Dimitris N. Chorafas, Heinrich Steinmann - Implementing Networks in Banking and Financial Services-Palgrave Macmillan UK (1988)

IMPLEMENTING NETWORKS IN BANKING AND
FINANCIAL SERVICES
Also by Dimitris N. Chorafas and Heinrich Steinmann
HIGH TECHNOLOGY AT UBS- FOR EXCELLENCE IN CUSTOMER SERVICE
Also by Dimitris N. Chorafas

*MEMBERSHIP OF THE BOARD OF DIRECTORS: The Job Top Executives Want
No More
STRATEGIC PLANNING FOR ELECTRONIC BANKING
ELECTRONIC FUNDS TRANSFER
APPLYING EXPERT SYSTEMS IN BUSINESS
ENGINEERING PRODUCTIVITY THROUGH CAD/CAM
FOURTH GENERATION PROGRAMMING LANGUAGES
INTERACTIVE WORKSTATIONS
PERSONAL COMPUTERS AND DATA COMMUNICATIONS
MANAGEMENT WORKSTATIONS FOR GREATER PRODUCTIVITY
HANDBOOK OF DATA COMMUNICATIONS AND COMPUTER NETWORKS
SOFTWARE HANDBOOK: ANALYSIS, DESIGN, PROGRAMMING
INTERACTIVE MESSAGE SERVICES
BANKING AUTOMATION
TELEPHONY: TODAY AND TOMORROW
LOCAL AREA NETWORKS
DBMS FOR DISTRIBUTED COMPUTERS AND NETWORKS
INFORMATION SYSTEMS IN FINANCIAL INSTITUTIONS: A Guide to Strategic
Planning Based on the Japanese Experience
MICROPROCESSORS FOR MANAGEMENT: CAD, CAM, AND ROBOTICS
OFFICE AUTOMATION- THE PRODUCTIVITY CHALLENGE
DATABASES FOR NETWORKS AND MINICOMPUTERS
INTERACTIVE VIDEOTEX- THE DOMESTICATED COMPUTER
MONEY: THE BANKS OF THE 80s
COMPUTER NETWORKS FOR DISTRIBUTED INFORMATION SYSTEMS
*Also published by Macmillan

Implementing
Networks in Banking
and Financial Services
Dimitris N. Chorafas
and
Heinrich Steinmann
M
MACMILLAN
PRESS
© Dimitris N. Chorafas and Heinrich Steinmann 1988
Softcover reprint of the hardcover 1st edition 1988
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First published 1988
Published by
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Eastleigh and London
British Library Cataloguing in Publication Data

Chorafas, Dimitris N. and Steinmann, Heinrich
Implementing networks in banking and
financial services.
1. Financial institutions- Data
processing 2. Computer networks
I. Title
332.1'028546 HG174
ISBN 978-1-349-09481-3 ISBN 978-1-349-09479-0 (eBook)
DOI 10.1007/978-1-349-09479-0
Contents
Foreword IX
1 High Technology in Banking: A Strategic Perspective 1

Generations of Banking Products 2
Evaluation of Business Opportunity 5
The Network is the Medium 8
A Network to Meet Marketing Requirements 12
Information Management in Financial Institutions 14
2 The Role of Money: From Coins to Electronics 18

Electronic Funds Transfer 19
Technology Assimilation 21
From Paper Money to Electronics 25
Branch Offices and the Network Concept 30
Innovation in Financial Transactions 32
3 Generations of Online Systems 36

The First Two Generations of Online Systems 37
The Third Generation Online System 40
Co-involving Top Management 44
Appreciating the Benefits from Networking 47
The Structure of the Network 50
4 Rethinking the Telecommunications Network 54

The ISO/OSI Reference Model 55
Establishing an Architectural Perspective 57
SNA and DNA 61
Implementing Interactive Systems 64
Project Management for Networking 67
5 UBINET, the Worldwide Network of the Union Bank

of Switzerland 70
Strategic Perspectives Behind UBINET 72
Communications Challenges as Seen by Top Man-
agement 77
vi Contents
Developing the Concept of a Communications

Architecture 80
Structuring Project UBINET: The Contribution of
Computer-Aided Design 85
Optical-Fibre Links: The Search for Capacity and
Dependability 90
Private Branch Exchanges and In-House Solutions for
Optimal Performance 93
6 Four Generations of Payment Systems in Japan 99

Background and Financial Infrastructure 100
The Japanese Generations of Online Systems 102
Customer Transactions and Consumer Payment Sys-
tems 109
ANSER: The Network for Response to Financial
Queries 114
7 Top Performers of Japanese Banking Industry 121

Sumitomo Bank 122
Mitsubishi Bank 125
Dai-Ichi Kangyo Bank 128
The Fuji Bank 131
Sanyo Securities 135
Nomura Computer Systems 139
8 National Payment Systems, Research on Artificial

Intelligence and Progress in Integration 143
National Payment Systems in Japan 144
Expanding the Interconnect Facilities: INS 150
Integration Study for Financial Networks 155
An Extended Notion of Integration 158
Work at the Mitsubishi Research Institute 161
9 Advanced Networking Solutions by American Banks 166

Innovative Network by Bank of America: The Con-
cord Center 167
Strategy Towards a Digital Utility Network 170
Meeting the Technology Challenge at Manufacturers
Hanover Trust Company 173
Contents Vll
A High Technology Architecture 178

Policies at National Life Insurance 180
Financial Networking at Merrill Lynch 182
10 Artificial Intelligence and Expert Network Systems 185

Modelling Human Expertise 186
Artificial Intelligence in Banking 189
Intelligent Financial Networks 192
Artificial Intelligence in Network Design 195
An Expert System as Assistant to the Network
Designer 198
11 Using Computers for Online Auditing 202

The Function of Internal Auditing 203
Expert Systems in Auditing Operations 206
Establishing Standards for Auditing Purposes 209
Improving Controls on Computer Applications 212
Detecting Fraudulent Practices 214
Ensuring that only Ethics Pays 217
12 Security in Financial Networks 219

Legal Liabilities with Electronic Banking 220
Regulatory and Organisational Standards for Trans-
actions 222
Basic Aspects of Physical and Logical Security 225
An Exercise on Risk Analysis 228
The Data Encryption Challenge 230
Glossary 233
Index 237
Foreword
Banking used to be centred on money. Now it is financial service. In the
last five years, deregulation, technology, and aggressive competition
fostered more changes in the banking industry than it has experienced in
its entire history. Precisely because of competition, providing financial
services in an able manner requires a first-class computers and
communications network. Yet most banking organisations are still
information poor. Management has not yet got the message. Eventually
it will, but by then it may be too late.
The objective of this book is to provide banks and the financial
industry at large with an analysis of what is and what is not a network at
their service. The background is electronic banking. The foreground
brings into perspective what has been done by forward-looking financial
industries and the benefits they achieved.
Banking is an industry today, but it is not like every other industry. It
operates on its own rules. Therefore only banking examples have been
taken: specifically, the four generations ofonline financial networks which
evolved over twenty years in Japan.
This book is a study addressed to the management of financial
institutions. Computers and communications technologists can also gain
from it insight and foresight. In chapters, the book analyses:
e what is happening to electronic funds transfer today;
e where current developments are leading;
e what options and choices are presently open to a bank;
e what are the alternative courses of action, the prerequisites, the
basic steps - and the timetable.
Chapter 1 introduces the concept of high technology in banking. The goal
is to give the reader a strategic perspective. The evolution of money,
from coins to electronics is discussed in Chapter 2. The text is written in a
pragmatic manner and it is service-oriented. It focuses on successive
generations of strategic banking products and the profits they bring to
the financial institution, and also on the risks management takes by
falling behind in the development of new services.
Successive technological solutions in the form of generations of online
systems are outlined in Chapter 3. Practical examples are presented with
emphasis on how to implement a modern financial network. Key choices
are outlined in Chapter 4. Chapter 5 is a case study based on Ubinet, the
lX
X Foreword
international, national and in-house network of the Union Bank of

Switzerland.
Planning is at a premium. When it comes to electronic banking,
opportunities abound. So do the hazards. Three major failures- and the
financial institution is out ofluck. This is part of the message successive
chapters convey to the reader. And they say why. Three chapters: 6, 7
and 8, describe some of the most successful experiences in electronic
banking the world has ever seen. The focal point is Japan. If discipline
and detail are the keys to the future, and they are, then the Japanese
example is the most telling. Not only do private banks and security
houses make a consistent effort in assuring effective, online financial
services for their clients, but also the public authorities are keen to
provide the needed infrastructure.
Chapter 9 reviews advanced networking solutions by American
banks. Specific references are taken to demonstrate what has been
achieved and how, that is, the means which have been used and the
results which were obtained.
European, American and Japanese financial institutions are now
betting on artificial intelligence (AI). This is the subject of Chapter 10.
After the introductory notions on AI have been cleared, attention is paid
to the benefits to be derived from a financial network enriched with
artificial intelligence constructs, from their design to their implementa-
tion.
While a primary reason for an online computer system is to serve the
client base in an able manner and remain competitive, the bank's own
management can also use it to advantage, for instance, for online
auditing. Its importance as well as its mechanics are explained in
Chapter 11.
Then the spotlight is on security in financial networks. Chapter 12
discusses the issue of legal liabilities with electronic banking. It
underlines basic aspects of physical and logical security, and concludes
with the data encryption challenge.
In the world of banking, as in horse racing, there is no 'sure thing.'
Speciality markets proliferate. The banking industry shifts. Diversifica-
tion aims aside, there is the growing realisation that markets served
through electronic media are becoming too important and too big to ignore.
But there are prerequisites to meet, and that is what this book is all
about. Banking is far more market-driven and prone to innovation than
hardware goods and real assets could ever be. Furthermore, in banking
services there is no copyright.
It is proper to express our thanks to everyone who has contributed to
Foreword Xl
this book- to our colleagues for their advice; to the organisations visited
in the research, for their insight; to Dr Herbert Huschke and Ulrich E.
Rimensberger for their contributions in Chapter 5 on UBINET. All the
quotations which are included come from personal meetings, working
seminars and conferences, either initiated by the authors or to which the
authors have been invited. To Eva-Maria Binder goes the credit for
typing the manuscript, doing the artwork and compiling the index.
DIMITRIS N. CHORAFAS
HEINRICH STEINMANN
1 High Technology in
Banking: a Strategic
Perspective
Banks are providers of financial services, insurers of deposits, financial
intermediaries, and key participants in a nation's payment system. As
such, banks play a major role in the economy and in the financial well-
being of a nation. To contribute in an able manner in this mission, the
banking system must operate under efficient conditions, rendering its
services in a reliable way. The costs to the economy, the clients, and the
banks themselves must be low, hence, affordable. Bank management
becomes increasingly conscious of cost effectiveness.
At the same time, and for evident reasons, banks wish to exploit new
opportunities to serve corporations and the general public. Competititve
equity and soundness demand this. To materialise their business plans,
the financial industries increasingly depend on technology. A great deal
of the existing banking services and practically all of the new banking
products revolve, in one way or another, around a technological
infrastructure. This has rapidly become the most actively sought-after
banking instrument. The last years have seen a revolution in techniques
and systems available to financial institutions. At the same time,
deregulation and aggressive competition have fostered more changes in
the banking industry than it has experienced in its entire history.
The goal of dynamic organisations is to become premier financial
service enterprises. This effort is market driven, but the motor is
technology. Harnessing the technology which will lead us into the
twenty-first century is a commitment made by the management of banks
destined to survive in this increasingly competitive market-place.
Four decades ago, just after the Second World War, the larger banks
relied on punched-card equipment and accounting machines for infor-
mation handling. Three decades ago they introduced computers to
slowly replace punched cards. Not until the mid-1960s did banking
products and information systems start to merge.
The catalyst to this merger have been the networks. By the mid to late
1960s, forward-looking banks had established real-time operations.
Crude by today's standards, these polling-selecting systems, with their
point-to-point or multidrop lines and their non-intelligent terminals,
heralded a new epoch in banking.
1
2 Implementing Networks in Financial Services
GENERATIONS OF BANKING PRODUCTS
Technologically advanced information systems and networks provide

the bank with a competitive edge. They assure an interactive link to serve
its markets more efficiently. They also facilitate management's control
of the business, thereby enabling it to compete under better terms.
Clear-eyed management is looking at the future in new ways. But
these ways change as a function of time, market drives and technology.
Perhaps no other reference can better dramatise this fact than the so-
called generations ofonline system (GOLS) defined by Japanese bankers.
Chapter 3 and Chapter 6 deal with this issue, but here is the essence of the
system in a nutshell.
The first online installations in a banking environment connected the
teller to the mainframes. They date back to the mid or late 1960s. The
applications regarded current accounts and savings. Japanese bankers
define this implementation as the first generation online system (1
GOLS). United States bankers give it a slightly different name, but the
system is roughly similar. They link the multidrop-online facility
handling current accounts to the product which it supports, and call it:
first generation product strategy (I GPS).
The 1 GOLS and 1 GPS started in the late 1960s and carried on into
the early 1970s. But at the beginning of that decade technology began to
change. This change came in two ways:
e In terms of minicomputers which provided the opportunity of
distributed data processing. This brought computer power nearer
to the user. It also made feasible to offer banking products which
required distributed support.
e By way of integration of processing routines, thus connecting
current account handling to the import/export business, portfolio
management and general accounting.
Looking at this evolution from a technological end, the Japanese talk of
a second generation online system (2 GOLS). Examining the same
environment in terms of banking products, the Americans call it second
generation product strategy (2 GPS). Quite evidently, not every financial
institution offered the same products, or used the same type of system
solutions. There have been leaders and there have been followers. But
there has also been a trend. It is precisely this trend which characterises 2
GOLS in terms of technology, and 2 GPS regarding product strategy.
The first and second generation product strategies, like the first and
second generation online systems, had a major impact on banking
High Technology in Banking 3
policies, which can be expressed in two ways: the one technical, the other
market-oriented. In the technical sense, the then classical approach to
data processing has been changed. This made possible the marketing
angle. Online operations made it feasible for the bank's managers and
professionals to start thinking in terms of new products and services.
Figure l.l demonstrates the technical evolution. Batch processing
gave way to a private online system built to serve the interests of one
bank (I GOLS, I GPS). But the lack of interbanking features saw to it
that a great deal of batch work still remained. Even today an estimated
85 per cent of banking transactions in the USA are dealt with in the
traditional manner, that is, drafts, cheques, LCs and so on. Only 15 per
cent are handled through electronics.
Electronic Funds Transfer (EFT) is crucial to the automation of
banking operations. But EFT requires cooperative online systems for
interbanking exchanges. This came with 2GOLS and provided the basis
for 2 GPS. The change has been significant. We have just said that even
today in the USA 85 per cent of banking transactions are dealt with in
the traditional manner - but the other 15 per cent of transactions
account for 85 per cent of the total dollars moved, which is in excess of
200 trillion dollars annually.
Thanks to cooperative online systems, every day 300,000 funds
transfers are executed on the various banking networks electronically.
The money is transferred from the sender to the receiver in a matter of
minutes. Typically each of these transactions involves over a million
dollars. The electronic funds are transferred over the various banking
networks, the most popular of which is CHIPS (Clearing House
Interbank Payment System). The other popular networks are Fedwire,
Bankwire, Swift, Cashier and Chess.
While these have been significant breakthroughs for the banking
industry, neither technology nor product strategy remained stagnant.
The 1970s, particularly the end of the decade, experienced several
mergers:
(I) Computers and communications (C&C) merged into one entity,

