SaaS: Making IT a ‘Strategic Weapon’ for Banks

By Nicole Hemsoth

February 11, 2008

3Tera Chairman and CEO Barry X Lynn discusses why it’s only a matter of time before all financial institutions — at those that want to be competitive — will be utilizing utility computing to enable software-as-service applications. Says Lynn: “[W]e are seeing financial institutions starting to think about it as a strategic weapon again, and using it that way. Those who do not will either play catch up or fade away.”

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GRIDtoday: Generally speaking, what kind of market are you seeing for the delivery of financial applications as a service? What kinds of applications are companies looking to get from a SaaS model?

BARRY X LYNN: The market is huge and already somewhat tapped. Look at banks; they all have online banking now. Look at brokerages; they all have online trading. Many banks offer corporate treasurers Web-based cash management services. Insurance companies allow subscribers to submit claims online, et cetera. The big change is this: These Web-based services have become predominant in financial institutions, and, in many cases, dominant. So, a financial institution no longer adds value simply by paying higher interest rates, charging lower commissions, keeping premiums down, et cetera. They add more value as distributors and processors of financial information. Affecting this distribution and processing on the Web through SaaS applications is less expensive, by, I’d estimate, 50-fold, versus doing the same transactions in person in a branch office.

Gt: What factors are driving this, and how is this demand not being snuffed out by concerns over security, reliability, availability, etc.?

LYNN: The main driving factors are progress, the ability to reduce costs, and being able to provide more services to more customers (e.g., online banking, payroll and tax payments now available equally to large corporations and to SMBs), and with far greater convenience to the customers all things that become competitive advantage to institutions who offer such services. Given the available bandwidth, processor speed and the cost effectiveness of it all, the expense incurred doing SaaS-y things is so much less than it is for human interaction. The Web also provides financial institutions with unlimited geographical reach.

It is not being snuffed out by concerns over security, reliability, availability, et cetera, but, because of these concerns, uptake is slower than it can be. Many of these concerns are valid, but many are the result of resistance to change and the remaining Luddites in the large corporate datacenters. However, so much investment has been, and is being, made in the areas of information technology security, privacy, scalability, et cetera, that technologies addressing these issues are state-of-the-art. Platforms that enable Web-based services and SaaS, and use these technologies, such as 3Tera’s AppLogic, have become extremely secure. Running the SaaS in a “cloud” makes it far more difficult to be targeted by hackers. Uptime is several nines out of the box and several more nines with relatively inexpensive customized configuration. Our product scales linearly. We have found that running a SaaS on our platform — be it four processors, 40 processors or 400 processors — incurs very little overhead, which remains flat in all of these cases. And this is not theory — we have done it!

Gt: How does 3Tera play into the concept of delivering financial applications as a service? What essential elements of a SaaS strategy does 3Tera bring to the table, and on what level(s) of the SaaS model does it operate?

LYNN: If a financial institution uses 3Tera as its SaaS platform, it can choose from several models. If they are offering a completely standalone service, including its own data, they can set up that application as a fully encapsulated element, either in their own datacenter or at a hosted datacenter, including all of its virtual infrastructure, totally isolated from whatever else they are running in their datacenters. Because the volume fluctuations of SaaS are volatile and unpredictable, without 3Tera, they would have to provision themselves for peak volume, something they may hit a small percentage of the time or, perhaps, not at all. With 3Tera, they can provision for their average needs. When those needs are exceeded, they can dynamically burst into additional resources, provisioning on the fly, and releasing those resources when they are no longer needed. Thus, they only incur the cost of what they consume, rather than incurring the cost of what they might, maybe, perhaps, but maybe not, someday need.

Also, if financial institutions want their SaaS applications to have access to their corporate database information or systems of record, they can do so with 3Tera, as we enable secure virtual gateways, rather than channel connections, so that those databases and SORs remain physically isolated from the SaaS. I have already discussed the security, reliability and scalability that 3Tera affords. To do this, we operate at the lowest level of the SaaS environment. Our platform runs on top of a computer grid, so it is, effectively, an operating system for the grid that enables all the other elements of the SaaS infrastructure. The native operating system or systems (yes, 3Tera enables the mixing and matching of multiple OSs in a single application!) runs on top of our AppLogic and the SaaS’s required middleware, application software, infrastructure, data, et cetera, runs on top of the native OS or OSs.

Gt: How important is a flexible utility computing platform for hosting/powering SaaS applications? Is enabling these flexible, scalable platforms 3Tera’s sweet spot in this market?

LYNN: The economics of delivering SaaS make it much more affordable, cost-effective and reasonable to use a utility computing model, where companies can grow their infrastructure and scale on demand, chooose the best geographic location to serve their applications, and not have long-term commitment and overprovisioning. Most 3Tera customers are ready to start small with a new application, test the hosted platform, and after that move more applications to the utility. There are companies who already have invested in building their own datacenters and are considering bringing the utility computing model in-house to serve various internal departments. 3Tera is offering both options hosted grids through our growing network of hosting partners, and direct enterprise licenses for building internal utilities. The platform also provides metering services, so that datacenters can easily provide charge-backs without adding expensive management systems. But, most importantly, 3Tera allows those who want to provide a new application with the convenience of not having to spent huge amounts of time, money and talent on building and maintaining the infrastructure, thus allowing them to focus on the particular application and functionality that they want to enable.

