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 ASP: When It's Good To Lose Control
Financial services companies among the most risk-averse
groups in Internet business are seeing the benefit of outsourcing technology
to ASPs.
September 2002 Financial services companies can't escape the cost and customer
relationship value of making their services available online. That's prodded
many of them to investigate what application service providers (ASPs) can
offer them.
By using an ASP, banks and brokerage firms can avoid a huge outlay in
capital expenses and still get an online presence up and running. What
financial services organizations need to do, however, is take the time to
properly screen ASPs to ensure that data and people feel secure. Application
service providers (ASPs) enable Internet businesses to outsource certain
functions while concentrating on their core competencies. As financial
services companies rapidly evolve into Internet businesses, their core
competencies generally continue to revolve around managing money, not
implementing technology.
ASPs gain acceptance among business leaders. In a recent study by IDC,
36% of corporate executives and 22% of IT professionals said they would
consider hiring an ASP. Financial services firms such as banks are
especially cautious about handing over part of their Internet business
infrastructure to an outside organization. After all, security is a bank's
number-one priority, and unless a solution is 100% secure, it's not likely
to win the business of financial institutions. "When financial institutions
enter Internet business, the stakes are phenomenally high," says Kneko
Burney, director of Internet business infrastructure and services at
research firm Cahners In-Stat Group. "ASPs aren't just running a bank's
business, they're running their customers' businesses, as well."
Tentative Steps
Some financial companies take a half step toward the ASP model, says
Burney: They host their own services, but at data center sites run by
companies such as AT&T and IBM. "The ASP model is viable, but there are a
lot of trust issues involved," Burney says. "Companies are looking for a
trusted partner."
Gradual Adoption
Leading financial services companies see many competitive advantages to
outsourcing to ASPs, according to Anne Syslo, marketing manager of Cisco
Systems Internet Business Solutions Group, but they're proceeding
cautiously. "The lack of system control in an ASP model is a big hurdle that
financial institutions must overcome," says Syslo. "Because of the pace of
business today, we are seeing the thinking is changing from owning
technology to refreshing technology. We are seeing that the real drivers are
around how ASPs can realize a faster time to market, increase customer
satisfaction, improve productivity, and lower operational costs."
When the entire world is embracing Internet business, no one can afford
to lag behind. For banks in particular, ASPs offer a golden opportunity.
Bricks-and-mortar banks are notorious for bad customer service. (Witness the
lines of people waiting for a lone, slow-moving teller.) By joining the
online world, banks can increase customer satisfaction by adding and
improving services. Creating the electronic tools they need, however, is not
necessarily within their area of expertise.
When Salem Five Cents Bank, with more than $1 billion in assets, dove
headfirst into electronic banking with the launch of directbanking.com, it
saw the ASP model as the best option. "ASPs give us speed-to-market and the
ability to grow on a variable basis," says Jay Spahr, Salem Five's senior
vice president of e-commerce. "There is a sense of need for control of our
systems because we are a bank, but ASPs provide us what we can't do
ourselves, which often means scaling up our services to handle more
business."
ASPs in Action
Most often, financial service firms use ASPs for their core business.
For instance, the online arm of First USA Bank, WingspanBank.com, uses an
application service from Frictionless Commerce to help customers decide
which mutual funds to buy. The Wingspan Profiler uses Frictionless's
PurchaseSource technology to determine a customer's investment goals and
style, and then sorts through more than 7,000 mutual funds to find the best
matches.
Even brokerage firms are getting into the ASP business. J.P. Morgan
recently spun off a company called Cygnifi, which provides application
services to financial institutions dealing in the complex derivatives
market. J.P.Morgan dominated more than 80% of the derivatives market thanks
to its superior analytical tools. Now, says Jay Helvey, Cygnifi's chair and
CEO,the company can sell these tools to other businesses. "As an ASP, we
provide simple access to sophisticated capabilities," Helvey says. "Our
model is ideal for financial institutions looking to upgrade their current
systems or to offer new services to their customer. And we accelerate their
time to market."
Will all financial services companies choose ASPs? Clearly not, but Jim
Taschetta, chief marketing officer at Yodlee, an innovative ASP, says that
if a few big banks embrace the ASP model, they can trigger a domino effect.
Cygnifi's Helvey points out that an ASP solution makes good financial sense.
"There are no big capital outlays. What you have in an ASP model is an
operating budget decision, not a capital decision," Helvey says. "It's a
smaller check up front when you're talking about renting an application on a
monthly basis."
Security and Risk
At Yodlee, part of the sales pitch includes a technical due diligence
session. Prospective clients tour the company's data center and examine
Yodlee's security measures. "Because banks have such stringent security
standards, we've had to build a best-of-breed solution. Now whenever we go
into a company to sell our services, they're impressed by our high level of
security," Taschetta says. Taschetta understands financial services firms'
initial apprehension. "Financial institutions are asking themselves two
things when considering an ASP: 'What is the value to me? And what is the
risk?' There's a distinct fear of not introducing new technology first.
These days, financial institutions are deciding that the value outweighs the
risk, that the opportunity cost of not adopting new technology is too great
for them to move slowly." |