thus creating the network concept.
(2) Data processing and word processing merged into one discipline:
Data Processing/Word Processing (DP/WP), with software, not
hardware, making the difference in terms of applications.
(3) Computer files merged into a database structure which supported
applications:- independent solutions. The transition has been from
file management to database management.
Basically technical in their nature, these developments evidently had an

impact on the banking products being offered. At the same time the
markets imposed their own requirements. To meet them the banks
developed their technology further.
As a result of pull and push, in the early 1980s we experienced a new
generation of systems and of banking products:
e The third generation online system in Japan (3 GOLS);
e The third generation product strategy in the United States (3 GPS).
Characteristically, they are both network based. They also had a

profound impact on organisation and structure at the financial insti-
tution's end.
The Bank of America restructured its Data Processing/Management
Information Systems (DP/MIS) Department and called it BASE. This
stands for infrastructure, but also for Bank of America Systems
Engineering. There is much of engineering today in banking. Though we
say: 'The modem bank is information in motion', the motion is not done
without engineering.
There is also the case of new products. In a banking symposium at
which one of the authors was lecturing in Paris in June 1986, the General
Manager of Banque Intemationale de Placements said that 35 per cent
of his bank's business is due to products which did not exist eighteen
months earlier. It takes engineering- not just information- to make new
products which bring profits to the bank.
Bankers with experience in the production sector would say that this is
not too different from the case of manufacturing industries. There is a
tremendous amount of technology which goes into new product
development today. To an increasing extent, a manufacturing com-
pany's new product development effort and the company's information
system tend to merge. The same happens in banking.
We need these definitions in order to make a point about the impact of
technology on the financial industries. Though the examples so far
mentioned come from two other continents, not Europe, let's keep in
mind that Japanese and US banks are pace-setters:
e Five of the top ten banks in the world are Japanese.
e Japanese bankers spend more on high technology than bankers in
any other country.
e The telephone system in Japan is in rapid evolution, giving the
financial institutions a communications capability which is difficult
to beat.
At the same time US bankers are the most product-oriented with a

perspective in future developments. Some US banks, like Citibank, have
been the first in the world to position themselves against the forces
dominating the financial markets during the last two decades of this
century. Such positioning has been based on strategic considerations.
EVALUATION OF BUSINESS OPPORTUNITY
The future belongs to those who prepare for it. Preparation means
business opportunity. There are critical questions to which we should
reply in a factual and documented manner. First of all: What's our
strategy? Then, what's the policy of the opponents? Can our strategy
overtake them?
A strategic plan is primarily market-oriented. The next questions are:
What's the market? How fast does the market grow? Are there
significant market shifts? The evaluation of market perspectives is not
only a significant part of planning for survival - it is the heart of it.
A key issue confronting the top management of a financial institution
at all times is: What's our product line? The associated questions to
answer are: What can technology do for our product line? Is our current
status satisfactory? Are we moving ahead, or are we falling behind?
Banking management should always be keen to ask itself and its
systems specialists: /s our use of technology making our products more
appealing? Sharply cutting our costs? Giving us a competitive edge in
distribution? Increasing our products' reliability and availability? In all
these questions the strategic aspects have to be answered first.
When we give to the strategic aspects the importance they deserve, we
find that 3 GOLS and 3 GPS are no longer good enough for our bank,
though they might have been quite adequate only two years ago.
Technology is moving fast. The market is changing. Here is how one of
the foremost money centre banks looks at technology to gain the upper
hand over the competition: 'The banking industry deeply depends on
computers and communications for the development, production and
delivery of its products. But it also depends on added value.' Let's always
remember that the solutions which are given closely connect to the
products and services which are offered to their market.
If we fall behind, we are lost. It is practically the same in the
manufacturing industry. Increasingly we find that the microprocessor
has become an integral component of man-made products, from sewing
machines to turbo-generators. This is an accepted fact, but not the final
one. In a few years, products of distinction will not feature just

microprocessor(s) and memory. They will show their competitiveness
through artificial intelligence (AI) constructs. The statement is valid
throughout an advanced economy: from the financial industries to
manufacturing- but it affects the former much more than the latter.
It takes more than a polished information-systems background to
project the upcoming generation of intelligent banking products. Yet in
the years to come, this will be one of the .key responsibilities of
management, with a conceptual range spanning from research and
development (R&D) to information systems. This emphasises the need
for a fourth generation online system (4 GOLS) which is currently in
development in Japan. It also underlines the requirement for a fourth
generation product strategy: 4 GOLS and 4 GPS are the two faces of the
same coin. The name of the game is survival.
Intelligent networks, that is, computers and communications systems
enriched with artificial intelligence, will be the backbone of the new
product strategy. Financial institutions able to master this technology
will flourish. Those unable to cope will be absorbed by other banks or
disappear. Intelligent networks will span continents, reach the client at
his workplace and his home, offer a variety of well-integrated banking
services, access global databases, automate most of the paper-based
products of today. This is not going to happen overnight. It will take
some years, but the time to start working on 4 GOLS and 4 GPS is now.
It is a rather sure guess that at least for the next five years or so, the bank
will continue making more money from paper-based products than from
electronic. But if well-directed major investments in high technology are
not made today the bank is not going to change its culture. Banks which
do not change their culture are not going to survive.
The topmost benefit derived from computers, communications and
artificial intelligence in banking is strategic. It directly affects the
financial institute's life-blood: its business. To help explain the sense of
this strategic advantage it is necessary to underline two issues:
(1) The banking industry clearly depends on computers and communi-

cations for the development, production and delivery of its
products. Therefore the technical solutions which are given closely
connect with the products and services which are offered. Equally,
the products and services depend on the technical solutions which
are available - or can be made available.
(2) The change from a regulated to a non-regulated banking environ-
ment has had a great impact on competition. The strategic aspects
have changed.
ADVANCES IN BANKING SYSTEMS
INTEGRATED
SYSTEMS
PRIVATE INTEGRATED COMPUTER NETWORK
SYSTEMS
_..
SYSTEMS
ONLINE ONLINE
INTEGRATED SYSTEM SYSTEMS
.....,. CONNECTING WITH
THE ENVIRONMENT
- SPECIFIC BANK GROUP - INTERBANK NETWORKS

- SHARED USE OF SOFTWARE -ELECTRONIC FUNDS TRANSFER
AND HARDWARE -ELECTRONIC BANKING
- CO-OPERATIVE
DEVELOPMENT
Figure 1.1 Advances in banking systems

The new framework in terms of profitability in banking services, and the

underlying strategic aspects, greatly reflects on the technology which
should be used to give a bank competitive advantages, and vice versa.
With these two premises an analysis was made at a leading US money
centre bank on technological supports which characterised the last two
generations of product strategy (2 GPS and 3 GPS) as well as the fourth
generation product strategy (4 GPS). The result is shown in Figure l.l.
Let us briefly repeat the terminology. We have spoken of the Japanese 2
GOLS, 3 GOLS and 4 GOLS. The US-defined 2 GPS, 3 GPS and 4 GPS
roughly correspond to these. The difference is that the Americans speak
of product strategy, the Japanese of online system technology. We all
know the two issues are highly related, as the foregoing discussion
helped to document. The US fourth generation product strategy is a
fully online system with sophisticated features. Networked with fifth
generation computer support (particularly dedicated database engines)
it compares favourably with the Japanese fourth generation online
system.
Let us look at the results of the study Figure 1.2 illustrates. What it
says is that if we were still in a regulated banking environment, then the
now obsolete second generation banking products (and associated
technology) might have been fine. But we are not in a regulated market.
The market-place is dynamic. The highly competitive non-regulated
market demands high technology in order to survive. But it also demands
getting the banking products to the market-place faster. As this US
banking study documents, if a bank is first in the market and uses fourth
generation product strategy it can make good profits. It will make less
profits with 3 GPS. It will lose money with 2 GPS. But if we do not move
fast, and competition is first in the market, then we will lose money, no
matter which technology we use. The difference is that we will lose less
money with 4 GPS, while 2 GPS amounts to bleeding.
While this study has been done under US conditions, it offers much
food for thought to any dynamic financial institution. For major banks,
the financial industry is worldwide and these results can be just as valid in
England, Germany, Switzerland, France, Japan or in the United States.
THE NETWORK IS THE MEDIUM
Selecting and planning innovative projects requires new skills, including

technological forecasting, economic viability, and thorough technical
analysis. It also calls for the identification and acquisition of tech-
PRODUCT PROFITABILITY AND INFORMATION SYSTEM
REGULATED ENVIRONMENT
PROFITABILITY
NON-REGULATED ENVIRONMENT: IF WE ARE FIRST IN MARKET
PROFITABILITY
+ 2 GPS
..
.......
.. · ..
LOSSES
NON-REGULATED ENVIRONMENT: IF COMPETITION IS FIRST

IN MARKET
+ 4 GPS 3 GPS 2 GPS

-L-
·· ....
: : :. : ·... . . ....
NEGATIVE
LOSSES
PROFITABI L1 TY :··
·..-· ..-..
.... ·.··
Figure 1.2 Product profitability and information system
no logical information. Knowhow has become a powerful weapon in the

arsenal of the bank's manager. This point does not only reflect current
realities in banking, it also identifies the systems skills to be used in
breakthroughs. Results can be expected only when we know how to
capitalise on knowhow, create a product, serve the market and make
profits.
Two viewpoints both contradict and complement each other in this

regard:
(1) The product defines the market.

(2) The market defines the product.
Number (1) has been the classical approach. The market was defined by
the product brought forward by the banking industry. This is still valid
where the pace of technological change, and therefore of market
dynamics, is slow, as in the past. Number (2) is the rule in a highly
competitive environment. For financial institutions, this is a relatively
new rule. Banks able to adopt it as a strategy are going to be the
survivors.
The market defines the product means customer partnership. The bank
does not operate alone. It collaborates with its clients. This is true not
only in product design but also in other areas:
(1) Account co-ordination Consulting with the client, providing a

supporting architecture, co-ordinating database administration,
assuring an efficient systems planning: generally, providing
problem management.
(2) Software support Computers and communications (C & C) have a
crying need for co-ordination, starting with able problem defini-
tion. This goes all the way into application development, the
provision of environmental conditions, system sizing and network-
ing: in short, the management of C & C implementation.
(3) Pre-sales co-ordination As the number of banking services depen-
ding on C & C has vastly increased, and the process accelerates, the
bank and its clients must jointly make an application definition- as
well as benchmarks. This is a new concept. It is part of a vital
justification methodology the financial institutions must adopt.
New banking products are developed through computers, but largely

based on network delivery. As such they impose severe requirements on
the way the network will function. We are evidently discussing the
bank's communications network, and hence it is helpful to have a crisp
definition of terminology.
The term communication is used with different and often contradic-
tory meanings. In the present text we will restrict that meaning to
transaction processing and message transfers. The latter range from
person-to-person exchanges to the use of electronic devices. Emphasis

will be on the latter.
Given such emphasis, the terms communications and telecommunica-
tions will be used in an all-inclusive sense: all processes of message
transfer and transaction handling. The same terms will also be employed
to identify the mechanics of the process of communication in the
exchange of messages. (It may sound a little confusing, but that is how
literature wants it.)
In ancient Greek, the prefix 'tele' meant far off, and it was initially
used to describe processes involving longer distances than the human
voice can cover. By consequence the term 'telecommunications' iden-
tifies both the process of and the tools for the technical transmission
involved in long-range communications. The basic matter focuses on
signal sequences, the equipment we employ, and their meaning or
content.
Telecommunications may involve voice, image, data, text, graphics-
with textual information (not voice) being the first implementation.
Indeed, the telegraph was introduced in the mid-1830s, though its
commercial office-to-office acceptance took place in the late 1940s in the
form of telex. Again in the nineteenth century (mid-1870s) the telephone
gave for the first time the facility of voice transmission over longer
distances than human voice can reach otherwise.
For almost a century telephony has been the most important
telecommunications means of financial institutions. As voice commun-
ications became an integral part of the banking business, and their
importance increased, banks sought to establish gateways towards the
public telephone network- over which they have no control. These are
the private branch exchanges (PBXs) which have undergone a tremen-
dous evolution. As the use of the telephone grew, with commercial,
financial, and foreign exchange transactions on the increase, more
potent house telephone systems were required. Apart from greater
capacity, the new PBXs feature a host of services and are computer-
supported. A fast pace of development characterises the PBX during the
last fifteen years.
The telephone network is composed of three main parts:
(1) Switching That's the role of the PBX as well as of the city and
regional centres of the phone company.
(2) Transmission The switches are interconnected through links. The
latter may be cables, microwaves or other media.
(3) Terminal equipment They range from the simple telephone set to
a microcomputer combining data, text, voice and image.
Switching, transmission and terminal equipment define the physical

characteristics. That's the lowest layer in a networking structure. When
we talk of networking we also include a number of logical layers, as a
subsequent chapter will show. The topmost logical layer is the banking
service which we offer.
A NETWORK TO MEET MARKETING REQUIREMENTS
The network which we design has a goal to meet. The goal is an able,
cost-effective and reliable answer to marketing requirements. That is the
role of an enabling technology.
Marketing requirements are strategic in nature. Responding to them
positions our bank against its competition. Marketing has to define:
e what new function or performance is expected.
Then the bank's system engineering must detail:
e what technologies can we capitalise on.
The bank's technologists look at the tool market; its salesmen focus on
co-ordinated products. The two together must define and implement
application packages.
They must also care about competitiveness which means:
(1) Best response to market needs;

(2) Timely product introduction;
(3) Very low labour costs;
(4) High environment utilisation;
(5) Availability and reliability;
(6) Network-wide security;
(7) Steady development of value-added solutions.
This means a focus on customer requirements. These are generally

tactical in nature. The mechanics of an able answer largely depend on
how C & C hardware and software is being used. It is always necessary to
maximise current capabilities and to prioritise enhancements. We must
excel in creating banking services. We must also be nuturing and
protecting customer satisfaction.
The background is well known: create department objectives; tie each

set of objectives to all others; establish cohesive, consistent direction.
The top management of the financial institution must embrace an attitude
where the customer and quality come first.
Correspondingly, the bank's own system-engineering effort should
provide programmes that establish and cultivate a financial industry
image for the institution. Marketing and technology together should
display a bank with a refreshing commitment to customer satisfaction
through quality products and services. While the bank's marketing
experts should be riding horses not desks, being first in the markets to
sell the bank's products, the technologists must support them through
meticulously thought-out and efficiently implemented services. That's
the network's role.
Integrated telecommunications see to it that the higher-up layers of a
communications system are intense in software support. Such support
focuses on needed infrastructure for:
(1) Integrating text and digital communications;

