See Table of Contents for Tiburon's Financial Services Industry Technology Research Report Tiburon Strategic Advisors, a market research & strategy consulting firm serving a wide variety of financial institutions and investment managers, is pleased to announce the release of its new research report on Financial Services Industry Technology. This research release summarizes some of the report's key findings. The purpose of this report is to provide readers with an initial understanding of financial services technology, including bank institutional technology, brokerage institutional technology, asset management institutional technology, & insurance institutional technology. This is the first draft of Tiburon’s research on this topic. This is Tiburon's first draft of this report; this draft consolidated prior Tiburon research into one report and was unbundled from Tiburon's equally thorough financial advisor technology research report. Key Findings This report has a long list of interesting facts to share: Market History Between 1995 and 2000, the internet penetration in the United States tripled from less than 15% to almost half of households Personal computers began outselling televisions in 1995 Full-service brokerages enter the online world in 1997 America was clearly the internet growth leader, with its near 50% penetration in 2000 dwarfing those of other countries Specifically, by 2000 over one-quarter of US individual tax returns were filed via tax software alone By 2000, over one-third of affluent consumers used the internet for financial purposes In 2000, over half of affluent internet users were using it for investment research Day traders generated the lion’s share of online brokerage trades before 2000 – they accounted for only 5% of assets, but a third of trades Personal computer ownership eclipsed 50% household penetration by 2001 Online investors were almost twice as likely to be interested in buying stocks as opposed to mutual funds, and almost fifteen times as opposed to bonds Insurance companies were driven into the online distribution business due to its low cost as compared to the high cost of its traditional distribution systems Breaking it down differently, Americans making over $75,000 in income made up less than 25% of the population, but accounted for 40% of households with internet access Internet stock trades accounted for only 15% of all volume in the US stock markets in 2002, half the share of 2000 Nearly two-thirds of online investors rate it important or very important to be able to speak with a broker in person Bank Institutional Technologies Over half of banking industry executives feel that they will be spending more on technology in the near future Market share of data processing technology has been taken up by large players such as Fiserv, Fidelity National Financial, and Jack Henry & Associates Most data errors occur because of poor standards at the data entry point On top of errors coming from data entry, three-quarters of all business contact records change each year Amazingly, two-thirds of data integration & warehouse projects get delayed, exceed budget, or fail because of poor data quality It is suspected that $50 million to $60 million is lost per year to ATM related fraud Market share of online banking technology is primarily in the hands of a few leaders including Corillian, which provides online banking technology to 28 of the top 100 banks $60 billion is lost per year due to online transaction fraud Interestingly, one-third of all internet users will not bank online due to security concerns Twice as many online banking customers blame the internet for making them a victim of financial fraud than blame a stolen wallet Half of affluent internet users report their security concerns could be alleviated through communication of fraud schemes The most frequently mentioned technology projects of the banking industry executives involves developing Check 21 technology Forecasts suspect that well over half of all business to business transactions will be e-payments, which will largely be spurred on by the transfer of check images via the crucial Check 21 legislation that is helping transfer the function of imaging away from the banks and to the hands of individual proprietors Trust & investment accounting technology has evolved gradually over time, and is now a market concentrated largely with only two major players SunGard treasury systems controls over 40% of the treasury workstations market in terms of sales The anti-money laundering acts are the most concerning to banking industry executives Compliance costs have risen drastically over the past several years across the entire financial services industry, including banks, brokerage firms, and insurance companies Between 1995 and 2000, the internet penetration in the United States tripled from less than 15% to almost half of households Personal computers began outselling televisions in 1995 Full-service brokerages enter the online world in 1997 America was clearly the internet growth leader, with its near 50% penetration in 2000 dwarfing those of other countries Specifically, by 2000 over one-quarter of US individual tax returns were filed via tax software alone By 2000, over one-third of affluent consumers used the internet for financial purposes In 2000, over half of affluent internet users were using it for investment research Day traders generated the lion’s share of online brokerage trades before 2000 – they accounted for only 5% of assets, but a third of trades Personal computer ownership eclipsed 50% household