FT SPECIAL REPORT The Connected Business

Wednesday September 24 2014 www.ft.com/reports | @ftreports

Inside

Digital era hits Upstarts target banks’ lunch investment banks How regulatory changes and legacy IT systems affect older institutions New, technologically Page 2 savvy rivals are aiming to take business from Lenders attempt new traditional institutions, rules of engagement report Martin Arnold Banks make huge efforts to bolster and Murad Ahmed their online offerings Page 2 echnology is a double- edged sword for banks. Traders turn from Most are focused on provid- speed to safety ingthelatestdigitalbanking High-frequency markets T applications to their cus- tomers and investing in whizzy new look to provide better technology, such as finger pulse scan- service all-round ners and digital cheque imaging. But Page 3 theyalsofacegrowingcompetitionfrom tech-savvyrivals. How to survive the Apple’s announcement this month that it aims to revolutionise the world of curse of the inbox credit card payments with the launch of Even senior managers Apple Pay, a service that allows custom- can become paralysed erstomakepaymentsbywavingtheir by too many emails iPhones over a terminal, is widely seen Illustrator: Oivind Hovland asawake-upcallforbanks. Page 4 Most senior bankers knew the chal- the big technology groups are well of mobile and internet transactions are ing banks’ systems say that merely their IT vendor or cannot be supported lenge was coming. “[They] all want to positioned to play and Apple’s latest being processed every day. This year, accessingsomearchiveddatahasbeena by internal staff, yet which are still criti- eat our lunch,”Jamie Dimon, chief exec- moveisasignofthat.” more than 15,000 people a day have challenge because of the obsolete for- caltotheiroperations. utive of JPMorgan Chase, said in Febru- Yet responding to this challenge is downloadedbankingapplicationsinthe matsused. For instance, after Lloyds Banking ary, referring to the big technology hardforbanks,manyofwhichhavevast UK.Atthesametime,theuseoftradi- Also,asbankshaveexpandedthrough Group acquired Halifax Bank of Scot- groups, such as Apple, Google and Face- IT systems dating back to the 1960s and tionalbrancheshasfallensharply. acquisitions, they have tended to bolt landin2008,itchosetomoveitsnew book. “I mean every single one of them, 1970s that are prone to problems and A wave of “fintech” start ups new systems on to existing ones, rather customers on to its core system, rather andthey’regoingtotry.” expensive to maintain. Furthermore, as has emerged, seeking to disrupt banks’ thanundertakethemoredisruptiveand than invest in building an entirely new Harry Nelis from Accel Partners, the people check their accounts more regu- business models. They are particularly costly process of fully integrating them. platform. In contrast, Nationwide chose venture capital firm that backs several larlyontabletsandsmartphones,itputs prevalent in London and companies The result is hugely complex IT net- the more costly and time-consuming On FT.com financial technology start-ups including additionalstrainonthosesystems. such as TransferWise, Zopa and works that it may be impossible to route of investing in a new core system the UK peer-to-peer lender Funding A report from the British Bankers’ WorldRemit have become significant untangle. fromSAPandAccenture. Customers turn to Circle, says: “There are certain parts of Association and EY, the consultancy, actorsontheglobalstageinrecentyears. Often, banks find themselves relying UK banks say they are spending mobile banking apps the financial services industry where found that in the UK alone, almost £1bn Consultants responsible for improv- on systems that are unsupported by continuedonpage3 ft.com/connectedbusiness Criminals eye markets for a better return on investment