(2) Providing faster, more polyvalent digital services;
(3) Interconnecting facsimile, telex, electronic mail, and document
exchange;
(4) Assuring voice and video teleconferencing;
(5) Using increasingly powerful carriers and broadband switching
equipment;
(6) Assuring that all services can be combined into one network;
(7) Helping to drastically cut telecommunications costs.
Every one ofthese goals is results-oriented. The bank's chief technology

officer (CTO) should demonstrate his expertise not only through what
he plans but also by means of what he can do, using the company's C & C
organisation departments and its resources. Another important
criterion of his expertise is the observance of strict timetables.
It is fairly evident that the chief technology officer must obtain results.
The user should be happy - and this means both the bank's own
personnel and the clients. Hence the CTO must answer their
requirements in a timely and accurate fashion. He should do so while
preserving cost effectiveness. The most important message is to move
ahead at a pace which will at least assure us that our bank is not falling
behind. This will allow us to predict technology and plan for the future.
The 1980s have witnessed a rapid transition of computer networks
from experimental projects to full commercial offerings. We have
reached a pivotal point in banking history. Today's technologies are but

the first wave of other more beneficial and increasingly profitable
developments. Given the current geographical spread of business
activity, computer networks become the infrastructure for further
growth. At the same time the size and costs of computer networks makes
wise the acquisition of appropriate knowledge regarding their design,
implementation, behaviour while in usage, and maintenance. This is
valid both for the computer components and for telecommunications in
general.
The level of studies to be undertaken, and the knowhow which they
require, can be better ascertained if we recall that analog transmission
over a network uses a nude wire. Since this technology has been well
known for over 100 years, it causes no problems. But modem digital
transmission needs real management: ingenious design, computer-aided
support, and permanent supervision, as we will see in Chapter 5 on
Ubinet.
Some studies for networks involve impressive requirements if goals
are to be met. These range from proper specifications to topological
design, system configuration, system evaluation and cost evaluation.
Each one of these steps involves feedbacks. The design must be
interactive.
The chief technology officer and his network design have goals to
meet. One of the top goals is the integrative capability of the network.
Other goals are serviceability, reliability and reasonable cost, given the
bank's topology and the services the network provides. A properly
elaborated enabling technology will see to it that the network is an open
system, that it is end-user-oriented and fulfils all current standards. We
will return to these issues.
INFORMATION MANAGEMENT IN FINANCIAL INSTITU-

TIONS
Information management plays a significant role in banking strategy. It

also demands high priority in the allocation of human and financial
resources. Technical expertise is no longer enough to manage the
information network. Just as vital is:
(I) Understanding environmental factors at work in the market-place;

(2) Identifying goals to be reached within a strategic plan;
(3) Evaluating alternatives for reaching goals - and making choices;
(4) Developing an essential framework for successful implementation;

(5) Managing the implementation process in an able manner.
In a client-driven market, the product is not simply software and

hardware. It is the entire scope of client expectations. The communica-
tions network of our financial institution must respond precisely to client
expectation. It must be flexible, because client needs change with time. It
must be competitive, since other banks too are in the same market with
the same technology. It must be expandable to cover an increasing
domain of services.
Flexibility, competitiveness and expandability are well served through
digital solutions, and also by means of integrated approaches. It has not
been so in the past, not only because analog solutions presented lesser
opportunities, but also because technical knowhow was below current
levels. For over seventy years, communications media have been
designed for voice traffic, primarily analog. Message switching, as
implemented in Telex/TWX is a late-1940s development. Twenty years
later, packet switching associated conventional communications tech-
niques and computers.
e It provided a more reliable service at lower cost.

e It handled text and data directly through appropriately designed
protocols.
One of the significant contributions of new switching technologies has

been the radical change in architecture. The original real-time networks
in the banking industry (early 1960s) were of the star type, with terminals
linked to one central computer. However, this network design lacks
flexibility. It is also bound to obsolescence, since basic functions such as:
e communications proper
e terminal handling
e access methods
are more or less intermingled. With star networks the protocols are
asymmetrical, based on telephone-line properties. They lack structure as
they mix terminal, application and computer constraints in an ad hoc
implementation.
The philosophy underlying the new approach to the design of
financial business systems is that power should be in the network, not in
its many processors, and also that there should be an appropriate
balance between the network and its attached devices.
Parallel networks for financial institutions get increasingly fast,

integrating the advantages of packet and circuit switching.
e The advantage of circuit switching is that it has to route a message
once, no matter how long it is, no matter how the communication
takes place.
e The advantage of packet switching is that we can dynamically
route, and we do not tie up the resources of the whole system just to
send one message.
New architectures assure a layered approach by separating functions
(and protocols) into consistent levels independent from one another.
This permits various computers as well as both intelligent and non-
intelligent terminals to be connected and share a common communica-
tion network. Such a network acts as an information freeway in a
transparent manner, accepting bit streams of text, data, voice and image.
The transition from a pure voice-switching and transmission system
to a full-blown financial business network has affected the technologies
of both computers and communications. It has progressed by steps as we
will see in Chapter 3. User terminals are connected to a global network
through gateways or interface directly if they can handle the protocol-
or through interfaces if they don't. This is typically the case of intelligent
terminals, including personal computers, supermicros, and the worksta-
tions (WS) built with them.
Several factors contribute to the success of an intelligent business
system. Not only is the handling of larger volumes in a secure and
reliable manner important, but (as the preceding sections underlined)
this must be done at reduced communications costs, upgrading clerical
work efficiency, significantly assisting executive decision making, and
serving our clients in an able manner. The management of clear-eyed
financial institutions increasingly focuses its interest on computers and
communications aggregates able to be upgraded to become an
intelligent business system. Newer solutions systematically integrate the
individual capabilities of various types of equipment, while preserving
the versatility to create a system of more advanced intelligence.
The functions expected from information management see to it that a
computers and communications system provides in its basic functions
timely information according to the situation, thus responding instantly
to unforeseen or unexpected requirements. In the all-digital, knowledge-
based society of the future, communications services will be vital in:
e helping hasten efficient production of services;
e providing for effective online distribution of banking products;
e distilling information for management decisions;

e saving energy and resources, thus helping develop economy in the
use of services.
A highly competitive banking market demands improved productivity,
arguing persuasively for innovative technological solutions. Improved
productivity is generally essential given the growth of service-oriented
industries. We are moving towards application breakthroughs that
should help managers and professionals improve their reach of mind.
At the clerical level, office automation can play an equally vital role in
reducing the huge volume of manual contributions and swamp costs.
There is an impressive amount of work still to be done: today an
estimated 65 per cent of product cost at sales point still represents labour
costs. Further evolution aims at rationalising and advancing office work
further. When combined imaginatively in the office of the future,
currently available devices and systems have an enormous impact on the
speed and efficiency with which the financial industry processes, stores,
retrieves and transmits vital information; and also in the decisions being
made as well as the aftermaths of such decisions.
As President of Chase Manhattan, Dr David Rockefeller was in direct
contact with an estimated 15,000 senior people throughout the world.
Many called during the day for a follow-upon discussions. It is a matter
of business efficiency to be able to press a button and bring up all
information on the calling party. Online access to the senior executives'
database guarantees a personal approach to business transactions.
2 The Role of Money: From
Coins to Electronics
Money is a means of trust. It is also an instrument of exchange,
measurement and accountability. Guy de Rothschild 1 defines money as
the blood of the economy, the general purpose tool, the instrument of
success, the symbol of might.
There is no clear historical answer to the question: 'Who invented
money?' It might have been the Sumerians, Chinese, Assyrians,
Babylonians or Lydians. But if history does not say with certainty who
minted the first coins, we do know that it has served as means of
exchange for an estimated three to four thousand years.
Some of the earliest evidence of what we would call today banking
operations dates from the Code of Hammurabi, the founder of the
Babylonian Empire ( 1728-1686 BC). It created a uniform public law
which might be looked at as a standard banking procedure. Existing
evidence in terms of unit of coinage dates from ten centuries after
Hammurabi. Its origins lie in the reign of Gyges, King of Lydia, in
687 BC. The first known coin was an alloy of gold and silver cast in
uniform shape and weight.
The next milestone in the history of money comes when it assumed the
role of instrument of financial transfer. Banks act as intermediaries to
accept and make payments. Hence a means of transfer is needed to make
credits and debits at various places and accounts without having to
transport bulky commodities or precious metals over long distances. In
this sense, after an acceptable unit of value is established, transfers can
be made through an exchange of liabilities. In other words, there has
been an evolution in the character of money:
e from a concrete, physical, tangible commodity (the coin)
e to an abstract, logical intangible entity - which is practically
financial information.
Such financial information can be embodied in the form of a banknote
(paper money), promissory note, commercial paper, IOU bill or other
debt instrument.
One of a variety of financial information documents is the cheque
(check). Another is the direct debit; still another, the wire transfer. That
l. Guy de Rothschild, Contre Bonne Fortune', Pierre Belford, Paris, 1983.
18
The Role of Money: From Coins to Electronics 19
is the new form money took in the 1970s: a form based on electronics
rather than paper; hence the notion of electronic money.
ELECTRONIC FUNDS TRANSFER
The advent of electronic money does not change money's definition. It

remains an instrument of holding value, exchanging value, expressing
trust. But now the logical rather than the physical aspect of money is
underlined: precisely, money as information.
There are however other issues which are radically changing with
electronic funds transfer (EFT), for instance, how financial transactions
can be processed, transmitted, stored, manipulated:
e from one banking location to another
e as well as within the same banking site.
Instead of writing financial information on media easily visible to
humans, such as tablets, metal or paper, such financial information is
handled through computers and communications. That is the network
concept we were discussing in Chapter I :
e The means are debit cards.
e Prerequisites are customer identification and transaction authen-
tication.
e Computers and communications provide the infrastructure.
The change is due to the cutting edge of technology, an increasingly
more demanding market-place, the accelerating pace of development,
and a growing business diversification with functional subdivisions.
Logical rather than physical information solutions to money-handling
see to it that information rapidly increases in volume. Further progress
in a knowledge society is greatly dependent on the means whereby
information is stored, retrieved, processed, transmitted, and presented.
We said that the modern bank is information in motion, and that the
motion is provided by bank engineering.
The objective of financial networks is to reduce delays in financial
transactions and provide a basis for continuity in terms of improvement
in client service made feasible through a steadily developing technology.
Another major goal is to eliminate the cost of manual intervention while
improving the qualities of service. An able implementation of financial
networking starts with clear goals. It rests on technology and it affects in
many aspects the banking profession. However, a great number of

financial networks have failed to consider the global impact which they
have on the banking business. They did not pay enough attention to the
need for much higher security systems than those employed in the past,
and they have been surprisingly weak in cost effectiveness.
Factors influencing the success of an EFT programme are locations,
service range, functional availability, fees. Also important are the
quality of the service, the security it presents (avoidance of fraudulent
transactions), and consumer protection (liabilities). A major role is
played by marketing and advertising. Its popularity would be increased
through customer-friendliness.
Successful EFT systems make money. They must steadily earn income
exceeding fixed and variable costs after an initial start-up phase. One of
the prime success factors is intensity of usage. The electronic funds
transfer system- therefore, the financial network- must be designed so
that a sufficient number of users are convinced that the system is:
(1) Highly functional, answering their needs;

(2) Economically favourable to them;
(3) Reliable and secure in a global sense;
(4) Easy-to-use but not to violate.
Violations of privacy or frequent fraudulent activities result in financial

losses to the bank and in a reduced public acceptance. This kills the
network.
Security in online financial transactions is that much more important
as an enormous struggle is now gathering over the regulation, and
deregulation, of the banking industry. The banks argue that changes in
the financial world have made their traditional business of lending far
less profitable. They are working with energy to open legal avenues into
other kinds of businesses. The network can help them in this goal only if
it is secure and reliable. But network dependability will not come as a
matter of course. It requires:
e first-class technology
e properly accounting for the changes restructuring the banking
industry.
The new financial instruments and electronics services offered to
banking customers call for both technical expertise and banking
experience. The experience is embodied in increasingly successful
developments in electronic banking.
The management of financial institutions appreciates that the ineff-

iciencies of paper-based, labour-intensive payments systems increas-
ingly hamper economic activity. But a sense of perspective is easily lost
in the ferment of changing details. This is the more true as the overall
structure of cash, paper and electronics that was recognisable years ago
still persists.
The reference has been made in Chapter 1 that for the next five years
or so the bank will continue making more money from paper-based
products than from electronics. Yet if a radical change does not take
place today in its structure, the media it is using, and the concept of its
people- in short, in its culture- the bank will not be able to survive past
the mid-1990s.
Statistics are already telling:
e Cash-based systems provide for at least two-thirds of the trans-
actions but represent less than 1 per cent of the value transferred.
e Electronics-based systems transfer more than three-quarters of the
total dollar value and do so with less than 1 per cent of the
transaction volume.
Paper-based, physical-item systems are still significant but are no more
dominant in terms of volume or value. There was a time (for instance,
the 1950s) when cheques characterised United States payment practices.
Today cheques are pre-eminent only in cost. Cheques presently consume
about 66 per cent of all resources devoted to the payment mechanism.
This means that our existing payment mechanism is not ideal. We have
not hit the target of the best attainable effectiveness, convenience,
efficiency and functionality. This happens because paper and related
systems based on physical items dominate the thinking about payments
and lead to unfavourable cost trends. Here lies the cultural change which
we need.
Nevertheless, the balance among the major types of payment systems
is changing and each change adds to the squeeze on paper. The
substitution of funds transfers for cheques in large-value payments is
well under way. It can be accelerated through technology assimilation.
TECHNOLOGY ASSIMILATION
Technology assimilation is the process of conversion of a technical

capability into an accepted, widely used product. Typically, it involves
four phases: gestation, rapid growth, mature growth, and saturation
(Figure 2.1 ). Such phases are inherent in all major changes. None comes
overnight.
Gestation is the period during which the product is defined, refined,
tested on the market, and reactions are recorded. Though a basic
ingredient is technology, gestation involves a great deal of market
research, user education, and product refinement. Market awareness
grows. Capabilities for reducing, selling, distributing and supporting the
product are developed. An organisation is created to provide this
support, and the technical part itself is fine-tuned.
Today we are at the end of the gestation period with electronics funds
transfer. The same is true of financial networks in general. The Japanese
first generation online system and second generation online system are
gestation-era products. With the third generation online system starts
the rapid growth phase. It will find its fulfilment with the fourth
generation online system.
Rapid growth is the second stage, during which volume grows
significantly. Customer awareness of the product becomes widespread.
Yet growth is often constrained by limits on production and distribution
capacity. Support may be deficient in the early portion of rapid growth.
By contrast, the mature growth stage has adequate production,
distribution and support capabilities. Competition is stiff and prices
decline over the course of this stage, providing further incentives for
accelerated volume growth. While under rapid growth the early starters
gain the upper ground, with mature growth the financial institutions
which are better organised win. When technology changes, both the
organisation and the culture of its people must also change. This is
necessary to match the new possibilities and answer the developing
needs.
The management of financial institutions must pay attention to the
fact that technology is a 'peculiar critter'. The key question which it asks
is whether we are able to:
e develop our concepts appropriately;
e implement the new advances made available; and
e live with our time, in a manner which is both competitive and
ethical.
Reaction to challenge must be fast and efficient. The fifty years covered
in Figure 2.1 dramatise the connectivity which exists between the phases
of gestation, rapid growth, and mature growth. If we fail in our
leadership we will pay for such failure by losing our market.
A study done by Kodak in the 1970s documented that for a major
23
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company it takes about six years to lose its market position when
management fails in its plans. Translated to the context of a financial
industry, such failure means living in the past: that is, in the saturation
part of the graph. Saturation occurs when virtually all potential users
have adopted the formerly new product. Sales represent replacement,
upgrading to new models, and growth in the population. But these are
slow-moving items. The dynamics favour innovation, and innovation
does not exist in the saturation phase.
At the same time, the fact of supporting innovation and electronic
funds transfer is no guarantee of success - though the opposite is a
prescription for failure. A financial network must have goals. The first
critical question we should ask ourselves is: 'What do we want to
achieve?' Are we sure we wish to be in the financial networking business?
Are we investing in this line to cover only our own needs as a financial
institution, or are we planning to sell time and services?
If our answer tends towards the latter case, a torrent of other
questions should come up, among them: What's the market? What's the
projected growth? Can it sustain well its current players? Can it afford
new entrants? What is the projected return on investment? In short, can
we see a business opportunity? Can we document it?
Only when these questions have been answered in a positive sense,
should the second round of analysis be started: Do we have the
technology to launch a financial network? Do we have the brains to set it
up? Are the computer-aided design tools available to us? the expert
system for the design? Gone is the time when the setting up of a network
based on multidrop lines called for pirating some modem specialists
from the local telephone company. Complex networks today require the
highest skill.
A modern, competitive, sophisticated financial network needs the
highest available skill to be technically successful. It also calls for first-
class management and maintenance. This is the third round. A
computer-based network control centre (NCC) must be set up. It should
operate in real-time with first-class diagnostics. The network must
measure its traffic. Not only must it be able to bill the user (whether
internal or external) but it must also provide the needed detail so that
these users can subsequently bill the service to their customers.
Competition is tough. The players in the development and operation
of financial networks are:
e telephone companies (Telcos)
e banks
e other financial institutions

