The hands-down winner of Buzzword of the Year for 2002 is Web services. Software manufacturers, from giants such as IBM, Microsoft and Sun Microsystems on down to the smallest boutiques, are putting out announcements that their products are "Web services-compliant."
But before the term drowns in its own hype, let's consider what Web services are, and what they can and cannot do for the banking industry.
A Web service, first and foremost, is a service: an action done by something on behalf of another. In a software context, a service is a program, or set of programs, that performs some real function, such as calculating the interest on a loan. Originally, software services existed as monolithic blocks of code residing on a mainframe. The legacy systems which constitute the core IT asset for most companies have multiple blocks of code embedded within them.
Later, it made economic sense to split up applications into discrete components, or objects, and disperse them throughout a network, where they could be invoked when needed. Because networks were proprietary, however, these components had to communicate via network-specific protocols, limiting their practical application. The Internet changed that, giving birth to the concept of Web services.
Today, programs can communicate over the Web using standard communications protocols, enabling components to be freely distributed throughout an enterprise or throughout the globe.
"Except for the firewall and some security issues, I may be indifferent whether I'm invoking a service across the room or across the nation," said Tom Richards, analyst at Meridien Research.
Web services promise to deliver big benefits to the banking industry. By modularizing the software development process, they can lop off between 8 and 12 percent of an organization's IT budget, according to Meridien. Armed with a set of loosely-coupled software components, banks are free to mix-and-match them to create automated business processes that can be used in various business lines. "It is now possible to assemble workflow-the sequencing of business logic-dynamically," Richards wrote in a report, Web Services: Emergence of a CRM Architecture. "Business process can be assembled without the need for IT intervention."
Sixty to seventy percent of large banks are experimenting with Web services, said Richards. "The take-up has been phenomenal."
Web services have ramifications for CRM, where banks have struggled to reconcile disparate delivery channels.
"You should be able to compose process out of parts and pieces," said Richards. "And you should have consistent process across channels, which has always been one of the bugaboos about financial services."
He continued, "We add more and more channels, but we do things that are tailored to that channel. We do things differently on the Web than in the branch. The consequence is you can't start a process, pick it up in another and finish it in yet a third."
Web services stand to not only stem integration costs, but to eliminate them altogether through the outsourcing of business processes to third-party developers. Traditionally, banks have had to either build business processes from scratch or use development toolkits to "expose," or isolate, business processes hidden in legacy systems. Web services provide a third, cheaper alternative.
"An institution either doesn't have to build multiple processes unique to channels, or could get that process from a third party," said Richards. "Companies are producing reusable components that institutions can stitch together to create business processes."
Credit scoring and identification screening are two examples of services that could be outsourced to firms such as Inside Out Technologies (a subsidiary of American Management Systems), which provides a network utility for consumer loan underwriting.
The rapid evolution of Web services has produced a stampede toward new e-commerce partnerships. For example, The Credit Network (a Framingham, Mass.-based software company that automates the process of requesting mortgage credit reports) and RealEC Technologies (owner of RealEC Exchange, a routing process for closing and managing real estate transactions online) have teamed up to allow originators to access The Credit Network's credit reports via RealEC Exchange.
In another example, Bluebook, an Orange County, Calif.-based publisher of cost estimates for property-casualty insurers, has partnered with Cotelligent, an Irvine, Calif.-based enterprise integration software firm, to automate the handling of insurance claims using Microsoft's .NET and Web services technologies. Their solution, due for release in October, will address longstanding multiline insurance issues, including redundant handling of claims, lengthy processing times and overpayment.
Still, Web services are in their infancy. The biggest obstacle is security. "Because Web services employ standard Internet protocols-TCP/IP and HTTP-they freely traverse the firewalls in most organizations," Richards wrote. "This means Web services may be exposed to unauthorized users or worse." For this reason, he said, Web services should be placed behind the firewall at first.