penetration by 2001 Online investors were almost twice as likely to be interested in buying stocks as opposed to mutual funds, and almost fifteen times as opposed to bonds Insurance companies were driven into the online distribution business due to its low cost as compared to the high cost of its traditional distribution systems Breaking it down differently, Americans making over $75,000 in income made up less than 25% of the population, but accounted for 40% of households with internet access Internet stock trades accounted for only 15% of all volume in the US stock markets in 2002, half the share of 2000 Nearly two-thirds of online investors rate it important or very important to be able to speak with a broker in person Brokerage Institutional Technologies Market share of transaction processing systems technology is ruled by Thomson’s Beta and ADP, with huge share between them Key developments in broker desktop & trading systems technology include a war between in houses & third-party providers, further integration of advisor tools, the integration of Instant Messaging, and integration of collaborative technology Sales of electronic commerce technology are likely rebounding after some slippage through the dry period between 2001 and 2002 Compliance costs have risen drastically over the past several years across the entire financial services industry, which is spearheaded by those incurred by brokerage firms Compliance costs should eventually peak and then taper off in a couple of years due to the implementation of enterprise-wide risk architecture solutions Sales of managed accounts technology are likely up as brokerage firms move away from a commission focus Asset Management Insitutional Technologies Transfer agent systems serve hundreds of millions of client accounts total, a number that continues to increase as flows go to mutual funds at a steady rate DST Systems services 85 million mutual fund accounts, making it the largest transfer agent in terms of users Almost all the leading separate account managers use the CheckFree APL system 95% of asset managers would be best served by purchasing rather than building a proprietary asset management system Hedge fund technology is crucial to the survival of individual funds; for instance, half of all hedge fund failures are precipitated due to operational failures The performance measurement & attribution market is dominated by Zephyr Technology. Other vendors include Ron Surz’s PPCA Insurance Institutional Technologies Insurance companies are redesigning insurance distribution technology with the goal of bringing critical information and tasks to the front Multiline insurance carriers do not offer critical information on the secure landing page, due to the oftentimes complex nature of their client relationships Future Predictions for Financial Services Industry Technology This section outlines future predictions for financial services industry technology. Increased Spending on Technology & Shift in View of Technology Financial services industry technology spending is expected to grow steadily at 4% a year until 2013 Fidelity Investments, The Charles Schwab Corporation, & Merrill Lynch will continue to lead the way in technology spending Most companies focus their technology spending on ongoing operation & maintenance, with only about one-third of it spend on new developments Financial services companies seem ready to embrace technology development; nearly three-quarters of bank senior executives feel it is essential for growth Industry estimates suggest that financial advisory firms that focus on streamlining processes through technology can expect more than 10% in profit margin increases Amongst fee-based financial advisor firms, operational inefficiency costs on average about 8% of total revenues, exemplifying the need for technology to be fully embraced on the front lines Growing Dependence of Application Service Providers (ASP) Models Application service provider model companies believe that their technology will not be adopted by large software companies like Oracle, due to a lack of nimbleness and other reasons Implementing document management systems in the front office tend to add to the bottom line; for instance, banks that have made document management investments have seen returns on investments of between 20% and 40% Rapid Growth in Outsourcing Financial advisors are most likely to outsource classic operating activities such as web site hosting and disaster recovery Outsourcing will likely grow across the financial services industry because of growing variety of client demands as they retire, increasing investment product sophistication, escalating labor costs, increasing compliance demands, & rapidly changing technology Three-quarters of financial advisors believe that portfolio management is getting more complex Financial advisors consider various ways to ease their portfolio construction burdens, including seeking home office support, building teams, & outsourcing Outsourcing is likely to grow dramatically in the next few years as measured by number of financial advisors using such models, their clients, accounts, & assets under management, as well as the revenues & net profits of the firms taking on the tasks To better understand the developments for Financial Services Industry Technology, executives can purchase Tiburon's An Initial Overview of Financial Services Industry Technology research report where the key findings highlighted above are covered in greater detail. Please contact Sarah Sage at SSage@TiburonAdvisors.Com or 415-789-2540.