e retailers and wholesalers
e industries (production, merchandising)
e consumers.
With the exception of the consumer class, these main players compete
for the job of system operator. They will consider acting as information
providers, but would avoid trailing as users.
But the stakes are high. Whoever controls the network gains the high
ground. If a financial institution finds it preferable not to enter the
system-operator arena, that's its business. Management should however
consider both sides of the coin. Banks which keep out of the financial
network business may tomorrow find themselves obliged to pay for
services for which today they are charging fees.
This is no call to join the lot of system operators at all cost. Such a
policy would be disastrous. It is however a reminder that the banking
business has tremendously changed. Not only is technology today an
integral part of banking, but also the competitive rules are different from
those in the past. Financial institutions which took notice of this fact are
the most successful competitors in the steadily developing landscape of
the international financial markets.
FROM PAPER MONEY TO ELECTRONICS
The point has been made that modern banking is information in motion.
This new way of thinking is characterised by the shift from paper money
to electronics. The latter is as important as the change from barter to
money which took place twenty-five to thirty centuries ago. The change
from paper-based financial transactions generally, and from paper
money in particular, to electronics is profound. It would have long-
lasting effects in the banking industry, as well as a noticeable cultural
impact. The problem is that:
e our thinking
e our attitudes
e our skills and - consequently
e our decisions
have not yet caught up with the new reality. Yet this is a professional
obligation.
A study made by a large American institution demonstrated that the
approach displayed by successful banks typifies the way in which

forward-thinking organisations should be seeking to exploit informa-
tion technology. It can be summarised as getting right both our thinking
and our action.
Getting our thinking right means ensuring that we are able to draw on
the relevant sources of knowledge and experience: in short, that we can
formulate an information systems and technology strategy. A most
significant requirement is that the chief executive officer (or someone
organisationally very close to him) should be highly committed to
reaping the rewards from new systems and technology - and he should
make this known. The chairman, the president, the board of directors,
the bank's top management, have to be either the instigators of new
initiatives or at least sufficiently enthusiastic about their potential. The
chairman and the president should put their standing behind efforts to
implement viable new strategies. This is not just for appearances. The
genuinely committed senior executives must be relied upon to make their
own essential contribution in terms of policy guidelines, business
priorities and directions.
When we speak of~ move from paper money to electronics, we are not
talking about the automation of one or another operation. Our
reference concerns the core of the bank's business:
e its life-blood
e its clients
e its way of doing business
e its profits
e its survival.
Therefore while emphasis is placed on networks, communications are
not the only critical factors for success in the future financial markets,
even if they are a polyvalent reference. Networks involve voice, text,
data, graphics, image and their integration. So do databases- this is the
second basic ingredient: the necessary technological infrastructure. But
the first basic ingredient is cultural. There is where top management
attention should be directed.
In our society at large, and in banking operations in particular, we
often face the need to change our way of thinking. This has been
particularly true in the course of the past four decades because of the
impact of technology.
Figure 2.2 shows the life-cycles of products and processes served or
supported by computers and communications in banking, over a period
of fifty years. EAM stands for electrical accounting machines. Until
1962, IBM in the USA was dealing with more money from EAM than
from computers. Batch and Stand alone have had a long life-cycle, but
since about 1970 change has set in and the transition accelerated- as we
have seen in Chapter I.
Technology in banking sees to it that many of the difficulties
experienced by financial institutions relate to the practices and policies
of management in terms of unwillingness to invest in the company's
infrastructure. Precisely for this reason several banks have restructured
their organisation and through well-chosen investments in computers
and communications have seen substantial increases in earnings.
The views and experience of several different types of contributors are
normally essential to develop a balanced approach to the benefits to be
sought, as well as the practicalities of their achievement. There is also a
big profit in getting the fresh look and external experience that suitably
qualified outsiders can bring.
In moving from paper money to electronics, cultural change means that
the quality and level of thinking is vitally important when formulating a
new strategy. We must take a strategic view of major long-term business
opportunities and we need people able to do so.
Only when the cultural problem has been successfully approached,
can technical issues find meaningful solutions. Invariably, such technical
issues will involve networks, databases, telecommunications, central
computers, distributed resources, personal workstations- and a golden
horde of software support.
The reason why so much interest is placed on databases and networks
should be found in the fact that the market-place is catching up with the
changing landscape of supports, systems and checks necessary to remain
competitive. This challenges bank management. It also obliges them to
plan now for new services that can be developed under the current
regulatory structure, while remaining as the prevailing regulations are
dropped. The question is not whether banks have the capability to offer
their customers innovative services in a technical sense, but rather how
they can make such offering pay dividends. Banks have been innovating
for the last three decades: computers, private branch exchanges, MICR
(magnetic ink character recognition) and OCR (optical character
recognitioin), automated tellers, automated clearing houses, interbank
payment systems, cash and treasury management are some of the
examples.
Each of these developments has a specific reason (and applications
perspective) in the background. The first aim of electronic funds transfer
(EFT) has been to facilitate payments between businesses. This
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Figure 2.2
represents a small volume of payment: some 17 per cent of payment

volumes, but some 70 per cent of the value, according to statistics.
While electronic funds transfer services have seen their initial growth
in interbanking settlements, consumer services and competition for the
business market has been the next moving gear. From international
interbanking settlements to national wire transfer systems, co-operative
funds transfer mechanisms, and private banking initiatives, rarely has a
year gone by without the introduction of new electronics products
somewhere around the globe.
The need for polyvalent networks gets further underlined as increas-
ingly the EFT effort gets oriented towards the consumer. Automated
teller machines, pay-by-phone, banking-at-home, microcomputers
online to the bank's database, have this in common: they facilitate the
linkage of the consumer with his bank.
Networks are a highly competitive tool. They ease the process of
banking, help in attracting deposits, automate operations, cut personnel
costs, and fit nicely into a financial institution's medium-to-long-range
strategy. Intelligent, multifunctional workstations attached to these
networks effectively support the client interface, and they come at
different levels of sophistication.
Automated teller machines (ATMs) are an example. Originally
invented as offline cash dispensers (CDs) they limited their service to
what their name implied. End-use requirements have nevertheless
changed since the early 1970s. ATM equipment is now supported by
microcomputers; gets online to the bank's database; allows queries on
account balance and latest transactions; makes feasible transfers
between accounts; and accepts deposits. In fact recent statistics indicate
that though they are usually thought as dispensers of money, ATMs
start receiving more deposits than the money they dispense. A second
major change should be noted: while originally projected to guarantee
24-hours-a-day banking, their role is rapidly shifting toward labour-
saving devices.
A problem facing banks everywhere is matching the number of tellers
to varying customer service needs. To meet the requirements for
flexibility and to minimise the impression of idle teller positions during
slower periods, bank engineering developed new tools featuring the use
of computer-based equipment to substitute for more classical transac-
tion-processing media.
The role of networks goes still further. US companies today spend
twice as much money on the electronic transmission of information as
they do on first-class mail. Organisations have a large and growing
demand to get messages to recipients as quickly as possible, to close

deals and to handle transactions through electronic communications.
BRANCH OFFICES AND THE NETWORK CONCEPT
Crucial to sustaining confidence is the bank's ability to handle the next

stage of growth. This is intimately related to its network. It used to be
that reference to a bank's network automatically brought to mind its
branch offices. Branches are still an important issue but no more in
terms of expansion. The massive branch network is now shrinking as
financial institutions are establishing that brick and mortar solutions
cost too much money for the benefit which they bring.
The mission of branch offices is changing. The large-in-number
smaller branches are weeded out, being replaced by electronics: from
automated teller machines (ATMs) to home banking and cash man-
agement, and also by joint ventures with merchandising outlets. But the
major branches are expanding, getting more support in specialised
services and a wealth of customer consulting skill.
In all cases where electronics replace formerly manual services,
customer support is critical during the stages of:
e initial installation - from central resources to client terminals;
e problem resolution at all levels of implementation;
e marketing of the new service;
e provision of customer interfaces;
e the process of fostering confidence in the system.
The emerging concept is that the new branch office network centres on
electronics. This statement is valid both nationally and internationally.
There is no better example than the Citibank-Dai-Ichi Kangyo Bank
agreements. In January 1987 it was announced that Citicorp and Dai-
lchi were forging some kind of alliance. The prospect that two of the
world's largest financial institutions might join forces is in itself
interesting. Once the arrangement is formalised:
e Citibank will have dramatically increased its potential to become a
major retail-banking force in Japan.
e From Dai-Ichi Kangyo's standpoint, any one of its customers from
Tokyo, Osaka or Kyoto could withdraw dollars while visiting New
York.
The agreement is an arrangement permitting access to mighty A TM
networks, and this is nowhere more valid than in Japan. An estimated
52,000 cash machines dot the Japanese landscape. Transmitting funds

electronically is commonplace. Japanese banks which cannot offer this
convenience have a hard time competing for customers. 'To me, if you
don't have ATM, you are not a bank in Japan,' said Citibank Vice-
President Kenneth A. Grossberg in Tokyo. The 1987 arrangement gives
Citibank customers full access only to Dai-Ichi's 1500 ATMs and cash
dispensers. But for an extra 63 cents charge on each transaction,
customers can draw cash from machines belonging to any of the other
twelve banks that belong to the same network of Japanese financial
institutions.
This is an example of retail electronic banking on a worldwide scale.
Other examples are national, such as co-operative banking networks.
Money One, run by the First National Bank of Boston for a consortium
of about 200 smaller banks in New England is an example; a similar co-
operative ATM network led by the Mellon Bank is another.
More important in a generic sense and in a longer-term perspective are
joint efforts by banks and merchandisers. Plenty of consumers are
beginning to find it both convenient and profitable to bank at the same
place where they shop: the department store, K mart, America's
Number Two retailer, is teaming up with the seventh-largest savings and
loan organisation, California-based First Nationwide Bank, which is
owned by the Ford Motor Company. This means that like America's
largest retailer - Sears, Roebuck - K mart is now offering in-store
financial services to customers. Unlike Sears, however, K mart is doing
this through financial companies it does not actually own. The K mart-
First Nationwide link shows how both the retail and financial service
industries continue to adapt to changing consumer demands and the
impact of government deregulation.
This kind of development has tremendous implications for networks
and networking. The more we integrate formerly diverse services, such
as banking and merchandising, the more we need electronics to support
the combined offer. At the same time, the spreading of banking services
into merchandising outlets further changes the topology of the bank's
network of branch offices- their number, type of services, and mission.
As a result of their in-store shopping programme, both K mart and
First Nationwide are forecasting increased business and profits. Con-
sumers will get longer banking hours. According to K mart officials,
there should be banking facilities in at least half of their stores by the
early 1990s, along with ATMs in hundreds more K marts. Management
projects a growth rate of as much as 200 branches a year.
For the bank, in this case First Nationwide, this solution offers a
quick and inexpensive way to expand. The savings and loans organisa-
tion has aggressively ventured into the new field of interstate banking,
largely through the tactic of acquiring weak or failed savings and loans
companies which offer it the regulatory rights to operate out of state. To
open a branch on the merchandising floor, K mart simply makes room
among its pots and pans, sporting goods and small appliances for First
Nationwide to set up a tiny branch office- some 12 square metres (136
square feet), about 1/30 to 1/40 the floor of a standard, independent
merchandising outlet.
Other EFT-oriented efforts start at point of sale (POS) equipment.
EFT/POS allows customers to make purchases using the same card as
with ATM. The result is a payment alternative more convenient than
cheques or cash. The purchase amount is debited from the customer's
account and credited to the trader's account electronically. EFT/POS is
a communications system between customers, traders, and their finan-
cial institutions. The bank authorises the transaction, transfers the
funds, and sends a completion message back through the switch to the
store - typically, in seconds.
EFT/POS has been tried since the early to mid-1970s and for a good ten
years was in gestation. Today the system has grown both in terms of
terminal locations and technological capabilities, with an emphasis on
reliability. Both the range of supported services and their generalisation
can make EFT/POS appealing. To serve the latter aim, financial
institutions co-sponsor an EFT/POS network. This is a different way of
looking at the restructuring of their branch offices.
INNOVATION IN FINANCIAL TRANSACTIONS
Many roles are given to the computers and communications networks