Security is accused of, for example, shorting a stock based on the knowledge gained Experts are warning that during an attack, they could shrug it off astakingagambleonarumourthey commodities and futures heard. “It is very,very hard to prosecute traders offer a lucrative anyoneforthiskindofcrime,”hesays. Marc Maiffret, chief technology target for fraudsters officer for Beyond Trust, a security and around the world, compliance management company, reports Hannah Kuchler agrees with Mr Borg that markets will receivemoreattentionfromcybercrim- inals as straightforward stealing of data Cyber criminals could turn to the finan- becomeslesslucrative. cial markets to make money – using Headdedthatascompaniesputin tricks such as shorting stocks before bettermeasurestoprotectagainstcredit attacking listed companies, buying card fraud, such as two-factor authenti- commodities futures before taking cation with online banking, using hard- down the website of a large company or ware devices or phones to generate breaking into computer systems to steal codes, or the introduction of chip-and- confidential mergers and acquisitions pin in the US, cyber criminals in eastern informationbeforeplayingthemarkets. Europe, China and even across the US These are some of the ways advanced willbegintodabbleinmarketmanipula- hackers could manipulate the financial tion. markets, a threat security experts are DerekManky,whoheadstheresearch warningisjustoverthehorizon. arm of Fortinet, a US cyber security In a paper last year, Scott Borg, chief company, says he has already seen evi- executiveoftheUSCyberConsequences denceofaninfectionthatscannedthou- Unit, an independent non-profit organi- sands of his clients’ machines searching sation that advises the US government Market breakers: crooks may aim to for trading accounts. The bug was on the economic consequences of possi- influence transactions designed to issue automatic trading ble cyber attacks, warned that some instructionsifithadsucceededintaking criminals are set to go beyond stealing potentially be market-moving eco- overtheaccounts. thefinancialdataofcustomersandstart nomicdata. “Itisnothappeningonaregularbasis, profitingfromcyberattacksbymanipu- These types of attacks are not yet but we’re seeing indications that the latingmarketmovements. widespread, as many cyber criminals technology is being developed to enable “The potential scope of the new focus on the easy pickings from selling criminalstomanipulatethemarket,”he attacksisstunning.Thereisalimittothe credit card data or clearing out bank said. amount of money that can be stolen accounts. Gary Owen, a director at Promontory, directly by diverting payments. There is Manipulating financial markets could a consulting firm, used to run the threat nolimittotheamountofmoneythatcan be much more complex. Criminals may management centre at Goldman Sachs. be made by manipulating markets,”he have to use advanced phishing tech- He says that while big banks tend to run wrote. niques – where very carefully crafted sophisticated security operations, those MrBorgtoldtheFinancialTimeshe emails, often based on specialist knowl- lower down the food chain often have to had been talking to banks privately edge, are sent to executives to elicit rely on third-party vendors, and this aboutthisriskforsometime,buthad could pose a threat to the financial sys- been cautious about making public tem. warnings for fear he would inadvert- “Morepressureneedstobeputonspe- entlybegivingideastocriminals. ‘Trading and data services cific vendors who are systemically Now, however, he has seen signs of are incentivised to be important to a subset of the community someearlyattacksthatmaybeaimedat because they provide services for tier- manipulatingmarkets.“Foranumberof cheaper or faster, but not twoortier-threeclients,”hesaid. years,Ikeptquiet,Ididn’twanttoput necessarily more secure’ “Trading and data services tend to be theideaintopeople’sheadsthatthiswas incentivised to be cheaper or faster, but an enormous opportunity.But that is no information, or ask them to click on notnecessarilymoresecure.” longer a good argument, as the bad guys links or downloads – or advanced mal- Mr Owen says criminals could distort havecaughton,”hesaid. ware, which is especially designed to get data to siphon off cash. “What if one in MrBorghasseendiscussionofthe intocustomisedsoftware. 10tradesiscorruptedsomehow,butyou potential for this type of attack on Once an attack has been carried out, can’t see it? Instead of 10 shares, it’s 11, the underground forums frequented however, it could be very hard to track insteadof$9,it’s$8.50?”Theintegrityof by cyber criminals and evidence that down the culprits, Mr Borg says. It is rel- the data available in the market is para- hackers are targeting government atively easy to hide one’s identity in a mount,headds,aswithouttrustthesys- organisations that hold what could busy marketplace and even if someone temcouldfallapart. 2 ★ FINANCIALTIMES Wednesday 24 September 2014 The Connected Business

Electronic challenge Regulatory changes and old IT systems add to sector’s woes, says Daniel Schäfer

Digital erosion threatens investment banks’ business

et another threat to invest- and cost-cutting. Such issues are eating $188bn this year alone, according to technologies they have developed in- thephoneandexecutedealspersonally– The way we lived ment banks’ business mod- upalltheITbudget,sothereislittle Celent,aresearchfirm. house, while initiatives to share costs whileelectronictradingheadsbecomea then: many els looms on the horizon. roomleftfordisruptivetechnologies.” Consultants say the sector needs a between rivals through joint ventures, dominantforce. banks have While having to cope with a Yet there is a sense of urgency among radical approach to rid itself of a legacy partnerships and open-source projects “Theheadofetradingusedtobea computer Y host of stricter rules, a executive boards, as they realise that where each business unit has its own IT havemostlyfailed. token position, but now is a force to be systems that tougher capital regime and a sharp drop trading houses will in future primarily department,tradingplatformsandback Seniorbankerssaytoptierbanksneed reckoned with,” says Sassan Danesh, date from the in revenues, trading firms also face an be technology firms. The top executive office infrastructure. Advisors say to become technology leaders rather managing partner at Etrading Software, 1970s – Getty uphill struggle to transform themselves of a large European bank says: “We investmentbanksneedtomoveonfrom than merely cutting costs. One area aconsultancygroup. intotechnologycompanies. should have revolutionised the way we such a “mushroom strategy” to create wherethisisclearlyvisibleisinthetrad- Tradingautomationisalsoacompeti- The digital challenge has hit invest- approach our clients. But instead, we centralisedITdepartments. ing of fixed income and currencies, tive threat for investment banks. “The ment banks in several ways. More and have not moved anything like as rapidly Ultimately, this will mean going from which is rapidly becoming more like electronification of trading will make it more trading is moving into the elec- as other industries. Banks have fallen acobwebofdozensormoretradingplat- equities trading, where transactions are easier for technology firms to step into tronic realm, inefficient back office IT behind.” forms to a unified solution. Consultants executed electronically for a fee instead thebusiness,”MrFanwarns. systems need urgent reform, and multi- Oneofthemostpressingissuesisto atMcKinseysaidinareportlastyear: ofbanksactingasmarketmakersand The digital revolution means that pletradingplatformshavetobeunified. tackle the bloated technology infra- “The end-game may see firms merging chargingaspreadfortheriskstheytake. longstanding barriers to entry have At the same time, competition from IT- structure built up in the boom years. [fixedincome,currenciesandcommod- “If the bid/offer spread is zero, you crumbled. The need for a large focusednicheplayersisincreasing. Regulatory demands on conduct moni- ities] and equities franchises to create havetofindotherwaystomakemoney,” balance sheet has waned; the advent of Executives, distracted by all the other toring and risk management is inflating executionfactories.” ‘Where says Colin Fan, co-head of Deutsche the agency model brings more price serious problems in their industry,have IT costs at a time when return on equity Investment banks outside the top five trading is Bank’sinvestmentbank.“Soyouhaveto transparency; and online trading plat- had little scope to come up with a proac- languishesatanaverage11percent,says have already outsourced crucial parts of be more tech-focused than ever before. formshaveopenedmoresaleschannels. tiveITagenda. theBostonConsultingGroup. their trading infrastructure. UBS this technology- Where trading is dominated by technol- So far, investment banks have held Bob Gach, global managing director Marketleaders,suchasJPMorganand year struck two deals to replace its dominated, ogy, the heads of businesses better also theirown.“Therearelotsofupstartsand of Accenture’scapital markets practice, Deutsche Bank, spend billions of dollars patchwork of multiple trading plat- betechguys.” disruptive technology firms in various says: “The industry has been slow on technology each year and most of forms with standardised solutions from the heads of Inforeignexchangetrading,acocktail areas of investment banking,” Accen- and inconsistent in adopting digital them have moved some IT centres Murex and Ion Trading, while France’s businesses of regulatory investigations into alleged ture’sMrGachsays.“Buttheyaremostly technologies, particularly because the to low-cost countries and slashed SociétéGénéralelastyearoutsourcedits market rigging, mixed with a decline in very small and on the fringes. What we larger investment banks have been staff numbers. But this has not been post-trade processing to a partnership better be revenues, has this year prompted a haven’tseenyetistheWalmartofinvest- focused on other huge issues, such as enough to contain costs. Global bank IT betweenAccentureandBroadridge. tech guys’ shakeout among once-powerful foreign ment banking that completely changes regulatory changes, conduct, litigation spending grew more than 4 per cent to Nonetheless, larger banks retain exchange voice traders – who work over themodel.” Lenders struggle to Nimble groups move into established engage with customers financial institutions’ territory

