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Tracking Innovation in Financial Services

The idea of innovation has been on a conceptual roller coaster in recent years.

IT Digs Deeper Into Business

Financial firms are employing technologies to improve service and increase revenue.

By: Steven Marlin

The U.S. financial services industry will spend about $60 billion on IT this year, split among banks, securities firms and insurance companies. In an industry whose only tangible product is information, IT is being called upon to supply more of it in support of new customer-service and revenue-producing opportunities.

Innovative firms such as investment house Vanguard Group (Valley Forge, Pa.) use IT to stay ahead of the competition. Unscathed by the scandals that have rocked the mutual-fund industry the past 12 months, the company experienced record business growth earlier this year. Canny decisions made several years earlier to off-load as many customer-service inquiries as possible from the call center to the Web enabled Vanguard to handily absorb this increase.

In January 2003, when the company experienced cash inflows of $4 billion, its call centers handled an average of 48,000 calls per day and its Web site received 170,000 log-ons per day. The next January, after the scandals broke, cash inflow more than doubled to $9.5 billion. Vanguard's Web site easily handled an increased load of 300,000 customer-service inquiries a day, 75 percent more than the year-earlier figure; call volume, meanwhile, held steady at 48,000.

Today, more than 40 percent of all new accounts are opened online and 65 percent of all fund exchanges are processed through Because of attrition, fewer client-service associates are on staff to handle phone calls. But the company has made investments in technology that will improve the ability of its live customer-service reps to help clients - and ultimately make those clients more comfortable using the Web site. Vanguard is in the third and final stage of implementing its Wave client-service desktop, an easy-to-use version of

But Vanguard is faced with the same vexing problem as its competitors, namely changing demographics. The mutual fund industry's growth has followed that of the baby-boom generation, to the point where mutual funds manage $3 trillion in retirement assets, a quarter of the nation's total. As baby boomers begin to retire, those assets, which began as a trickle and swelled into a river of cash, are about to be tapped.

Aware that individual investors become more conservative with their 401(k) portfolios as they near retirement, Vanguard created a system called One Step that aims to keep individual investors increasing their contributions - say, by 1 percent a year - to those savings as long as possible. The premise is to make it easy for people to increase their savings without even thinking about it, Vanguard CIO Tim Buckley says. Nearly 11,000 clients have enrolled in just six months. Changes to enable this feature were easily facilitated across applications such as Vanguard's Web site and its customer relationship management desktop and payroll software, and through the reuse of Web-based objects.

An Education in Lending

Operating at the other end of the demographic spectrum, Reston, Va.-based SLM Corp., better known as Sallie Mae, owns or manages a third of the $75 billion in federally funded student loans granted annually, taking on administrative and collection tasks on behalf of educational institutions and the guarantee agencies that insure loans against default. Behind the idyllic scenes of academic life is the scut work of obtaining a school's fair share of the lending pie; that's the province of financial aid officers, and making their lives easier is Sallie Mae's raison d'etre. It does that by acting as intermediary with the semiprivate agencies that guarantee loans against default and by making it easier for colleges to submit loans electronically to Sallie Mae.

Sallie Mae is in the process of becoming privatized, and competitors such as Citigroup are breathing down its neck, says Daniel Park, VP of IT strategy and solutions. To fend them off, Sallie Mae implemented OpenNet, a Web services platform that lets schools transmit documents to Sallie Mae in a variety of formats. To date, more than 700 schools have connected their systems to OpenNet. In 2003, Sallie Mae experienced a 23 percent jump in new loans and double-digit earnings per share growth. The flexible platform also is expected to help SLM quickly introduce customized services.

Supporting that growth is an IT budget consisting of $92 million for application development and $102 million for operations and infrastructure; included are 800 app developers (65 percent of whom are Sallie Mae employees and 35 percent contract workers) and 250 operations and infrastructure workers (80 percent employees and 20 percent contract workers). Additionally, Sallie Mae instituted an IT charge-back plan to remove the perception that IT services are free and to form tighter links between business and IT pros, including the joint building of IT spending plans for projects.

With successes like OpenNet and an e-borrowing initiative, which produced $11 million in savings the first year by increasing self-service opportunities on the Web for loan holders, "The IT budget pays for itself," Park says.

Lifting the Bottom Line

At Calabasas, Calif.-based Countrywide Financial Corp., a main focus is on cost savings. One of the heavy-hitters in the mortgage industry, the company has replaced a proprietary voice response system with a standards-based speech platform employing voice XML and Web services. This year Countrywide will deploy more than 20 speech-based self-service apps; three were deployed during the past 12 months for mortgage payments, delinquencies and insurance applications. The use of speech-recognition technology has resulted in dramatic cost reductions; the mortgage-payment systems eliminated more than 80,000 customer-service calls per month.

Using knowledge management software from InstantASP, Countrywide has created an online messaging forum for its software developers and has revamped its help desk- and PC-support functions. Knowledge management techniques have enabled the company to shift 60,000 monthly PC-support calls at a cost of $45 a call to help desk calls at $7 a call.

In the past 12 months, Countrywide has also created a portfolio management office that receives monthly project information representing 75 percent of the company's technology efforts. The information enhances decision-making abilities and improves executives' visibility into IT projects. Fundamental to this process is communication, says Jeff Caldwell, senior VP of enterprise technology. To be truly aligned requires a huge amount of face-to-face dialogue, including team-building exercises, summits, task forces, committees, executive briefings and "good old-fashioned discussions over a few beers."

For innovative financial institutions such as Vanguard, Countrywide and Sallie Mae, the lines separating IT and core businesses keep getting finer.

This article originally appeared in InformationWeek, a sibling publication of Bank Systems & Technology.

Katherine Burger is Editorial Director of Bank Systems & Technology and Insurance & Technology, members of UBM TechWeb's InformationWeek Financial Services. She assumed leadership of Bank Systems & Technology in 2003 and of Insurance & Technology in 1991. In addition to ... View Full Bio

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