developed, or in development, by financial institutions. These roles can
be expressed by one term: innovation in financial transactions. Innova-
tion means new departures. We spoke of cultural and technological
policies of co-operation in another example, and the same is true of
marketing programmes. We must keep the flow of information open-
which, in turn, means more co-operation.
In mid-1983 California's 'big five' banks announced a common
electronic network to permit traders to accept debit cards at the sales
counter. Known as Interlink Network, it is owned by Bank of America,
Crocker Bank, First Interstate Bank of California, Security Pacific Bank
and Wells Fargo Bank. Together, the five banks represent about 80 per
cent of California's debit-card base. As a point-of-scale network, the co-
operative venture substitutes plastic cards for cheques and cash. The
switch, which is a computer facility, is owned by Interlink.
Preparation is the necessary prerequisite for making profits with
innovation. In the years to come, technological opportunities will be
increasing at a rate faster than our ability to absorb them. All of us, and
particularly those who have been involved in major high-technology
ventures, are victims of:
e slipping time-scales;
e scarcity in obtaining knowhow;
e overrunning budgets;
e teething problems.
There always seems to be a mismatch between the claims of suppliers
and the practicalities of implementation and use. Bankers are users of
technology. As users they tend to suggest that this is overselling- but
they would also do well to ponder whether they themselves have given
adequate consideration to the environments into which they are
introducing technology. We should ask whether our staff (and our
customer base) are able to absorb the new concepts and new thought-
processes. Have we done our homework in preparing them for this
mission? Have we considered in due form the changing work patterns?
Changing banking habits are part of the new emerging lifestyles,
encouraged by more flexible social and work activity, as well as
increasing familiarity with the use of new technology. These two are
forces influencing the switch to electronic banking- and the demand for
innovation at financial institutions. Bankers will be well advised to
realise that the currently ongoing innovation reflects only the first steps,
a timid beginning. There are going to be many more steps and a much
faster pace underlining the importance of a well-planned, sophisticated
financial network.
Since we are talking of innovation in banking it is correct to underline
that the concept was not born overnight. It has existed since the mid-
nineteenth century, though the focal point of innovation was different.
Let's take an example.
The American Express was established in 1850, when three indepen-
dent express companies merged. In 1882 the new company issued its
successful money order. In 1891 the traveller's cheque was born. In the
late nineteenth century M. C. Berry designed both instruments: the
money order and the traveller's cheque. His designs remained virtually
unaltered till today. Many banks pride themselves on being giro (money
order, direct debit) oriented. Besides influencing the habits of the
banking public, the financial instrument itself is nearly one century old.
Diners Club was incorporated in 1950. It immediately established the
principles of the worldwide credit-card industry. At American Express
the plastic cards were introduced in 1958. Visa was also launched in
1958. It evolved from BankAmericard.
e In 1966 Bank of America began to license other banks.
e In 1967 the Interbank Card Association (Ibanco) was incorporated
with seven founding members.
e In 1969 Interbank acquired the Master Card trademark.
e In 1974 Ibanco was extended to control the worldwide operation of
all licensed cards.
e In 1977 the Visa debit card was brought on to the market.
e In 1980 the name was replaced by Master Card.
e The premium Gold Master Card was introduced in 1981.
In 1968, Eurocheque was established to provide standard procedure
for cheque encashment. Eurocheque was enhanced in 1974 when banks
from six countries agreed to replace their local guarantee system with
uniform procedures. Eurocheque now constitutes a standard procedure
in about twenty countries, involving 8,000 banks. This, too, is a network
for financial service. It is charging for the facility which it provides. The
fee for uniform Eurocheque transaction in foreign countries is 1.25 per
cent of cheque value. When we charge for our services, the primary
criterion is not the absolute level of pricing but the quality of the service
which we offer. This sense of service quality has not yet entered the
banking culture. Yet its impact will greatly increase as time goes on and
competition stiffens.
In their innovation programme, banks have to reach specific targets.
The first challenge is image. Banks have to convince their customers that
their institution is reliable enough to carry all their relationships. The
second is performance. Banks have to deliver improved products and
new services if they want to keep and develop the client relationship. The
third challenge is low cost. Banks have to become not only innovators but
also low-cost producers and deliveres of services. The fourth is incentive.
What is in it for their clients? That covers everything from pricing to
packaging- but also the investment image and a dynamic sales effort.
The fifth challenge is able investment advice. The right advice on the
client's financial and investment issue makes up the background for
relationship banking. That is a key concept for the future.
These challenges represent a considerable departure from the practice
of the past. For money centre banks, three more issues must be brought
into focus:
e international management
e internationally oriented research
e international sales
Financial institutions can achieve these objectives by establishing new
policies regarding managers, analysts, account executives- and covering
major financial centres.
A global strategy is a critical component in the expansion of
consumer, institutional, and international markets. Internationalisation
is more than simple geographical expansion. A bank must move
aggressively to increase its information coverage of markets which are
diverse and, sometimes, contradictory in their drives. This too is a
mission to be covered by the network.
3 Generations of Online
Systems
There exists a rather significant difference between the perspectives of
the late 1980s, such as the preceding two chapters have been discussing,
and those of two decades earlier when the online effort started. To
understand better where we are and where we are going, as well as the
opportunities and constraints which we are facing, it is always helpful to
turn to the past and look at how we started and what has been achieved
through steady effort.
Today we say that a major financial institution must provide its clients
with windows to international capital markets, monitoring opportun-
ities in:
e corporate finance
e asset management
e venture capital
e mergers
e acquisitions.
Bank management should look at these activities as opportunities to
promote two-way flows of capital, information and technology. This is
the spirit which allows the ground work for market leadership to be laid.
A dual commitment to internationalisation and client services
provides the bank with distinctive capabilities best suited to meet the
market demands of the future, which means with the needed competitive
edge. A properly organised computers and communications programme
reflects the goals to be achieved; is strong on project organizations and
management; has established the financial justification of ongoing and
coming projects; and places emphasis on timetables. The swift manner in
which the projects it involves have been moving ahead is a valid
reflection of the programme as a whole.
Once top management has decided to go ahead with the next
generation of information systems, the men entrusted with the job
should be conducting their mission in a concrete, unambiguous, and
well-organised manner. But management must be co-involved in order
to give its unqualified support to the project. That's the only way to
achieve results. At least that's what we say, and in some cases do, today.
However, these principles of action have not been present from the start.
36
Generations of Online Systems 37
As is to be expected, the first steps were rather limited in scope,

functionality and skill.
Today, online transactions will involve ATM, POS, credit verifica-
tion, cash management, automatic clearing houses, long-haul funds
transfer. They will provide polyvalent account information, handle
client orders, flash video catalogues, permit teleshopping.
In the mid to late 1960s, when the first generation of online systems
was established, the applications nowhere met this range of function-
ality. It has taken two decades of expertise to reach where we are.
THE FIRST TWO GENERATIONS OF ONLINE SYSTEMS
In terms of applications, the first generation online system focused on

current accounts (demand deposit accounts) and savings. Together with
general accounting these were also the first implementations to which
computers were put.
The banking industry moved into computers during the 1950s.
Between 1953 and 1958, practically all major banks and many of
medium size had a computer installation. The data-processing work was
done in batch and still is, to a very large measure. Batch work has long
delays and is prone to many errors.
FIRST GENERATION ONLINE SYSTEM
- HIERARCHICAL
- 2 DEGREES REMOTE FROM USER
-DATA ORIENTATION
-OPERATING SYSTEM
- FRONT-END PROCESSOR
-POLLING/SELECTING
-COMMUNICATIONS SOFTWARE
AT DATA LINK
-NETWORK CONTROL CENTRE ( NCCl
Figure 3.1 First generation online system

The first generation online system (I GOLS) was an effort to correct

part of these inconveniences. This first generation characterised the
decade from 1965 to 1975 (Figure 3.1 ). The solution adopted at the time
is currently totally obsolete, but still used by many banks.
The I GOLS approach rested on a central computer. Terminals were
connected to it, first with point-to-point, then with multidrop lines. The
system was fully hierarchical and two degrees remote from the user. The
object centred strictly on data processing- and in some cases only one
data capture. There was no real-time update with 1 GOLS. The chosen
solution has been memo posting. This is a convention, not a law, at least
in New York. And as a recent banking meeting suggests, few of the
financial institutions have yet moved beyond that convention.
At the beginning of the first generation online system, the operating
system (OS) on the mainframe supported the online job. Nevertheless, it
was soon found out that this was not enough. The result has been the
adoption of special teleprocessing routines (TPRs). One of the computer
manufacturers (General Electric) introduced the concept of separate
front-end processors (FEP), which is today a generalised practice. FEP
relieved the mainframe from the communications chores. In 1986 with
the third generation online system, and heading towards the fourth, the
practice is being repeated- this time with dedicated database computers
(DBCs).
The communications discipline in this 1 GOLS solution has been
polling/selecting. The terminals were dumb. Typically, the communica-
tions software was at the data-link level, just one layer above the
hardware. There has been no network control centre (NCC) availability.
As the number of applications started mounting, 1 GOLS was no
longer able to handle the load. Neither could it provide the necessary
dependability. By the early to mid-1970s, the banking industry entered
an epoch where diligence, range of functionality, and the ability to
observe strict timetables became crucial prerequisites. This underlined
an important issue in providing modern and efficient banking service:
the provision of an effective way of bringing computer power where it is
really needed - at the workplace.
At the same time, consciousness grew that a bank would be that much
better off if its information systems executives sought and achieved co-
involvement with top management. This established the stage for
results, and for a greater visibility.
The new needs could be met, as by 1970-72 there was the develop-
ment of minicomputers. This presented a new opportunity: computer
power could be brought to the branch office and to the departmental
level. That is, nearer to the end-user than could be ever achieved through
mainframes.
Figure 3.2 outlines the technical characteristics of the second
generation online system (2 GOLS). It is distributed, only one degree
remote from the end user, but the data orientation prevails. The range of
applications has been enlarged, but there are also other technical
developments.
SECOND GENERATION ONLINE SYSTEM
-DISTRIBUTED
- 1 DEGREE REMOTE FROM USER
-DATA ORIENTATION
-OPERATING SYSTEM
- DATABASE MANAGEMENT SYSTEM
- FRONT -END PROCESSOR
-BEGINNING NETWORKS
-COMMUNICATIONS SOFTWARE AT X.25
- BEGINNING LOCAL AREA NETWORKS
-BEGINNING NETWORK CONTROL CENTR
Figure 3.2 Second generation online system
The period over which the second generation online system developed
has seen the beginning of four major issues:
(l) The consciousness that the database must be managed as a separate

entity. Separate database computers (DBCs) had not yet been
developed, but we had software constructs doing part of this job,
namely, database management systems (DMBS).
(2) With distributed data processing, multidrop lines no longer made

sense. A networking concept took its place. In a technical sense, we
moved out of the lowest logical layer of communications (data
link) and up into the next level, known as networking. This
involved the definition of routing and virtual circuit protocols done
through X.25, The X.25 agreement was signed in May 1978.
(3) Local area networks (LANs) started to appear, answering the need
for local interconnection of computer resources. This not only
provided a needed facility but also assured an internet-levellogical
definition, thus adding another layer to the communications
protocols structure. The layer is known as transport and we will
define it when we talk of the ISO/OSI model.
(4) An early implementation of network control centre (NCC)
appeared in some advanced installations. Today we would not
create a banking network without NCC, but in the late 1970s the
NCC was a novelty. Only the best technical online solutions had it.
Networks of the 2 GOLS variety have also been a driving force in

developing a better systems perspective. Since distributed data process-
ing, distributed databases, office automation and computer networks
cost money well beyond past expenditures with classical real-time and
batch, it is highly advisable to do a good job right at the start. It is
important to:
e synchronise the information systems and organisation policies;
e study and provide alternatives;
e visit financial institutions which are ahead of their time in the sector
to see what is done in modern banking;
e create a major well-defined project.
The best-managed projects were keen on integrating banking experts,
organisational specialists and information systems professionals. Such
projects put as a key objective a return to the main consideration of
banking, namely, serving information to the man who needs it. It sounds
easy, but it isn't. The prerequisite is to perform strategic studies within
the banking environment, involving both today's and tomorrow's
realities.
THE THIRD GENERATION ONLINE SYSTEM
If the first two generations of online systems made communications a

focal point of interest, the third generation online system (3 GOLS) was
instrumental in fostering the personal computing practice. This was a

development supported both by end-user needs and by advancements in
technology.
The early 1970s had seen the introduction of minicomputers in
banking. In the early 1980s avant-garde organisations switched to
intelligent workstations (WSs) supported by personal computers (PCs).
Microcomputers made feasible personal computing at an affordable
cost. They also provided full user-visibility. They reduced to zero the
degrees of remoteness between the computer users for whom such
resource is intended. At the same time, their number and capability
emphasised the need for a solid networking structure (Figure 3.3).
THIRD GENERATION ONLINE SYSTEM
-PERSONAL COMPUTING
- FULL 'ENDUSER VISIBILITY
- DATABASE MANAGEMENT SYSTEM
- SYSTEM ARCHITECTURE
- NETWORK ARCHITECTURE
- COMMUNICATING DATABASES
- WIDE AREA NETWORKS-LOCAL AREA NETWORKS
-COMMUNICATIONS SOFTWARE,
e -
ALL 7 LAYERS ISO/OSI
- NEED ·FOR 8TH LAYER AND INTERCONNECT
FULLY SUPPORTED NCC
0:::=:;_-----f-----:J..J - RELIABILITY - BIT ERROR RATE
Figure 3.3 Third generation online system
The concept of a system architecture has been prompted. Many

network architectures developed to meet requirements. Communicating
databases attracted major attention. Local and wide area networks
(WANs) got interconnected. What's more, system reliability increased,

fully supported by a network control centre. Remote diagnostics became
a normal practice, and metrics have been developed to express
reliability. An example is the bit-error rate (BER).
The range of applications supported through 3 GOLS is impressive,
though both its depth and its breadth vary from one country to another
and, within the same country, from one financial institution to another.
In the most advanced implementation, this range covers most of the
services supported by the bank, as well as other services using the online
network as carrier. Examples are schedules of airlines or trains and
reservations; teleguides, bookings, weather reports.
The bank may provide current account information and stock market
prices. Other companies, acting as information providers, will supply
the specialised databases. Through its network, the bank will assure
online office and home links. Its specialists will establish and support PC
(personal computer)-to-host switching, communicating databases, fac-
simile interconnection and image handling, mostly in collaboration with
the public telephone authorities. They will also provide the layers of
security necessary to permit direct client hook-up to the bank's
database.
Another way to compare the three generations of online systems
among themselves is through their predominant applications feature
and the amount of information being exchanged:
(1) The first was oriented basically to transactions:

e data
e 20-50 character input
e 50-100 character output
(2) The focal point of the second was messages:
e text and data
e electronic mail has an average 100 words v. 65 for telex
(3) The third features communicating databases and voice/image han-
dling:
e text, data, voice, image
e 500 megabyte transmissions equal to 100 million words
In terms of transmission needs, the difference between 3 GOLS and 2
GOLS is six orders of magnitude. Technology has been ready to oblige.
Perhaps the greatest breakthrough with the 3rd Generation Online
Systems has been the beginning of a generalised computer literacy and
management co-involvement. Such co-involvement has been instrumen-

tal in convincing the bank executives of the needed steps toward the
future: It helped to learn at least the fundamentals in computer literacy.
While it is up to the specialists to evaluate the latest developments in
telephony and data communications, and apply the most cost-effective
approaches advanced technology permits - as much in the projected
computer centres as in the offices of the financial institutions - the
results should be highlighted to management together with the proper
explanations. This must be done in terms management easily under-
stands. It can, for instance, be explained how, why and when the network
of computers and communications facilities would help bank man-
agement to implement new functions: planning; marketing; analytical
accounting; account management. It is also possible to demonstrate
what is necessary to provide banking management with decision-making
tools, and create a more efficient, productive workplace. The
requirements of this policy should lead to the definition of what
information systems must offer and not vice versa.
A networking environment is no multiplication ofDP (data process-
ing) centres, the way we have known them for years- and anyway the
simple multiplication of computer centres was not satisfactory. More is
necessary in terms of functional and geographic definitions. Weight
must also be given to the fact that computers become power centres.
Discussions with other banks, with acknowledged experts in the field
and with manufacturers, can bring results: they help to crystallise ideas,
establish whether or not the technical answers are converging, and look
into the cost issue.
Goals should be reaching beyond the level of computer systems and
towards the integration of business functions. In the grand design of a
distributed information system (DIS), each subsystem is an integral part
of the overall organisation plan. A information system built on such
interdependencies can provide management with a thorough outlook
upon the operation of the bank. It will invariably lead to the elimination
of duplication. And it will direct attention towards the out-of-control
items and the background issues creating the disturbance.
Appraisal procedures are an example. Appraisal procedures should
be devised in such a way as to elicit information about the most critical
factors (or elements). Approval leads to management control, and
control means action. In the past, management appraisal procedures
resembled the laws of traffic in the sense that they were made for the
single driver. And the single driver had to go slow and to stop very often.
With the new thinking in computers and communications, management
appraisal resembles more closely the hydrodynamic principles govern-