tomersviaotherchannels,suchasvideo ing international payments is really no “We also see ourselves as a tech com- Social media conferences and text messages. In the Start-ups different from sending an international pany. We’ve hired loads of engineers UK, Lloyds Banking Group, the govern- email. It would be absurd if an interna- who will build robust new technologies. Institutions are making huge ment-backed lender, is trialling a Some older banking groups tionalemailcost5centsaletter.” Banks, by contrast, typically use fairly efforts to bolster digital scheme that allows customers to talk to have decided the best Investorsarepumpingcashintofledg- old technologies, building systems by offerings for their clients, an adviser via video if one is not availa- response is to work with ling “fintech” companies. According to hiringconsultancies.” ble in their branch. Meanwhile, Royal Accenture, global investment in finan- Somebanksareattemptingtoheadoff writes Sharlene Goff Bank of Scotland sends 200,000 texts a newer tech companies, cial technology ventures has risen from the threat. Barclays launched the Pingit daywarningcustomerswhoareaboutto reports Murad Ahmed under $930m in 2008 to $2.97bn in mobile app two years ago, allowing cus- exceed their overdraft limit or incur 2013. tomersfromanyUKbanktosend WhenTSB,aUKbank,sufferedaserious account charges. Spain’s Caixabank has Computer error: TSB suffered a Fintech groups say their advantage moneytoanotherpersonusingonlya systems failure this year,its chief execu- devised a mobile application that lets huge systems failure this year Seven years ago, Taavet Hinrikus, the overbanksisanabilitytoconcentrateon phone number. The Payments Council, tive took to Twitter to apologise to cus- privatebankingcustomersinteractwith first employee of Skype, moved to Lon- a small market sector and their better the UK industry group responsible for tomersunabletowithdrawcashormake wealthmanagersviavideocalls. haveoncustomerstoconnectwiththem don from the free internet telephony understanding of how to use technology payment mechanisms, has launched a payments. These moves are part of banks’ efforts inamorepersonalway.Syniverse–a company’sbase in Estonia. However,he totheiradvantage. similarmobilesystemcalledPaym. Conscious of how damaging a highly to bolster their digital offering as they technologyfirmthatworkswithsomeof faced a problem. Every time he trans- Hiroki Takeuchi is founder and chief Barclays, MasterCard, Rabobank and publicised outage could be just months faceanonslaughtfromnewcompetitors the world’slargest banks and retailers – ferred money to his UK bank he executive of GoCardless, a London- Lloyds are among older financial groups after TSB’slaunch as a standalone bank, such as peer-to-peer lenders, technol- says smartphones present an opportu- incurred charges of 5 per cent per trans- based enterprise that allows small busi- attempting to turn into investors, help- Paul Pester used the site to explain the ogyfirmsandsupermarkets. nityforlenderstoextractvaluableinfor- action. nesses and individual entrepreneurs to ing to fund “accelerators” – environ- causesofthecrashandprovideprogress Some peer-to-peer lenders – which mation about customers’ whereabouts, Kristo Käärmann, a fellow Estonian set up direct debit payments from cus- ments for would-be entrepreneurs who updates, often with tweets to individual enable individuals and small businesses demographics and tastes. This could be livinginLondon,hadtheoppositeprob- tomers, targeting groups that have diffi- exchange equity in their fledgling enter- customers. tolenddirectlytoeachother–are used to provide tailored financial serv- lem. He wanted to transfer local cur- cultiessettinguprecurringpayments. prises for cash, mentorship and office His efforts, which were generally already using the information available ice, such as on-the-spot insurance to rency home but he was paid in pounds. “Banksdolotsofthingsatonce,”he space. applauded, illustrate how banks are on social media sites to underwrite customers when they arrive at a holiday Intheend,thepairstruckupaninfor- says. “Fintech companies take one area Others have partnered with fintech connecting with their customers in an loans,accordingtooneofthebanks. destination, as well as offers for their mal deal. Mr Hinrikus would transfer and laser-focus on it. Banks can’t do companies, believing it may be better to era in which the once-a-week branch Meanwhile UK retailers such as Tesco preferredshopsandrestaurants. cash from his Estonian account to Mr that. collaboratethanbetocompete. visitseemstohavevanished. and Marks and Spencer use innovative SyniversehasteamedupwithMaster- Käärmann’sEstonian bank account. Mr In June, Santander announced a deal Other banks’ attempts to use social ways to reward customer loyalty that Card to trial technology that links a per- Käärmann would move money from his so customers it cannot serve may use media channels have not been greeted traditionalbanksareyettoemploy. son’s credit or debit card with the loca- UKaccounttoMrHinrikus. Funding Circle, a UK peer-to-peer sowarmly. Tesco, for example, offers its current tion of their mobile, making sure both Asthemoneydidnotcrossnational lenderspecialisingincorporateloans. JPMorgan Chase, the US lender, was account holders points for its Clubcard are in the same place. If the card and the borders, they