It’s no secret that banks are under tremendous pressure. The rapid increase in sophisticated and complex financial products and services has strained banks IT capabilities and has exposed banks and their clients to significant risks. The huge increase in rules and regulations applicable to banks has strained bank IT resources even further.
While IT resources may be straining to keep pace, overall IT budgets remain enormous. In 2011, IT spending by banks in North America was over $55B. The top 5 banks in the US alone spent an average of $8.3B which represents over $1.6 billion that each bank spent on IT. Yet with all that money being spent on technology and related services, virtually all banks are straining to keep up and remain dependent on unreliable technologies that expose the savings and investments of millions of American businesses and consumers to enormous risk.
In my travels at NES Financial I have had the opportunity to meet with hundreds of banks with a wide range of IT budgets. Independent of the bank’s size, when it comes to IT, it seems that two things are generally true: First, there are talented IT professionals at all banks, and second, all banks (regardless of size) rely on a simple and unreliable tool for very sophisticated transactions. That tool is the spreadsheet. How can it be that a bank that spends billions more on IT than the annual revenue of 99.9% of companies in the US generate in revenue manages transactions involving hundreds of millions of dollars and risk on a $149 Excel spreadsheet?
Not that Excel is a bad technology – on the contrary, spreadsheets are a great productivity tool well suited for many applications. But the fact that they are by their nature highly flexible, easily customized, and highly distributed makes them difficult to manage and control in a highly distributed enterprise environment. Many of the spreadsheets in use are not developed by a professional programmer and are often tools that started out as a scratch-pad application by a non-IT employee, and evolved to support an entire line of business. As a result, they lack the robust development and testing procedures of world class software and inherently are not reliable enough for the task they are being used for.
In an updated 2008 study completed by the University of Hawaii, it was found that 88% of 113 spreadsheets audited had contained errors. In another study conducted in 2007 at Dartmouth College, they evaluated 25 sample spreadsheets and found that 15 workbooks contained a total of 117 errors. While the majority of the errors cause little or no quantitative impact, seven of the errors uncovered had cost impacts ranging between $4MM and $110MM. The conclusion of all of these studies is that the error rate is highly predictable and consistent across industry segments.
The risks inherent in this approach are enormous. Consider the case of Allfirst Bank, the US subsidiary of Allied Irish Banks, which lost $691MM because a spreadsheet used to monitor the trading risks contained links to uncontrolled sources of data that could be easily manipulated.
A new generation of software to help financial institutions meet today’s needs has arrived. Virtually everybody has a memory of their father telling them how critical it is to “use the right tool for the job.” The good news is that these new tools can be rapidly implemented and are more affordable than many might think.
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