ing continuous flow. The laws must be rewritten for decisions (and
traffic) to go fast. This is one of the services distributed intelligence
should aim to provide- and a successful financial institution should give
evidence that it understands the implications.
CO-INVOLVING TOP MANAGEMENT
The project to be undertaken must properly reflect the size of the bank,
its network of branch offices, the clientele to which it appeals, the new
approaches to be chosen, the applications to be implemented, and the
services to be provided. For these reasons it is helpful when the
organisational analysis starts with the macrostructure and the aim to
streamline the structural issues incompatible with or contradicting the
implementation of a computers and communications network. Top
management should definitely be co-involved in this project, and
convinced of what needs to be done. This can be achieved through a top
management committee which supervises the systems development,
whether strategic, decision-making, organisational, or at the informa-
tion-handling level.
This approach helps ensure that the Information Systems (IS) projects
consider many facets, not only information-level studies, and that policy
making is not centred on hardware but on strategic approaches of a wide
breadth which affect:
e client services
e market orientation
e employment practices
e cost control
e customer number systems
e applications programming.
Such projects will influence the whole structure of the bank's accounting
procedures. Their impact will be just as great on management. Planning
is a major issue: through computers it can be handled at three levels:
strategic, medium-range, and yearly (budget) - with the objective of
automating the planning process.
A distributed information system should be designed to provide
management with the capability to improve control over costs. Con-
sequently, the programs must be concerned for total compatibility and
maximum usage of a common, though segmeted, database.
An enterprise of such magnitude would evidently face many challen-

ges. Data communications problems are an example, and so is the
organisation and management of the database. The key issue is the
change in the philosophy of the bank; with it, personnel development
becomes a basic necessity to be integrated with organisational, struc-
tural and information systems studies. The personnel must be formed to
manage the new structures ~ and the new facilities ~ in an effective
manner.
Not having computer specialists on the periphery~ either as machine
operators or as programmers~ must be one of the prerequisites from the
start. A decision needs to be taken that everything ~ programming,
maintenance, diagnostics ~ will be handled through a network control
centre. As the management of a leading bank was to observe: 'This
requires a careful study and lots of training. Computer operations are
undergoing major changes. It is necessary to convert personnel, as for
many years it was centred on a different environment.'
True enough, for nearly thirty years, the very nature of computers,
their memory capacity, processing speed, stored program capability, led
to misunderstandings as to end use. One of the most critical mistakes
touches the objective of information systems, and the way the
preparatory work could best be done. While it is true that by automating
office work, and by streamlining the flow of data, an organisation may
succeed in cutting costs, the bigger pay-off comes when new systems
make it possible for management to do its job better, that is, in a manner
which is:
e orderly
e timely
e accurate
e more profitable.
At the design end of it, the need for systems knowhow is exemplified
by the very fact of using general purpose machinery for special purpose
applications. It is a fallacy to believe that as versatile an item of
equipment as a stored-program computer is going to make de facto
reporting practices flexible. Up to and including 3 GOLS, flexibility
diminishes with computer usage. This is the price management pays for
structuring the information environment, and these facts must be
properly explained to management.
The grand design of management information systems should
account for this potential inflexibility from the very start. In describing
the system's structure, and the way it works, it is necessary to:
(1) Enumerate its physical characteristics;

(2) Present its systems implications.
A thorough study must portray the future organisational relationships

of the major segments of banking work. The fundamental concept
should provide multiple levels, emphasing the analytical and evaluation
aspects of central management, while assuring the flash reports and
graphic presentations needed to fulfil the day-to-day operating needs of
local management.
By and large, different managers require different types of informa-
tion and different formats. The point, however, is that formats and their
content do not need to spring from different databases. It is sufficient to
differ the 'processing algorithm' designing it appropriately for each case
according to its requirements. The process is:
Data
-.¥
Processing algorithms
-.¥
Information
-.¥
Formatted management report (preferably graphics)
-.¥
Presented interactively to management
For reasons of managerial accountability, reports should be directed to

the individuals whose authority covers a particular control action. This
calls for a logical progression of the type of information to be presented.
But let nobody be misled. The source of this information is in the
database, not in different arbitrarily stratified reporting levels, no matter
how imbedded in formal organisation such levels can be.
Let's recapitulate these points. In the general situation, each banking
executive has his own information requirements. Such requirements
(often) present unique characteristics. Management decisions can easily
call for different information elements. These 'elements' nevertheless
come from the same database, their compilation implying separate
development of algorithmic approaches applicable to the executive's
job. The algorithms in question may:
(1) Present value and deviation of condition from planned target in

quantitative terms.
(2) Suggest reason for deviation or for exception condition (i.e.,

whether this deviation is caused by other exception conditions).
(3) Recommend alternative paths for corrective action.
(4) Estimate the effectiveness of the corrective action being recommen-
ded.
(5) Provide indication of need for updating factors or assumptions
used in preplanning the action response.
This approach to 'one integrated database,' several algorithms', is a

totally different design concept from the one which (up until recently)
has been practised. Old approaches to the design of an information
system have been mainly concerned with batch processing, keeping
records and accounts with huge overlaps, and doing sorting procedures
to weed out the unwanted. The integration of files (and hence the
creation of a unified database) has now become one of the main concerns
- and the bank's management must be co-involved in this task.
APPRECIATING THE BENEFITS FROM NETWORKING
We have been talking of management co-involvement. Let me take a

specific example from a financial institution, to help demonstrate
management's appreciation of what has been studied in the course of
working meetings with the specialists. The essence can be summarised
through the following remark made by a cognisant bank executive to his
colleagues: 'Modern, packet switching networks- whether local or long
haul- are a political choice. They reflect: banking strategy; means for
facing the competitors; the new banking services; basic economics;
expansion, and security. The reasons are these. And they are worth
money.'
Another member of the bank's Executive Committee said 'Our basic
concept is simple. There is a way to look at the bank. This is its
information system.' These were no computer specialists, but they took
the time to reach the minimum basic understanding. At the President's
request, the IS Department organised for the members of the Executive
Committee eight three-day seminars spread over the period of two years.
They were held at a small lakeside hotel and involved: in the morning a
presentation of the fundamental notions on computers, communica-
tions and databases; and in the afternoon round-table discussions on
how these notions could be put immediately into practice.
Strategic considerations dominated the afternoon meetings. For
l. Albeit segmented: geographically, functionally, or by type of use.
instance, the members of the Executive Committee, having heard the

Marketing Vice-President's report that: 'Self-service banking is coming
because the economics, the technology, and the marketplace needs are
shaping a place for it,' tried to define together with the specialists the sort
of network which will serve this purpose, including product support,
timing, and cost aspects.
Let me repeat this example. In a seminarfworkship environment the
Executive Committee first focused on strategic issues, then gained
visibility on the system. The ideal do-it-yourself transaction and message
system was defined as one in which the customer originates the
transaction data. The data then flows through the electronic transport
and processing mechanism, creating the proper:
e debits
e credits
e controls.
The members of the Executive Committee also came to appreciate that
computer-based banking systems are being steadily perfected; that some
banks are ahead of their time, while others are behind; that systems cost
money and take years to mature. The question then became whether or
not the bank was working on the right things.
These seminars/workshops were instrumental in changing man-
agement's mentality. Education is a great eye-opener. Without a
properly trained human potential to see the projects through, even the
best plans would fail. The meetings held between top management and
the specialists saw to it that the bank made significant advances. Let's see
the results.
The concept of a peer-to-peer, dedicated text and data transport
facility was set, the X.25 recommended standard was chosen for the
implementation of the network mechanism. It rests on three pillars:
e switching
e transmission
e data and command storage
in what concerns the data link, routing and virtual circuit application at
the backbone. The adoption of X.25 meant the choice of a packet-
switching network. The key issue of this technology is specialisation.
The functions of distributing and dispatching the information are not
handled by the processing computers.
Management does not need to elaborate on the technical facts but
should appreciate the prerequisites and the outcome, both in terms of
service and of costs. Between the user of the information and the
supplier, an adequate distribution channel must be provided. This is the

role of the data transmission network; by way of explanation, man-
agement was able to look at the fundamentals.
The specialists, for instance, demonstrated how- from the beginning
the distribution of computerised information has been using the
infrastructure of other distribution processes: printout from a computer
has been mailed by regular postal services, or carried to the periphery by
the private car fleet. But the new generation of information systems
brought with it some powerful replacements. It substituted:
e microfiche with direct access to the database;
e batch and star-type solution with message/packet switching;
e OCR (optical character recognition) with direct entry on video;
e private car transport with the network.
It was also demonstrated to management that, by doing so, 'networking
changes the very structure of the central computer, but also the POS and
the ATM. Electronic media, like telephone lines, enter the computer's
workplace.' The telephone network is by far the most obvious network
to be used in data transmission if economical means can be found.
Almost any computer can transmit and receive data over a telephone
line. But the solution to be adopted must give guarantee of an
economical and reliable operation. The X.25 switching network was
chosen by the bank because it is designed to operate in the real world
where phone lines fail. (Current packet-switching technology guaran-
tees no more than 1 bad bit of information over 4 million bits
transmitted).
The network the bank put in development assured 'value-added'
services, including:
(1) Error detection and correction.
(2) Security/protection.
(3) Adoption of a great variety of: terminal devices, transmission
codes, protocols, speeds.
(4) Store and forward.
(5) Complete accounting and statistical information.
(6) Gateway capability.
Through practical examples, the management of the bank was
convinced that there is a basic reason for building such networks: major
technological development must occur before wide-scale public accep-
tance of the new banking services can come about. The data transmis-
sion capabilities a financial institution has at its disposal must be
materially improved; and until better telecommunications are available,
widespread expansion of the new, lucrative banking services will be

hindered.
But once the results of the developing technologies are felt, there will
be a host of benefits. With improvements in telecommunications will
come electronic mail, widespread communication capabilities, and a
great deal of computer terminals. This leads to electronic billing,
enhancing the acceptability and ease of electronic paying. The exploita-
tion of mass marketing media is part of the total picture, involving
e supermarkets
e department stores
e commuter facilities.
Benefits can come from a great variety of sources, including direct client
input to the database of the financial institution (to give payment orders
and transfer funds) and eventually not only industry client, but private
client service as well.
A critical issue for such developments to materialise is the extent and
continuity of service. To present and protect continuity, the seminar/
workshop prompted management to examine supporting subjects: the
debit-card policy and impact; the ATM network; the point of sales
(POS) installations. Some of the banking policies in the making during
the 1970s- such as direct deposit of payroll, divident, social security and
other payments - reached a high percentage of acceptance during the
1980s.
Management was able to appreciate through co-involvement that new
policies are necessary to enable the financial institution to offer
comprehensive chequeless bill-paying, with value dating.
e The increasing costs and decreasing reliability of the postal services,
for instance, makes electronic bill-paying seem very advantageous.
e Explicit pricing, in which large depositors become net fee-payers,
will make the traditional cheque service much more expensive than
electronic services.
These are the services this bank established, through the seminar
sessions, as its goal. Let's see how they are being implemented.
THE STRUCTURE OF THE NETWORK
First we should look at the objectives. The study which led to

management authorisation pointed out that the projected network
should be:
(I) Distributed, with diversified facilities;

(2) Oriented both to clients and management needs;
(3) Able to answer the coming requirements for new banking services
and management control.
This led to the establishment of the technical objectives. These stated

that the network must be:
e open-ended- which means any terminal, any applications program;
e user-oriented - that is, able to bring the data communications
facility to the user's site.
It must also:
e support communicating databases;
e serve as a communications engine for text and data;
e help implement a user-friendly environment.
A primary goal thus has been from the start to let the user communicate
with the system without any difficulty. The 'on' hours to be ensured are
all in the user's reach. The following step was the exact definition of
machine functionalisation: hosts to act as text and data warehouses;
intelligent workstations at the user level; and the communications
engine itself. The technical study established that every level must have
high availability.
The same study also examined the kind of applications the network
should support:
e interactive features;
e analytical capabilities;
e simple queries;
e controlled data entry.
It also identified that the major benefit to the bank in the near future will
come from analytical capabilities. In turn this brought into perspective
the need to define who are the users and potential users. Two answers
were given: professionals (by function) and managers.
Having established goals and environmental perspectives, the next
basic task management and the specialists thrust upon themselves was to
specify the desirable features in detail. Management's decision was made
on the evidence that packet switching:
e is cheaper;
e means the user pays per bit of transport, not for lots of lines and
equipment.
e is adaptive;
e is applications-independent;
e has international standards to observe;
The results of this study were convincing. As a senior Vice-President
ofthe bank was to remark: 'We decided on a network which has a future,
because it is flexible. The system will stress on office automation and this
needs open-ended solutions.'
The bank's management firmly believes that the chosen packet-
switching discipline can be used for computer-based and office automa-
tion applications; that it can serve both clients and management in an
able manner. Management expressed the opinion that while 'Many
banks use data communications networks,' these in the general case are
obsolete because they are host-centred and dependent. Packet switching
is host-independent, and this constitutes a major advantage.
The investment called for by a private network was one of the crucial
factors in establishing the technical specifications. Both technical and
financial reasons made it clear that the network contemplated should be
able to handle any type of transaction, ranging from inquiry through
conversational operations to data entry. It should also be able to
connect with a minimum of complications to terminal systems, micros,
minicomputers and mainframes; and allow fairly easy interfacing with
other networks (Swift, telex network, etc.).
To permit broadcasting and narrowcasting capabilities, the network
has been endowed with the following software support:
(1) One originator, one addressee In this case the storage/retrieval

function acts as a mailbox service. A subscriber just selects a
suitable moment for checking if there is anything in his mailbox.
(2) One originator, many addressees This makes available updates,
newsflashes, management directives to all offices- on a selected list
or general basis.
(3) Many originators, one addressee This is typical of data entry
applications. In the network the batches are queued. The addressee
may retrieve portions of the queue (FIFP (first in/first out), LIFO
(last in/last out), other criterion) and process it accordingly.
The protocols have been standardised throughout the network to

assure that what is transmitted from the one side is received and
understood at the other. The following levels need attention:
e application protocols: between applications;
e message protocols: between message handlers;

e transport protocols: between transport handlers;
e data-link protocols: between link handlers.
Applications and message levels are end-to-end protocols. They define
communication between components located in two subsystems. As
such they are transparent to any intermediate switching nodes. The
transport protocol is at node level. Its control information is interpreted
by every machine involved in the transport. But the transport protocol
also has some end-to-end aspects: it is connected with the establishment
of a user-based service.
The data-link protocol has only local scope. It addresses itself to the
communication between two adjacent processors, connected by a data
link. All this gives the impression of a very clean study and the reaction
to it is necessarily positive.
4 Rethinking the
Telecommunications
Network
In a generic, design-oriented sense, telecommunications networks may be
broadcasting, such as the networks of radio and television; or interactive,
that is, conversational. Apart from the transmission function performed
by the network, the latter also supports a polyvalent communications
facility.
If we look carefully into the functionality of I GOLS we will see that it
was not truly interactive. It did support query and update, but of a very
limited capability. This was in no way comparable to the interactivity
characterising, for instance, telephone networks since the end of last
century.
By contrast, a value-added network (VAN) developed by independent
systems operations and the company's own operated and maintained
network (COAM) developed and implemented by leading financial
organisations and by independent system operators, are pre-eminently
interactive:
e Theoretically, when we develop a value-added network, the first

thing we have to examine is the protocols which it will support,
aiming at homogeneity.
e Practically, the variety of users feeding into this network, and the
diversity of protocols which they employ, will make it necessary to
provide interfaces.
Generally known as gateways, interfaces are software- and hardware-