did not trigger a bank’s Readers’ views In return, Funding Circle, which has lastyearforcedtocancelalivequestion- loyalty scheme when they use their mobile are not in the same location, international transfer charges, saving lent some £290m to 5,000 businesses and-answer session on Twitter after it debit card. The points are turned into transactionscouldbeblocked. them some £10,000 over the two years The Connected Business section of since it began trading in 2010, will pro- suffered criticism over the bank’s prac- voucherstouseinitsstoresorelse- Some banks are looking at customis- thearrangementlasted. the Financial Times is devoted to mote Santander’s current account and ticesalongsidetoughquestionsfromdis- ing text messages to customers’ behav- Their experience prompted them to delivering in-depth news and cashmanagementservices. gruntledcustomerssuchas:“WhencanI iour.So,forexample,ifacustomertends found TransferWise, a “peer-to-peer” features about how technology is “It will by no means be our last part- getmyhouseback?” to check their bank balance every Mon- moneytransfersystemthatletsindivid- affecting business in all its forms – nership,”says Samir Desai, chief execu- Recent research shows that many 87 per cent of customers day morning, the bank could automati- uals and businesses send money from banking to retail, from tiveofFundingCircle. lenders are struggling to connect with found lenders’ use of social cally send a message with that informa- between countries, charging a small fee education to logistics, and In the US, San Francisco-based Union customers in a useful way through sites tion. foreachtransfer. everything in between. Bank announced a similar deal to sell such as Twitter and Facebook. A survey media ‘annoying or boring’ Oneriskforbanksisfallingfoulofreg- Since launching in 2011, the company We are keen to have feedback some personal loans via Lending Club, from US consultancy Carlisle & Gal- ulatory requirements when they use has raised $33m from investors includ- from readers about what they want anonlinemarketplace. lagher, for example, showed 87 per cent where. social media, particularly to promote ing Richard Branson and Index Ven- to see in print and online. What Mr Desai says that, although fintech of bank customers found lenders’ use of However, big banks – whose digital financial products. The UK’s Financial tures,aventurecapitalfirm.InJune,the sectors, industries or topics would companiesaretakingabiteoutofbanks’ social media “annoying, boring or progress has been hampered in recent Conduct Authority last month set out company said it had processed pay- you like to see featured? How does revenue streams, they are also helping unhelpful”. years by dysfunctional IT systems – are guidelines for social media use, stating mentsworthmorethan£1bn. the current mix of a three-page expandthefinancialservicessector. Meanwhile, Capgemini’sWorld Retail startingtocatchup. that every individual communication – Thisexampleispartofawaveoffinan- focus on a specific industry and He says about a third of his customers Banking Report 2014 found that, while While about half of financial services beitasingletweet,Facebookpostorweb cial technology start-ups that are nib- one page on more general and have told him they would not have been almostnineoutof10bankcustomers organisations’ IT budgets is spent on page – must comply with their rules and bling at the fringes of banks’ business topical features in the print edition able to raise finance without Funding had social media accounts, and 10 per maintainingexistingsystems,according be“fair,clearandnotmisleading”. model,theundervaluedpartsofafinan- work? Would you like more general Circle,socreatingcustomersoutsidethe cent used them weekly to interact with toFujitsu,anITservicesprovider,28per This presents difficulties regarding cialinstitution’soperationsthatareinef- features about IT and technology? orbitoftraditionalbanking. banks, few lenders had clear plans for centisnowinvestedin“innovation”. risk warnings on Twitter, for example, ficientorthatcanbeundercut. Is the content too geeky? Though fintech companies expect to socialmedia. “Innovation, which typically took a which limits banks and other users to “Banks are relying on the old inter- To have your say, email work with banks, their efforts will lead Analysts say the risk is that these sites back seat during the recent economic 140 characters. With the regulator alive bank system for making international [email protected] with the words to a more fragmented financial services will become not much more than public difficulties, is now receiving much war- to social media use, analysts say lenders payments,” said Mr Hinrikus. “They Connected Business Readers Views marketplace. platforms for customers to air com- rantedattention,”saysthegroup. must take extra precautions to ensure don’thaveanyincentivestoinnovate. in the subject line. Mr Hinrikus comments: “Wemay see plaints about banks. They say lenders Analysts say one opportunity for the theirattemptstogodigitaldonotleadto “Forbanks,theserviceisaconvenient thataone-size-fits-alluniversalbankno arehavingmoresuccessinengagingcus- banks is to use the information they thenextmis-sellingscandal. cash cow . . . If you think about it, mak- longerworks.” Wednesday 24 September 2014 ★ FINANCIALTIMES 3 The Connected Business The focus moves from speed to safety