Gt: Where is 3Tera seeing the most demand for its product in regard to SaaS — from companies with internal “clouds” or from hosting providers supplying the “clouds?”

LYNN: As the number of companies trying to deliver their applications as services grows, we see tremendous interest in both hosted solutions and in-house clouds. While a lot of customers are interested in the licensed model, some are willing to try with a small hosted grid as a proof-of-concept for their applications. As the applications are deployed and start running, and as the demand grows and they are free to easily add more resources, the confidence in the reliability of the hosted environment grows, not to mention the cost effectiveness of the solution. Therefore, we see many more companies going with the hosted model than with the enterprise license.

Gt: Has the company been doing a lot with SaaS thus far? How much of this has been in the financial sector?

LYNN: Naturally, our early adopters were mostly in the Web 2.0 and online content and application areas, where the immediate advantages and enablement could be realized. As the product matured, we are seeing more and more SaaS adoption and those customers are shocked at the ease with which AppLogic solves problems they have considered hard to crack. From three days for proofs-of-concept to less than a month for full production deployments, AppLogic has also enabled SaaS customer to shorten their deployment times, make upgrades more reliable and secure, and offer more differentiated services. Now that our customers have experienced firsthand that our platform is secure and reliable, we are working with several large financial companies who are currently in various stages of evaluation.

Gt: From your perspective, what are the major barriers to SaaS in the financial sector? Are they mostly technological or cultural?

LYNN: I would say that it was a fairly balanced mix just a couple of years ago, but the technology barriers have been broken by the hardware providers enabling necessary processor speed and bandwidth — and by 3Tera providing a platform on which this power can be harnessed. The cultural resistance varies from institution to institution. There are still a lot of people out there who resist change. With platforms such as 3Tera, empires shrink. And there are still those out there who only do what behemoth, nimbleness-challenged vendors tell them to do. Traditionally, large financial institutions have seen information technology as an operational necessity, but, more and more, we are seeing financial institutions starting to think about it as a strategic weapon again, and using it that way. Those who do not will either play catch up or fade away.

In 1969, a man walked on the moon. I’d say any financial institution that claims, almost 40 years later, that any of their creative ways of debiting and crediting accounts cannot be offered as a Web-based service is not being truthful.

Gt: How, and when, will these concerns be overcome?

LYNN: They are in the process of being overcome. As the early adopters gain higher profit margins while offering lower prices, thus increasing market share, these concerns will mystically disappear, for the most part.

Gt: Ultimately, how important do you see SaaS and computing as a service becoming in the financial sector? Will the brunt of access be internal or external, and what platforms for powering these applications will emerge as the big winners?

LYNN: Obviously, I see this to be ultra-important. Technology and the Web enable financial institutions to offer an infinitely diverse set of products, geographically unlimited at huge profit margins. As a result, I can actually see the day when financial services firms think about dropping their charters to become distributors and processors of financial information and transactions, without regulation. Think about it. If you are, for example, JPMorgan Chase and someone comes to your SaaS to buy a home loan, you might be better off selling them a Wells Fargo home loan, as long as they came to your SaaS to buy it. You could devoid yourself of all the “manufacturing” and servicing costs — and credit risk — and, you would pocket pure profit.

I think the uptake will result in significant internal access, as well. First, when done right, these SaaS Web-based applications afford the ultimate in efficiency. So, why have separate front-ends, applications and databases for internal use when you have these? Simply, deploy them on your intranets. Furthermore, this technology enables datacenter managers to turn their datacenters into metered utilities to offer to their end users. My completely unbiased opinion is that 3Tera will be the platform of choice for SaaS and utility computing.

Gt: What kind of timeframe are we looking at until SaaS becomes a normal practice for financial applications?

LYNN: SaaS is already, and has been, for quite some time, normal practice. What it is not yet is pervasive. This will be a follow-the-leader game. In financial services, as most industries, there are early adopters, followers and also-rans. The early adopters will kick butt and the followers will scurry to replicate what they are doing. When a critical mass of followers is on board, we will have pervasiveness. Unless your head is in the sand, the coming hockey stick is apparent. Predicting when that hockey stick comes is difficult, though. It could be six months. It could be a few years. But, if it’s any longer than that, the early adopters will rule the world of financial services and the others will have to live on their scraps.

Gt: Is there anything else you’d like to add?

LYNN: I grew fond of being able to say that utility computing, cloud computing and SaaS are the future of information technology — but I no longer say that. Information technology is maintaining, processing and moving data. My epiphany was in realizing that information technology is a subset of utility computing, rather than the other way around. Utility computing is the future. The future of information technology is that it will become a commodity offered by the utility.

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Barry X Lynn will be discussing this subject Monday, Feb. 11, at the Web Services/SOA on Wall Street conference in New York. More information can be found at www.webservicesonwallstreet.com/.

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