based. Software is in the form of communications-access packages.
Hardware support usually comes through minicomputers: the network
interface message processor (NIM). The software and hardware of the
network, as well as its structure, are transparent to the user who only sees
his points of attachment. He also sees the facilities which permit him to
maintain and control his sessions of data exchange with other users.
While the regular measure and control of the network is the
responsibility of network management, the user can keep a log of the
services he is receiving, making it feasible for him to manage the
54
Rethinking the Telecommunications Network 55
capabilities made available through the VAN. The user can also
effectively attach to other users, whether nearby or remote, using the
network as the bridge.
Internetworking is an increasingly necessary capability, supported
either by means of gateways or, much better, by means of network
compatibility. For this we need standards- even semi-standards; hence
the emphasis on the reference model defined by the open network
interconnection of the International Standards Organization (ISO/
OSI).
We must polish our concept, collect our statistics, develop our
specifications, select our supplies, design our network. In-house domes-
tic and international operations should be included. (See Chapter 5 on
Ubinet.) We must apply our criteria of cost effectiveness, require the
vendors to comply with them, and make sure that they serve our bank to
the utmost in terms of benefit. We must also address problems before
they become acute. We must carry this approach to networking and
beyond. This spirit of anticipating a problem before it becomes a crisis
situation has consistently showed its worth. It can avoid further
problems, and it has always proved to be sound financial thinking as
well.
THE ISO/OSI REFERENCE MODEL
When it comes to communications, two organisations labour to

establish reference models. The one, classically present in all matters
regarding telephony is the Consultative Committee of International
Telephone and Telegraph (CCITT). While CCITT is made up of the
national public utilities (PTT, telcos), each exercising a monopoly over
telecommunications, in practice it is only a consultative body. As a
result, agreements reached at the CCITT level in terms of technical
features are only recommended standards. They imply a guideline, but
CCITT has no enforcement capability.
Something similar can be stated of ISO. The International Standards
Organization is made up of national standards bodies, but ISO itself has
no jurisdiction over its members. Hence technical proposals, no matter
how thoroughly elaborated they might have been, remain proposals.
Reference models is a nicer term.
In other words, CCITT and ISO/OSI describe but not define. This
makes easier for their members to agree on a technical proposal each can
interpret according to his own will and lights. For the same reason, it is
difficult to implement such a reference model in a standard manner. In

that sense, the ISO/OSI reference model is an elegant frame of reference,
but it is not a universally valid standard, subject to one single
interpretation. Its most important feature is its layered structure
described as follows:
(1) The physical layer is the lowest of all and describes the electrical,
mechanical, and functional interface to the carrier. Examples are
modems (modulators/demodulators) and cabling. Communica-
tions with distributed-access control depend on this level. The
carrier (transport medium) and the media access unit are the
sublayers.
(2) The data-link layer looks after data-flow initialisation, control, and
error recovery. The data-link layer is higher up than the physical
but is, at the same time, the lowest of the logical layers in a
communication. Data link handles channel addressing, error
detection, and transmission control. Its protocols are start/stop (S/
S) asynchronous and bisynchronous (BSC).
In a local area network implementation, media-access control and

logical-link control are sublayers of the data link. In a similar manner,
with LAN the physical level is split into two sublayers:
(3) The object of networking is routing and switching through logical

circuits. End-to-end addressing, menage routing, logical circuit (or
datagram) services are part of this level. Routing assures alternate
paths in case of disruption or line saturation, which is the strength
of packet switching.
(4) The transport layer guarantees a reliable flow control. Supported
services involve congestion control, the management of windows,
and other transaction-oriented features. The internet protocol is
applicable at this level.
(5) The session layer involves the management oflogical communica-
tions paths between two users (men or programs). Session control
handles name-to-address mapping, network monitoring, and other
control services. Resident on the data-terminating equipment, it
interfaces to the communications engine.
(6) The presentation layer provides the programmatic interfaces
necessary for data formatting, encoding, decoding, and encryp-
tion. In contrast to session control, the presentation level supports
finer programmatic interfaces. Other services are virtual terminal
management, entity identification, format translation and presen-

tation proper.
(7) The applications layer addresses itself to a number of services and
procedures which can be distinguished into sublayers.
These sublayers are applications, DBMS, file access, and end-user

interaction. The end-user interface is very important. Nevertheless, most
available protocol standards today do not include these levels. Neither
do they observe one strictly homogeneous and detailed definition. It will
take at least until the early 1990s before a unified application level
standard emerges and possibly not even then.
IBM's DIA/DCA (document interchange architecture/document
content architecture), and CCITT's X.400 complete as the standard at
the seventh ISO/OSI layer, with DIA/DCA having the edge. The reason
is that it is built on Logical Unit 6.X (LU 6.X) which is taken by many
vendors as a virtual standard. Even if each of the seven ISO/OSI layers
was well established, it would have been impossible to attach to the
network homogeneous and compatible equipment. To take one exam-
ple, ATM and POS work start/stop. Hence the need for packet
assembly /disassembly gateways.
Asynchronous terminals are connected to a public packet-switching
network through PAD (packet assembler/disassembler). Three CCITT
recommendations describe the PAD interface:
e X.3 concerns the terminal characteristics in respect to PAD.
e X.28 specifies the manipulation of PAD from the terminal.
e X.29 gives the view towards PAD from the host computer with
which the terminal in the network communicates.
It should be noted that X.29 is an added level to X.25. Subsequently,
data from the terminal and the X.29 protocol are transmitted in X.25
packets.
These are in a nutshell the technical characteristics of the network as
far as international recommended standards are concerned. There are
also references to modems and cabling, but these will not concern us at
this point. Instead attention must be paid to architectural issues which
are under the control of the bank's management.
ESTABLISHING AN ARCHITECTURAL PERSPECTIVE
A computers and communications network is as important in the

present generation of bankers as the desk, the filing cabinet and the
telephone were in the preceding one. The reasons are functional.

Furthermore, recent graduates hired by major financial institutions are
demanding an outstanding level of high technology as the number one
condition of employment.
But large-scale systems must be architectured. Big systems are not
little systems that have outgrown their original shell. Big systems are
totally different from smaller systems in design, implementation,
verification and maintenance.
A system architecture is a set of rules, procedures, conventions,
standards, protocols and software. It permits attached end-users,
whether they are:
e persons
e processes
e terminals
e mainframes
to communicate with each other and with databases.
Common rules, procedures, and protocols enable:
e efficient interconnection;
e an open vendor policy.
Efficient interconnection affects workstation attachment, hence user
visibility of the system. Managerial, professional and other workstations
are layered structures of one physical and several logical levels. The
topmost level is end-user functions, followed by: applications, com-
munications, databases (and DBMS), and OS functionality. These are
logical layers based on physical resources.
The system architecture these layers should obey:
(1) Permits a stable basis for planning.

(2) Gives a common direction in distributed developments.
(3) Makes it possible to integrate software and hardware from many
manufacturers.
(4) Ensures that technology will be made to work the way people work.
The open vendor policy which a system architecture makes feasible

permits the bank to diversify its sources of supply. As long as different
vendors observe the protocols, rules and procedures of the architecture-
and comply with them- their software and hardware can be attached to
the network without expensive interfacing.
In this sense, the system architecture must go well beyond the X.25
packet-switching level discussed in Chapter 3 to cover all seven layers of

the ISOJOSI reference model. The system architecture also provides the
bridge to two other fields of technological interest which enhance a
financial institution's presence in the market:
e new technologies, particularly fifth-generation computers (5GC)
and artificial intelligence (AI);
e system integration, involving central and departmental computers,
databases, PBXs, workstations.
The system architecture provides a composite framework for future
technology, capable of spanning seemingly different views. This is
important, as future computers will be oriented toward specialisation,
supporting a range of applications from the numerical calculations of
supercomputers to the symbol manipulation of fifth-generation com-
puters.
Integration is just as necessary at the logical/eve/. In the years to come,
programming languages will range from traditional procedural ones to
object languages such as PROLOG. Machine organisations will support
parallelism, utilising data-driven and demand-driven approaches.
Implementations will employ the latest VLSI (very large-scale integra-
tion) technology, linking components together in an integrated com-
puters and communications network.
As Figure 4.1 outlines, system architecture is the highest layer in a
concept of implementing system integration. System integration is
making a company's collection of:
e computers
e software
e PBX
e other C & C devices
work together. To integrate all our facilities we first have to automate the
office work and the delivery system to our clients. Integration
procedures are most important as we are witnessing the end of:
e the salient era of computing;
e the plain old telephone service.
Computers are increasingly seen as end-points of a large, interactive
communications network, and communications mean integration.
That's a far cry from the single-voice connections of other times.
Connecting the automated operations of a major financial institution
requires one of the world's largest and most sophisticated private
SYSTEM ARCHITECTURE
FACILITIES
FACILITIES FACILITIES
FACILITIES
>-
!:: FACILITIES
..J
<X
z Ul
~
~ Ul
~
NETWORK 0
u u
z STRUCTURE
=>
u.
0:
UJ
Ul
>
0
::E
UJ ..J
~ SOFTWARE 0
Ul 0:
>- SUPPORTS ~
(/)
z
..J 0
<X u
~
0
~ APPLICATIONS
PERSPECTIVES
\ I
\ I
USER
v
FUNCTIONS
Figure 4.1
telecommunications networks. Such a network must be engineered to

cut costs by raising productivity, improving managerial control, and
bettering client service, also optimising their own services.
Specialising on systems integration means tackling large jobs. It also
means permitting management to concentrate on areas which it knows
best. Architectural perspectives are also important in the sense that
computer management must set an example. It must be organised and
effective.
The elimination of multiple interfaces and gateways is consistent with
modern information systems theory. Answers must be quick and short.
An immediate response is not enough. The basis must be available for
reflection and for documentation. This means interactivity.
Effectively put into practice, system integration possibilities involve
purchasing and putting together all of the necessary pieces of a
computers and communications aggregate. The system architecture will
help the bank develop one logical network: integrating the many
physical networks in existence, and expanding its communications

capacity.
SNAANDDNA
Chapter 3 made a point on packet switching and the X.25 recommended

standard. While packet switching is today the frequently adopted
solution and X.25 is part of it (though not the exclusive part: an
alternative is the Datagram protocol), it is just as true that the
networking layer (to which it belongs) stands too low in the ISO/OSI
reference model.
In a presentation at the University of Vermont Symposium (where
one of the authors was lecturing in Aprill985), William McSweeny, then
Director of Marketing at American Telephone and Telegraph (AT & T)
Information Systems, made this forecast: 'All minicomputer and
microcomputer manufacturers will have to support SNA.' He then
followed this statement by an outline of AT & T policy: 'AT & T has
chosen DIA/DCA.'
A different way of expressing the same concept is to say that the choice
of a system architecture has to consider the compound electronic
document - it cannot stop at X.25. This means DIA/DCA or X.400
(Figure 4.2). In 1987 the recommended standards were enriched with the
Office Document Architecture (ODA) of ISO.
It cannot be too often repeated that a dynamic financial institution
needs a full network architecture, providing software above the layer of
networking, up to and including the functionality of the ISO/OSI
applications layer. The two most frequently chosen alternatives are:
e SNA (systems network architecture) by IBM (International Busi-
ness Machines);
e DNA (digital network architecture) by DEC (Digital Equipment
Corporation).
SNA and DNA are neither hardware nor simple software packages.
They are network architectures designed as total communications
systems. They are projected to grow in order to cover future communi-
cations requirements. Both network architectures converge design
practices, integrate facilities, promote resource sharing, and separate
logically independent functions, that is, data-link controls and end-to-
end data format protocols. They:
e accommodate advancing technology;

e provide for distribution of function;
e support a variety of communication-carrier offerings
Included in the SNA architecture is a definition of structure and of
components of the teleprocessing network, as well as a definition of rules
for the operation of this network and a framework for future product
decisions. This provides the infrastructure for what is required to permit
one end-user to communicate with another end-user.
APPL !CATIONS LAYER
PRESENTATION LAYER
SUB NETWORKING
NUCLEUS
<PHYSICAL>
DATA LINK
X.25
GRAPHIC SETS:
NAPLPS, CEPT
ELECTRONIC DOCUMENT HANDLING:

DIA/DCA, X.400
Figure 4.2
SNA helps control native devices, manage local resources, and looks
after operator interfaces. It supports application programs both in a
networking and in a stand-alone capability. The architecture defines the:
e functional responsibilities of components within the communica-
tions system;
e characteristics of the access method interface to the application

programs;
e sequences and controls of the TP (teleprocessing) link.
It contains basic controls of the entire network, has network man-

agement capability and supports devices that meet needs of a variety of
end-users. SNA software regulates data requests and control traffic,
such as contention for session control. It manages responses, i.e.,
acknowledgements to data or control requests.
In early hierarchical SNA networks, transport network congestion
could be controlled through settings of the pacing stages between
boundary function and primary logical unit (LU) for all sessions; also by
restricting the number of sessions. As the networks grew in size and
complexity, SNA chose a horizontal peer-to-peer approach. With the
advent of additional architectural modules, virtual route pacing in SNA
prevents the overuse of the key network resources. It features entry-to-
exit controls exercised by the virtual route and points, and uses
dynamically varying window sizes with the size range established at
virtual route activation.
While since its original introduction in the early 1970s SNA addressed
itself to the interconnection of mainframe resources, a new low-entry
networking (LEN) architecture by IBM responds to the WS-level
requirements. Known as advanced program-to-program communi-
cations (APPC) it covers requirements of the forthcoming 4 and 5 digit
numbers of interconnected intelligent terminals. Intelligent terminals
need to communicate peer-to-peer both among themselves and with
mainframe resources. As much of the work these personal workstations
will be doing is document handling, they also require appropriate
protocols. IBM's answer is LU 6.2. This logical unit definition stands a
good chance of becoming an international standard.
But SNA is limited to networking activities. While necessary in an
expanding computers and communications environment, networking
activities are not enough. In designing big systems with interactive
characteristics, it is absolutely imperative to overcome the diversity of
operating systems (OS) under which the attached computers run. IBM's
answer to this challenge has been the 1987 announcement of System
Applications Architecture (SAA).
While- if the SNA experience is of any value- SAA will most likely
take a dozen years to reach maturity, its advent will play an important
role in the data processing and data communications industry. This is
particularly true as IBM seems decided to make the technical specifica-
tions of SAA interfaces available to its customers as well as third party

software and hardware developers.
Design-wise, SAA has four major elements: common user access,
common programming interfaces, common communications support,
and common applications support. A new interface management group
has been formed at IBM that will oversee development of various SAA
components for IBM products, including local area networks (LAN).
This is in reflection of the fact that system integration will be the main
thrust of computing during the next decade.
In a manner quite similar to SNA, the Digital Network Architecture
(DNA) by DEC, offers capabilities allowing the linking of computers
into flexible configurations. It permits attached devices to share
resources and exchange information, files and programs.
DNA is the framework of all DEC communication products (DEC-
net, DECnetjSNA Gateway, communications servers). Its layered
structure incorporates X.25 data-link protocol as well as the Ethernet
data-link protocol. Since 1976 when DECnet Phase I was introduced,
each new phase of DNA has included features extending networking
capabilities. Functions and protocols offered by each phase of DNA are
implemented by an equivalent phase of the layered software product
DECnet, with specific DECnet versions offered for each of DEC's
operating systems.
Like all network architectures, DNA defines standards for protocols,
interfaces, and communications functions. These allow various OSs,
communication devices and computer hardware to function in a
network. As a result, users can access resources and programs on other
network nodes.
IMPLEMENTING INTERACTIVE SYSTEMS
As the preceding sections underlined, a bank needs considerable

communications network capability and expertise to serve its financial
purpose effectively. Professional bankers today want easy-to-use,
communications-intense solutions to their problems. Such solutions
must not only be provided once, but also be steadily upkept.
We have also emphasised that communications networks require an
architectural design in order to work. The flow of information must be
regulated; resources must be shared; and line costs can be saved by using
single high-speed carriers over which messages and transactions will
travel from any source to any destination. The architecture should
include features designed to optimise the communications functions of