High-frequency trading Companies are finding they need to demonstrate excellence in all departments in order to thrive, say Nicole Bullock and Philip Stafford

ore than 150 years ago, Catch me if you can: is the race Paul Julius Reuter, to be able to trade at ever-faster founderofwhatisnow rates over? – Bloomberg the Thomson Reuters M news agency,used carrier “big data types” who can undertake pigeons to transmit news and stock analysisthatpredictstradingpatterns. informationspeedilyandgainacompet- Ari Rubenstein, co-founder and chief itiveadvantage. executive officer of Global Trading Sys- Thebeatofwingshasnowgivenwayto tems, a market maker and high theflashoflightdownfibre-opticcables. frequency trader, says his company is But speed remains the name of the working on ways to store and quickly game. accessthe“oceans”offinancialdatacre- Inmodernmarkets,agroupknownas atedbyelectronictrading. high-frequency traders relies on the This, he says, is important now that transfer of data in microseconds to dart there are more risk and compliance across markets and trade at lightning checks on every order.Vigorous compe- speeds.Theymaketheirmoneybyearn- titionamongsuchfirmscreatesanenor- ing very small amounts on a huge mousamountofelectronicorderflow. numberoftrades. “Speed is important, it gets you in the Minimising “latency”,a term used to game, but responsible risk and compli- describethedelayittakesbeforeatrade ance management allow you to win,”he to be executed, has been an industry says. “What makes a Porsche great, for preoccupation for much of the past five example,isthebrakesandhandling,not years. theunbridledspeed.” Potentially, any physical factor can For Chris Concannon, president and affectthespeedofatrade,fromthe chief operating officer of Virtu Finan- hardware used to the distance the cial, it is about looking at the whole life signalhastotravel. cycleoftheorder. In an effort to be fastest, high- “You cannot ignore any single stop on frequency traders have been exploring thatlifecycle,”hesays.“Thatisnotnew, evermoreambitiousideas,suchasusing but there has been a refocusing of microwaves and even weather balloons resources in terms of where to find ways totransmitdata.Butistheraceforspeed to reduce speeds. A lot of time is being reachingitslimits? burned on the consumption of the data Kevin McPartland, head of research and what to do in response to that data. for market structure and technology at While you care about whether informa- Greenwich Associates, a financial serv- tion is received in a timely manner, you ices company,says: “Certainly,there are alsoneedtofocusonhowquicklyyou a handful of people out there who con- canrespondtoit.” tinue to look for microseconds. For the Latency cannot be ignored, no matter broader market, we have almost hit the how far it has progressed. Some routes threshold. To get beyond where we are aresaturated,othersareinefficient,and comes down to amazing innovations in extreme volatility and large volumes: intensifiedthefocus.Toremaincompet- decision-making and in how you man- companies will always need to worry technology.” 2008 was a boom time. But the post-cri- itive,high-frequencytraderswillalways agecosts.” aboutrivalsfindingfasterpathways. It also means higher costs. Dwindling sis period has been one of increasingly need to worry about latency, but there Being smarter in decision-making Jock Percy, chief executive of Perseus interest in eking out a microsecond lowvolatilityandsmallvolumes. are notable shifts in how they are seek- requires a whole set of skills beyond Telecom, a US trading technology more than competitors on routes Regulatory scrutiny is also raising ing–andinvesting–togainanedge. parsingsoftwarecodeandhardware. company, says: “Firms are happy being between big financial centres such as costs for all financial groups. The publi- “Speedcontinuestobeimportant,but Thomas Burrell of Chicago-based in the fast lane, but if a car pulls out and NewYorkandChicagohascomeasprof- cation of Michael Lewis’s book Flash it is just one of many factors,” says one ‘Firms are happy in the fast ObjectiveParadigm,arecruiterforhigh- passes,theyhavetogowithit.” itsforhigh-frequencytradershavebeen Boys: A Wall Street Revolt, which placed executive.“Marketsareextremelycom- lane, but if a car passes, frequency trading firms, says there has He adds: “Alot of market participants squeezedbymarketconditions. high-frequencytradingatthecentreofa petitive,soyouneedtobeexcellentinall been increasing demand for people who donotwanttomakethatmove,butifthe The optimal environment for modern market structure that the aspectsofyourbusinesstobesuccessful. they have to go with it’ specialise in risk management and trading opportunity is there, someone high-frequency trading is one of author slammed as “rigged”, has only Themeansnotjustfastbutsmartinyour quantitative trading strategies, and inevitablywill.” Tech upstarts plan to eat banks’ lunch

