Coley Clark is a senior vice president at technology services company EDS and heads its Financial and Transportation Industry Group. He is also the outgoing chairman of the International Chamber of Commerce's Commission on Financial Services and Insurance. He was in Hong Kong recently to attend a meeting of the Institute of International Finance and took the time to talk to FinanceAsia.
Q. In your role as chair of the ICC’s Financial services commission the new Basel accord on capital adequacy must have been something you’ve looked at. In your opinion what does it mean for banks in Asia.
Not just for Asian banks, but especially for the larger institutions everywhere, it takes operational risk and makes it more important to ensure you’ve got the capital to cover yourself. Although it is not being phased in until 2004, people are going to have to start getting serious about it. It’s probably just now starting to get financial institution’s attention.
It’s not a Y2K-style event where there is a wall you can get past. There will be that wall for the new Basel accords but after that it’s a continuous thing. Just in the past couple of months people are beginning to look at the issues more intensely, and I expect that will pick up throughout the year.
Q. In your role at EDS selling technology services to the financial industry what effect, if any, will the Basel accord have.
We’re spending time with the industry talking about it. One of the things you want to do is get some of the operational risk off your books, and outsourcing is one way to help do that.
There is, though, a regulatory consideration. It varies from country to country. Some governments are looking at relationships once they are in place, while others want to approve outsourcing relationships ahead of time. Basically they just want to ensure the company being outsourced to is financially viable and operationally capable.
Q. What are the big trends you’re seeing in the financial services industry right now?
There are about four big trends right now, sometimes working in concert, sometime in opposition. We’re seeing it in Asia as everywhere else. There is increasing consolidation of financial institutions through M&A, privatisation as governments are beginning to cut down on state ownership, convergence as financial institutions tackle multiple business areas and there is the spinning out of non-core business components into new companies.
The way these seem to be playing out is that convergence and the perceived need for scale are closely linked to consolidation. And we’re seeing all kinds of consolidation, within borders and across them. Where banks have been privatised that’s also feeding into consolidation.
With the spinning out of business units there seems to be two things happening. One is where there’s a commoditised service or profit centre like mortgage processing, cheque processing or the like, depending on what country you’re in. Here you can get a lot of benefit from combining what we call utilities. By spinning these out into their own companies you can also motivate key executives. Presumably there’s an exit strategy, and equity plans for the executives.
For example we’ve seen this kind of thing with Accordia and Riskmetrics at JPMorgan, and we’ve seen it with Fin.Force, the international payments processing subsidiary of KBC Bank in the US.
The start-up investment sections of some of the larger banks are also playing a related role in the spinning out of new companies. But I don’t know how this will play out in the future with the collapse of the dotcom sector. There’s not as much need to retain people who are going out trying to invest in the next big thing for financial technology, be it internet related or not.
But all of these trends – consolidation, privatisation, convergence and spinning out - I think are driven at their centre by a desire to get non-operating expenses down.
Q. What is your opinion in the way the consolidation trend is going to play out in Asia. Many markets are still considered as being overbanked and although governments have been trying to encourage mergers things still seem to be going quite slowly.
I think it’s inevitable, but there’s not going to be a big bang. Although I do think a lot of it will happen over the next three to five years. You’re going to see lots of consolidation as the process of talks, negotiations and feeling out the market for potential targets gets more advanced.
Q. What do you think the outlook is for IT budgets at financial institutions? Has spending really been put on pause?
I guess the answer to the question is yes. They’re not spending money on buying new PCs and hardware, but they are looking at other areas.
When financial services firms are doing well they’re looking at spending money on technology to help improve their business. When they aren’t doing well they’re looking at ways to decrease their expenses.
What we’re seeing, particularly in the US, is more of a propensity to outsource in order to cut costs both on the technology side and in the back office processing side. We’re seeing this mainly in the US and to some extent in Europe but it seems to be in its early stages in Asia.
