What would eurogeddon mean for IT?

The financial crisis of 2008 led to banking failures, bailouts and what was arguably the worst economic downturn since the Great Depression of the 1930s. But while times were undeniably tough, events over recent months suggest things could be about to get a whole lot worse.

Europe’s sovereign debt crisis has escalated to such an extent that a break-up of the eurozone is now a real possibility.

Such an outcome would obviously have massive technology implications for banks and just about any company that carries out payment transactions. A eurozone break-up would probably trigger a global depression, which is why many still cling to the hope that it won’t be allowed to happen. However, with the Financial Services Authority (FSA) warning the banks to prepare for the worst and increase their liquidity in case the euro collapses, no enterprise IT chief can afford to ignore the possibility.

So what would a total, or even partial, break-up mean for finance firms, banks and international trading companies?

“There will certainly be an impact on trading systems, because everything that has happened in the past 10 years or so has been moving towards greater harmonisation, a stable platform, greater speed, more liquidity and more transparency,” said Mohit Joshi, vice president and head of financial services, Europe, at business technology consulting firm Infosys.

More complex trading environment

The Single Euro Payments Area (SEPA) initiative is largely responsible for this, whereby all electronic payments are considered domestic between EU member states, and the difference between national and intra-European cross-border payments does not exist.

This has resulted in the finance industry integrating trading systems to become more homogenous and to enable faster and seamless transactions. If new currencies were to be introduced into these systems, the systems would become more fragmented and would likely have to be reprogrammed and reworked.

Payment systems – which are used to transfer money electronically – such as those used for market trading or to transfer money between banks and customers, are likely to be impacted by a break-up of SEPA.

“Banks have spent a huge amount of money on payment systems. They have been standardised in order to comply with the SEPA directive. It has taken more than a decade for the banks to create a single, seamless platform, and so it would be a huge undertaking and investment to reverse it.”

Consequently, banks would need to spend considerable capital on developing in-house systems for a fragmented market with more than one currency.

Gartner analyst Peter Redshaw agrees with Mohit that banks need to prepare for one or more countries leaving the eurozone and consider what impact restructuring of systems, updates to software and converting data to accommodate new currencies would have on their IT budget.

Redshaw estimates that banks spend 80 per cent of their IT budget on keeping the business running, and a large proportion of the remaining 20 per cent on managing regulatory compliance and risk management. Consequently, this leaves very little money available to accommodate the changes that would be required if a country breaks away from the euro.

The problem goes wider than reformatting payment systems and may well lead to many projects being axed as firms look to free up capital to cover the cost of restructuring systems. Redshaw argues that the projects that are most likely to be affected are those with a customer focus, such as initiatives aimed at improving the customer experience online.

“Banks would have to evaluate their IT portfolio and infrastructure, and services that aren’t adding value will be discontinued,” he said. “One impact of a break-up would be a retreat in the short term from customer-centric projects. Banks have been keen to deploy systems that offer more personalised services, but these may well be postponed.”