continuedfrompage1 billions of pounds on IT each year. State-backed Royal Bank of Scot- landandLloydsseemtofacethe biggest IT problems. They say they invest about £2bn ayear. The Financial Conduct Authority, the Prudential Regulation Authority and theBankofEnglandare conducting a joint review into the resilience of lenders’ systems andhowbankboardsaredealingwith can see opportunities and threats all bothsides.” therisksoffailures. acrossourbusiness.” Hiroki Takeuchi, chief executive of The review, which is expected to take Financial technology start-ups in the GoCardless, a UK start-up that helps about a year, follows a number of high- UKandIrelandraisedmorethan$700m small business set up direct debit pay- profile glitches, including a shutdown at from investors between 2008 and 2013, ments,says:“Itmayendupwithasitua- RBS in 2012 that meant millions of cus- accordingtoresearchfromAccenture. tion where banks providing core busi- tomers could not access their accounts The founders of these firms see banks ness infrastructure. I don’t think the forweeks. as slow-moving and complacent. They current account is going away soon. But After the outage, RBS admitted it had say financial institutions have failed to by partnering with fintech companies, underinvested in its IT systems and said understand that, while the mainstays of banks can offer provide better services it would spend an additional £450m their businesses – such as current overall.” over the next three years. Technical accounts and investment services – are MrTakeuchiadds:“Ifyoubelievethat glitchescanbeverydamagingforbanks’ not under threat, other less lucrative peoplewillkeepmoneyinbanks,fintech reputations.Evennewsofasmallfailure sectorsareunderattack. companies will have to go through the that lasts only minutes can be spread One founder described the process as banks rails. You have to work within the quickly to millions of people via social “death by a thousand cuts”, with each bankingsystem.Thatisfrustrating. media. fintechcompanytakingasmallsliceofa “EvenwithBitcoin,whereyou’vegota Figures from Celent, the research bank’s business, adding up to a signifi- currency outside the banking system, company, show that less than a quarter cantproportionofitsoverallrevenues. you need a way to load up real currency ofthe$180bnthatbanksspentonITlast However, fintech companies have intothatBitcoinaccount.” yearwasfornewinvestment–therest slowly changed their attitudes to the Mike Ward, head of OzForex in wasdevotedtomaintainingexistingsys- banks.Whereasbankswereonceseenas Europe and North America, says the tems. Asian banks devoted the highest the enemy, the fledgling groups Australia-basedonlineforeignexchange proportion of all IT spending to new havecometorealisethatthetwoneedto dealer has grown rapidly by selling cur- investments at 30 per cent, followed by worktogether. rencies at cheaper prices than most USbanksat24percent,whileEuropean For example, Samir Desai, chief exec- banks. banks had the lowest proportion at 13 utive of Funding Circle, a peer-to-peer The company, 51 per cent owned percent. lender,was behind a landmark partner- by Macquarie, the global investment As the banking behemoths are ship with Santander, the Spanish bank company, handled A$13.6bn ($12.2bn) weighed down by creaking legacy sys- that has agreed to send the London- of foreign exchange transactions last tems, it leaves them vulnerable to com- based start-up some customer leads in year. “It’s easy for us to undercut the petitionfromhigh-techupstarts. returnforpromotionalwork. banks,”says Mr Ward. “But online forex As Antony Jenkins, Barclays chief “Evolution has taken place,” he says. providershaveonlya5to10percent executive, admitted in a recent speech: “Our early messaging was anti-bank, share of the market. So, we have a long “Weareontheleadingedgeofatechnol- and banks were a bit dismissive of what runway before the banks start respond- ogy revolution in financial services. We we’re doing. There’sbeen growing up on ingtoourchallenge.”

Contributors

Martin Arnold Philip Stafford Adam Jezard Banking editor Trading Room editor Commissioning editor

Murad Ahmed Maija Palmer Steven Bird European technology Social media journalist Design correspondent Stephen Pritchard Andy Mears Hannah Kuchler Freelance technology journalist Picture editor San Francisco correspondent Jessica Twentyman For advertising details, contact: Freelance technology journalist James Aylott, tel Nicole Bullock +44 (0)20 7873 3392, email Capital markets correspondent [email protected] 4 ★ FINANCIALTIMES Wednesday 24 September 2014 The Connected Business

