be integration of the marketing and back-end operations with customer information files. This allows the maximum use to be made of the large quantity of information the bank collects about its customers, and acknowledges the growing recognition within the banking industry of the importance of using this information to strengthen the relationship and improve the associated profitability. This is something that banks throughout the world are struggling to achieve, despite long-standing recognition of its importance.

So how does Kiwibank measure up in terms of the “ideal”? Certainly it is providing the range of distribution channels that are needed, and most importantly the need for internet banking has been recognised. However, the political motives that are an important driving force behind the government’s approval of Kiwibank’s establishment have restricted the ability of Post to have the best IT infrastructure possible. In particular, it has meant that an early launch date is sought which in turn has required a decision to purchase an off-the-shelf system rather than develop a customised system. This has had flow on effects in terms of the choice of operating system made. Overall, the selection of IT for the bank has been made within specific constraints imposed by its planned marketing approach, which has prevented it from having an ideal system.

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