COMMENT Workers have to INSIDETECH Maija learn how to Palmer cope with the Behind the bland phrase lies the curse of the chilling reality of ‘kinetic action’ Frightening ideas often hide behind Estonia’s banks, media outlets and bland phrases – take “collateral ministries were disrupted by cyber damage” or “negative patient attacks believed to have come from outcome”.Similarly chilling is the Russia, but no one died. Would this act groaning inbox statement “we would consider a kinetic have warranted a “kinetic” response? response to a cyber attack”,words Even if Nato countries can decide bandied about at the FT Cyber Security when to act, how sure will they be they Summit, held earlier this month, by are bombing the right people? Hackers tech experts discussing Nato’s changing hide their tracks well, routing attacks Management Even senior staff can be paralysed defence policy. through a number of countries, Let’s be clear, “kinetic” means bullets legitimate businesses and by the deluge of emails, says Stephen Pritchard Hate mail: workers can receive up to 100 electronic messages a day – Dreamstime and bombs. In plain English: “if you organisations. Attacks are often carried hack us, we might bomb you”. out by groups at arm’s length from the he growth in email use over Then there are business-focused sites personalandculturalissueratherthana “Youneedtohaveaconversationatthat This becomes more alarming with government, which can claim to be the past decade has, it such as LinkedIn, business social net- purelycorporateone,expertssay. point,”he says. “Email is not the tool for Nato designating cyber attacks as independent actors. seems, been unstoppable. works – such as Yammer, owned by There are few general-purpose solu- resolvingacomplexdialogue.” events that could trigger Article 5 of It is easy to sow doubt over the issue. For example, Radicati Microsoft, Tibco’s tibbr and Jive – and tions other than using automated meth- Individuals can do more to manage the Washington Treaty, which states Although the attacks on Estonia almost T Group,atechnologymarket emailsubscriptions. ods such as spam filtering or message their email better. Microsoft’s Outlook, that an attack on one member is certainly originated in Russia, the research firm based in California, says Our ability to communicate on the archiving. The way each business, and the most used email application, has considered an attack on all and calls on Russian government has always 182bn emails were sent and received move also means some people hardly eachperson,usesemailistooindividual powerful tools for managing messages, Nato signatories to come to its aid. In claimed they were the work of each day worldwide in 2013. That figure stop sending messages, contributing to for technology to solve the challenge on suchaslabelling,categorisation,andthe other words: “Hack one Nato member “patriotic” independent citizens. isexpectedtoreach207bnby2017. theinformationoverload.Andtoomany itsown. ability to view emails as conversation and potentially get bombed by all (or, It is difficult to prove who shot down Business remains the main source of ofusfallintothe“cc”culture,copying “Emailisasymptom,nottheroot threads. in practice, by the US).” Malaysia Airlines flight MH17 over this traffic: business users sent 100bn of ever-larger groups of colleagues into cause,” says Mark Tonsetic, managing Google has put more message man- “I can’t believe no one seems more Ukraine. It would be even harder to those messages, Radicati says, while the email trails. Senior executives can fall directorforITatCEB,thebusinessadvi- agement features into its Gmail soft- alarmed about this,”said one man at prove who was behind a cyber assault average business user receives between into the trap of micromanagement by sory company. “The cause is informa- ware. On the mobile side, there are apps the summit. “Shouldn’t we all be that appeared to come from a dry 100and120messagesaday.Some,of email, commenting on and forwarding tionoverload.” suchasMailbox,designedtomakeemail shouting about this?” He had only been cleaners in Toronto. course,receivemany,manymore. messagesthatwouldbebetterdealtwith This, Mr Tonsetic says, touches on easiertohandle. working in cyber security for two This is why governments and Spam accounts for a large percentage atamorejuniorlevel. broader questions of how companies So far, however, such tools do not weeks. Everyone else was used to the security agencies are worried about the of messages. According to TrendMicro, Managing this can be a challenge, manage information and collaboration, transfer well between platforms, which idea: the US announced in 2011 it was soft underbelly of the small-business an IT security vendor, global spam especially when email tools, and specifi- but it also suggests they are not making limits their usefulness for executives prepared to go “kinetic” when hacked. sector, internet-connected but not volumes ranged between 93bn and cally mobile tools, are designed to bestuseofthetoolstheyhave.Forexam- whoneedtolookatemailonaPC,onthe Nevertheless, the prospect of Nato hugely inclined to spend money on 204bnmessagesadayinthefirsttwo attractattention. ple, companies could encourage the use webandonamobiledevice. countries responding to electronic antivirus software and firewalls. weeks of this month alone (the two sets “As you become more senior, you’re ofclearsubjectlines,limitthenumberof While employees need to be encour- attacks with conventional weapons The UK, for example, is running the of figures fail to correspond because copied in on more messages. That’s the people copied on messages, or even the agedtousethosetools,theymustalso should give us pause. What kind of catchy awareness campaign “Ten steps Radicatidoesnotmeasurespam). nature of things,” says Anna Marie numberofmessagesonatopic. not let email dominate their working attack would be bad enough to trigger to cyber security”,but it is hard to see While software to detect and block, or Detert, an expert in people and technol- “Youshouldhaveoneemailpertopic,” day,saysLarryCannell,aresearchdirec- retaliatory bombing, especially in an this bringing about rapid change. at least mark, spam messages, has ogy at professional services provider advisesJohnMancini,presidentofinfor- toratITanalystsGartner. era of “hybrid warfare”? What might capture SME bosses’ improved, there are other reasons for KPMG. mation management body,the Associa- One technique is to set aside specific Nato is leaving this ambiguous. attention is to imagine returning from executives’ groaning inboxes. Social “Executives who are successful don’t tionforInformationandImageManage- timesofdaytodealwithemail–andturn Drawing an explicit line in the sand lunch one day to find a military drone media, lauded by some as the likely allow email to become a tool for instant ment.“Emailshouldnotbealaundry offdevicesoutsidethosetimes. might invite people to test it. shooting at their company’s virus- cause of the death of emails, also creates messages, because it is not. People can list. And you need aggressive discipline “One thing I’ve let go of is the number Presumably, it would be something infected server. With pledges to “go them. The main consumer social media be paralysed by responding to emails aboutwhoiscopiedonmessages.” of unread messages in my inbox,”says crippling, such as the shutdown of a kinetic” over cyber threats, this is sites, including Twitter, Facebook and and more of their time is spent on email One organisation Mr Tonsetic worked MrCannell.“Therearepeoplewhowant national power grid, rather than starting to sound not so far-fetched. GooglePlus,aresignificantgeneratorsof than on the planning activities they withhadarulethat,afterthreeemail ‘inboxzero’butIneverlookatthe stealing naked photos of Jennifer electronic messages, unless users turn shouldbedoing.” exchanges on a single topic, executives number. A lot of messages can be dealt Lawrence. But what about attacks This article appeared earlier this month on emailnotificationsoff. Dealing with email overload is a hadtocallorseethepersoninstead. withfromthesubjectlinealone.” somewhere in between? In 2007 FT.com/connectedbusiness Social networks are one answer to information overload at work

Workplace in the field to work together more effectively on the marketing and sale of Some companies have found properties. Persuading Compton Green’s staff of they can function better the benefits of this approach was not as without internal emails, difficultasMrButerahadfeared. “The average age of employee in our writes Jessica Twentyman firmis30andtherewasaninstant understanding and appreciation of the ideaofa‘Facebookforwork’,”MrButera In 2011, Thierry Breton, chief executive says. at Atos, the information technology Today, some eight months after the services provider, set an ambitious goal internal social network went live, any- for his staff: to give up internal email for onewhoiseventemptedtorevertto goodbytheendof2013. internalemailtocontactacolleaguecan Criticssaidhiseffortsweredoomedto expectabacklash. fail – and, to a certain extent, they were “It’s quite funny,” says Mr Butera. right. Atos did not manage to eliminate “You see an immediate response from internalemailbytheendoflastyear.But recipients: ‘I’m not reading this. You itdidcutvolumesby60percent. needtotibbrit’.” More importantly, the “zero email” At Archant, a UK-based publishing initiative has got the company’s76,000- house, meanwhile, employees have plus employees working together in takentheleadinsettingupgroupsonthe more effective ways, according to a June company’sfour-year-old Connect social 2014 report on the project by Anthony Staff email ban: Compton Green network, says Chris Thompson, the Bradley and Samantha Searle, analysts company’shead of development. This is atGartner,theITmarketresearchfirm. Time spent dealing with email, they based on the Socialcast platform from Overcoming big barriers to change add, is typically slashed by between 25 VMware. sometimesrequiresdrasticactions,they and30percent. Archant’s accounts department, for say.Despite the Atos campaign’scontro- There are other problems, too, says example, used email for many years to versialname,eliminating internalemail Nikos Drakos, a Gartner analyst. “From make sure that regional sales executives wasnevertherealgoal.That,sayMr a worker’s perspective, email is proba- were chasing outstanding payments BradleyandMsSearle,wasto“movecol- bly still the best mechanism for focused from their clients. Now, there is an laboration activities out of email and conversations between small groups of accounts payable group on the Connect intoamoresuitableenvironment”. participantsworkingtogethertowardsa network, where details of outstanding In that sense, “zero email” has been a specific goal,” he says. “But from an paymentsareposted. resoundingsuccess.Aswellasthereduc- organisation’s perspective, a great deal “It’s not supposed to be a name-and- tion in internal email traffic, Atos now of valuable knowledge and content can shame exercise,” says Mr Thompson, hasmorethan74,000staffregisteredon get hidden or buried in individual email “buthavingaproductcodeupthereand the social networking platform it owns, accounts and may be lost forever when the name of the person responsible for blueKiwi. Every month, they create anemployeeleavesthecompany.” thatcodeisanincentive[forthem]to around 300,000 posts on the internal Nordoesemaildoagoodjobofpriori- makesurethatmoneycomesinon siteandviewalmost2mpages. tising issues or allocating tasks, says Mr time.” But why does this represent an Drakos, when forwarded and “carbon- There are also travel groups, where improvement–andwhatisthebigprob- copied” messages bounce backwards Archant employees can post reviews of lemwithemail,anyway? and forwards between large groups of places where they have stayed or eaten According to analysts at strategy employees. on work trips, and a popular photogra- house McKinsey, it is partly a matter of This can lead to chaos, says Adrian phy group, where keen amateur snap- productivity. In a 2012 research study, Butera, director of Compton Green, a perscansharetheirlatestimages. they found that the average “knowledge real estate company based in Mel- Another group focuses specifically on worker”spendsanestimated28percent bourne, Australia: “For us, email had Archant’scontent management system, of the working week reading and become too busy,too distracting. There providing a repository of information, responding to email and almost 20 per was too much clutter, too many ‘reply advice and documentation for those cent searching for internal information alls’.But the worst thing for me was that usingthepublishingtoolintheirday-to- or tracking down colleagues who can we were sometimes missing customer daywork. helpwithspecifictasks. emailsamongalltheinternalones.” “All in all, it’s more effective than “But when companies use social Radical action was called for, he says. emailforthewholecompanytoshare mediainternally,messagesbecomecon- This involved a blanket ban on internal important messages with each other, tent; a searchable record of knowledge emails and the rollout of an enterprise whether those are work-related or more can reduce – by as much as 35 per cent – social network, based on the tibbr plat- socialinnature,”saysMrThompson. the time employees spend searching for formfromTibcoSoftware. “And because employees have found company information,” the McKinsey That, Mr Butera decided, would ena- their own uses for the platform, they get researcherswrite. bleComptonGreen’ssalesassociatesout bettervaluefromit,too.”