networks.
Practice has added a great deal to such prerequisites which first
developed with the data communications systems of the early 1960s.
Among all issues, two can be stated as really outstanding:
e The first is the integration of voice, data, text and image over the
same network.
e The second is interactivity.
If sender and receiver are taken as the basic frame of reference, not all
messages are of an interactive nature. This is true even of voice: a study
by AT & T has documented that about half the voice communications in
a business environment are basically one-way messages: informing
somebody or giving an answer. From this simple finding derives the
concept of voice mail.
Yet we all know that the frame of reference has changed. Interactive
communications should no longer be seen as between two parties
(whether men or machines) but, rather, between the user of information
and the information stored in a text and database (TDB). Even
controlled data collection calls for an interactivity with the TDB. The
interfaces must be user-friendly, so that executives can learn to use
interactive systems in only minutes, and have the information represent-
ed to them in a graphical or textual form, at their choice. The system
should help monitor business operations, run simulation models, help in
day-to-day decision making. It should offer assistance to the man with
the problem.
Using a flexible database management, transparent to the non-
specialist, the system must allow managers and professionals to consult
directories or pick up references simply by touching the appropriate keys
on the keypad. As they have available an editing terminal, the function
generator should display data as figures or graphs (at the user's choice);
store graphs in memory; move on to other application programs, and
obtain a flexible user-directed output.
The distributive aspect of the interactive network minimises risk if
single outage occurs; reduces restart time after the problem has been
corrected; brings into perspective the wisdom of standardisation of
software to limit development cost; and assures a greater flexibility in
adding other applications, as the requirements develop.
Any network can be both physically and conceptually decomposed
into four basic components:
(I) The text and data transport ( datacommunications) carries text,

data, image, programs (and, eventually, voice) from point of origin to
storage and point of destination, as well as from point of origin to point
of storage. It includes the necessary links, switching and distribution
functions, but information is not altered. Memory at the switching
nodes is used only for store and forward (S & F) purposes. The transport
mechanism routes this information, checks for errors, corrects them,
gives acknowledgements, asks for repeated transmission.
Technology has moved forward in communications. We are assured a
brqadband capability for text, data, voice and image, with reasonably
low bit-error rates (BER). This is available by means of optical
techniques using glass fibres and lasers, through radio links and
satellites.
(2) Text and data processing (TDP) is concerned with the use of
computers for processing information. The semantic content, or
meaning, of input data (and text) is in a way transformed through the use
of stored programs (or firmware) which act on the information: add,
delete, sum up, abstract, or perform arithmetic and logical operations.
Storage and retrieval (initiated by TDP) takes place for other than S & F
purposes, and the output constitutes a programmed response to the
input.
A machine's capacity for data processing is measured in million
instructions per second (MIPS). This is not an absolute measure and
other factors such as system architecture, vertical and horizontal
microcode, array design and pipelining can influence machine perfor-
mance. But it is a useful standard both for evaluation and as a frame of
reference. If we keep the price of computing as a constant, the effect of
technology will result in significantly higher instruction-processing
rates. Improved price/performance ratios will extend the capability of
computer systems to new applications and it is in this sense that we are
talking of a significant evolution in text and data processing including
the handling of noncoded information: interactive graphics; voice input,
image character recognition, electronic mail and voice mail.
(3) The text and database (TBD) An impressive growth in storage
capabilities can be put to work in handling the global text and database.
It is the organised, orderly connection of information elements designed
in an application-independent manner to serve man - information
communications purposes. The elements (bytes, fields, records, whole
sections of the database) are the building blocks of the TDB.
A message is a file in the text and database. Files and messages must be
designed to be interchangeable. A modern network is made of commun-

ication databases and workstations. They are the basis of the function-
ability it supports.
(4) The provision ofuser-friendly interfaces This is the most challeng-

ing of the four components. It must be done in a way which allows the
final user to engage in computer-supported communication with the
information that computer support can provide. Graphics, colour and
menu solutions are thought today to be key issues in this approach. The
same is true of expert systems enriching and easing the man-machine
interface.
Between the challenge of the user-friendly solution and the fairly well-
known issues connected with data processing lies the communication
network, as well as the properly projected database capability able to
accommodate text, data, image, voice, and the needed vocabularies.
This system must provide complete information security.
PROJECT MANAGEMENT FOR NETWORKING
Design concepts must be evaluated in terms of improved reliability and

quality of service. Projecting in the right way the network, as well as the
database, is the most important factor for minimising the complexity of
the system. It also helps reduce its vulnerability to error or failure in
either hardware of software. This is the justification for the layered
approach we have been discussing. By distributing basic functions
among dedicated computers linked through a network, a problem that
develops in one area will not shut down other areas. As a matter offact,
the system should be designed so that functions served by a shut-down
computer can be taken over by another, without visible effects to the
end-user.
A bank-operated network is not a luxury. It's a necessity. It can be
effectively designed, implemented and maintained, but not without a
large amount of human skill. Financial institutions which try to get
around that fact are fooling themselves. A valid project must be set up if
we are to succeed.
Faced with the problem of designing a large telecommunications
network reflecting the best in technology, a leading bank correctly
started with objectives. The following goals highlighted the project
design from the beginning:
(1) General purpose orientation Including the aims of applications

independence and the possibility of handling the different types of
transactions. The overall objective has been to construct one
general-purpose network able to integrate all functions now on
separate networks, in other words, one logical network integrating
many physical.
(2) Flexibility, future growth Capability to absorb increase in traffic
and to accept new data-terminating equipment- also, to integrate
different hosts, and to link with both public and private data
networks. This goal includes peer-to-peer attachment of main-
frames, maxis, minis and micros, and also of private branch
exchanges (PBX), facsimile machines and other electronic gear.
(3) Reliability, adaptability Emphasis has been placed on depen-
dability in message transfer, electronic mail and document dis-
tribution -but it also applies to voice, image, ideas for transaction
processing.
The clear unambiguous statement of goals and objectives is a hallmark

of this application. As the responsible executive remarked to me: 'You
can survive only when: you have a clean architecture; you can allocate
the functions in well-defined modules; and provide for efficient inter-
relationships. The costs with information systems are so high that any
uncertainty, any diversion, will result in financial losses.'
To ensure that the goals are set right, the original Project Group
started with objectives definition at the top management level. A
working group of Vice-Presidents was formed- and largely focused on
banking strategy. Competition played a key role. Then a mixed top
management and specialists (ten man) committee established the
specifications and negotiated with the manufacturers. This took about
one year.
The third step was a design team composed of five people from the
bank and eight from the manufacturer (evidently after the choice ofthe
network manufacturer was made). The following precise objectives can
be quoted from personal meetings:
(1) To remain competitive in modem banking activities the need for

faster information exchange becomes more urgent. A data-com-
munications network must overcome the problem of geographical
spread of branch offices and directorates - and provide a fast
information exchange capability.
(2) It is expensive and operationally unworkable to generate stand-
alone hardware and software for individual applications. The

software to be developed must be generally applicable using the
network system as a general data-communications tool, with open-
ended and flexible interfaces towards all types of applications. Such
an offering must also provide an anticipation of, and interface to,
the new banking developments.
(3) The network architecture must anticipate new external develop-
ments like Swift and other data-communications activites. The
network must be one of the efforts by the bank to build the image of
a modern financial institution that is equipped with outstanding
and reliable systems to act as a banking enterprise.
(4) The network must provide the staff in the branches, directorates
and headquarters with a tool to handle information faster and
easier using easy-to-man procedures. It should liberate staff and
line from administrative tasks and other paperwork so that the
employees are able to spend their time productively on commercial
tasks, and create openings to a wider variety of client services and
easier job-rotation for the employees.
(5) The network must supply the management in the headquarters,
directorates and branches with up-to-date, complete and easy-to-
get information, enabling fast and well-documented decisions and
use of the information to avoid fraud.
(6) The network must serve as a system to provide a better and more
appealing service to the client in many banking fields.
(7) The functional specifications must allow the bank a clear and
complete vision about the network's own characteristics and
functioning.
The joint working meetings stressed the technical issues involved, after
the managerial aspects and the banking perspectives had been dealt
with. These issues were: to settle the details of the network architecture;
to define the systems architecture; to establish the applications perspec-
tives and their integration; to define the database and its distribution; to
work out the approach to retail banking at the branch level; and to
establish the principles of wholesale clients' handling at the central level.
In terms of work assignment, whatever depended on operational
procedures, configuration control and troubleshooting was developed
by the bank. The basic software was made by the manufacturer,
including detailed specifications, add-on software, and integration
testing.
5 UBINET, the Worldwide
Network of the Union
Bank of Switzerland
The first four chapters outlined the reasons why high technology affects
banking, while- at the same time- the sophistication of banking services
calls for further advances beyond the frontiers of current knowledge.
Within this highly competitive environment which is in steady evolution,
a financial institution finds it necessary to invest in communications and
in computers in order to preserve its biggest assest. The biggest assets of
a bank are not in its balance sheet. They are its customers, its people and
its technology.
Sophisticated customers steadily communicate with the bank's
professionals. That is why financial institutions build networks. They
help to increase effectiveness and lower service-handling costs. They also
make feasible online connection between the bank and its customers;
allow value-added services; and permit the bank to show value differen-
tiation over its competitors. That is the way the Union Bank of
Switzerland (UBS) looks at financial networking.
But cost effectiveness is not forgotton. The more sophisticated the
data-processing applications (Abacus, MOSS) the more they develop a
large amount of communications requirements. Among financial
institutions, Abacus has been one of the first integrated implementations
in data processing. 1 The Central Information File (CIF) has been its
pivot point. CIF not only serves the client database but is also the
infrastructure for client account handling. Among other Abacus
subsystems are online transaction processing, general accounting,
securities administration, stock exchange, foreign currency and
payments traffic. They are all handled interactively.
The concept of a Management and Office Support System (MOSS)
was developed at UBS in the mid-1980s. High technology saw to it that
personal computing could be done at an affordable price. UBS was
among the first banks to take advantage of that fact. In a nutshell, Phase
1 of the MOSS effort centred on supporting the UBS international
I. For details, see D. N. Chorafas and H. Steinmann, High Technology at UBS,

for Excellence in Client Service, published by Union Bank of Switzerland,
Zurich, 1988.
70
UBINET, Switzerland 71
business. Phase 2 focused on the implementation of MOSS in Swit-

zerland. The common grounds of Phases I and 2 have been intelligent,
multifunctional workstations and a polyvalent communications net-
work: UBINET.
'Today communications costs outstrip computer costs', suggests Dr
Hubert Huschke, the member of the UBS Board of Management
responsible for organisation, computers, and communications. 'Com-
munications cost money. An equally critical question is who pays for the
growing communications costs. If the user is asked to pay for it then he
needs higher and higher quality in terms of service - including the
communications bridge.'
Quality of the provided facilities, excellence in customer service, and
control over costs are the keywords. The computers and communica-
tions solutions UBS assures its clients and its own people are properly
targeted. They focus on:
(l) The globally linked markets- New York, London/Zurich, and

Tokyo- in which the bank assures full services.
(2) Other major financial centres, where it features corporate finance,
investment banking and other selected products.
(3) Domestic operations (Switzerland) where it acts as a universal
bank and is a leader in the services which it provides.
(4) Niche markets in which UBS has a competitive advantage because
of the skill of its people and the technology the bank employs.
This chapter discusses UBINET, the integrated network of the Union

Bank of Switzerland, which operates at three levels of reference:
e International, serving the UBS global operations with pivot points
New York, London/Zurich, Tokyo. It works twenty-four hours per
day.
e National, covering every UBS centre of operations in Switzerland,
from headquarters to the smaller branch office; also featuring
direct client linkage.
e In-house It addresses itself to three layers of operations: transac-
tional, professionals, and senior management. It interconnects
mainframes, minicomputers and personal workstations among
themselves and to the private branch exchanges, acting as gateways
to private and public lines.
At all three levels, design goals have been set to enable end-users, each
from his intelligent workstation, to access operational data-processing
systems, the bank's own information centre and public databases: in

short, the total communications perspective.
STRATEGIC PERSPECTIVES BEHIND UBINET
The communications and computers network of a financial institution is

a valuable investment affecting current and future business. It is also a
valid documentation of the fact that banks can only remain competitive
and profitable by using technology. But, while a very important
infrastructure, the network itself is not enough. Other strategic issues
include:
(I) Innovative banking services. Innovative banks think products

(securitisation, project financing, caps and collars, and so on).
(2) Quality of banking services. Sophisticated clients demand it.
Quality must be planned, supported, controlled.
(3) Client advising. This is financial engineering and calls for skills
never before available in large numbers, but now necessary because
of customer demands.
(4) Market orientation, including intensive marketing and calling on
customers. Aggressive marketing has entered the banking business
and requires first-class information systems to be effective.
(5) Cost control. All costs should be watched. Technology costs must
be justified. Personnel costs must be swamped with top man-
agement taking a clear position on this matter.
(6) A comprehensive system architecture. The computers and com-
munications aggregates built by leading financial institutions are
large, complex, demanding in terms of knowhow. As we said
earlier, big systems are not just little systems that have outgrown
their original size. They are totally different in their design,
implementation, verification, and maintenance. They must be
studied as such.
The system architecture we are adopting today and the value differentia-
tion which we do must make sure that our computers and communica-
tions will store, transport, retrieve and present in a user-friendly manner
vast amounts of text, data, graphics, image and voice messages.
e These will refer to our clients, our markets, our products and
services, our competition, our suppliers.
e They will reflect their habits, backgrounds, preferences - and the

profitability of our operations.
A new challenge we now face is how to use this information to discover
new business opportunities. Universal banking involves an enormous
number of transactions, a huge database and a complex inference
mechanism. UBS is a universal bank; therefore it requires an efficient
and powerful computers and communications network to serve its
needs.
Based on these policy guidelines which have been given by top
management, the Telecommunications Department of UBS elaborated
and published the basic concepts which we will examine in the following
sections. Particular attention has been paid to
(1) Supporting higher efficiency while swamping costs.

(2) Laying the groundwork for increasing performance, guaranteed
security and steadily improving reliability.
HIGHER EFFICIENCY,
LOWER COSTS
IMPROVED
RELIABILITY
FACILITIES
FACILITIES
FACILITIES
GUARANTEED
SECURITY
Figure 5.1 Higher efficiency and lower costs require the proper infrastructure
Figure 5.1 shows how these objectives can be structured in a coherent

manner to guide the hand of the designers. UBINET has been built on
these premises.
While choosing its strategic directives in the communications domain,
the Union Bank of Switzerland made three basic commitments: first, to
observe the ISO/OSI reference model as far as it is available in terms of
clear definitions; second, to use the evolving ISDN (integrated services
digital network) for corporate voice communication as well as commun-
ication with third parties; third, to employ the X.25 recommended
standard for data communications.
Seen under this perspective, the goals of UBINET have been to
provide any-to-any communications over standard interfaces which
guarantee connectivity:
e in an instantaneous manner;
e through cost-effective approaches;
e whenever and wherever required.
Figure 5.2 shows the goals pyramid of Figure 5.1 enriched with
computers and communications services supporting a three-layered
structure. The network is the connecting link. Apart from UBINET, this
diagram also refers to other terms: MOSS, AI and Abacus.
SENIOR MANAGEMENT
MIDDLE MANAGEMENT
AND PROFESSIONALS
TRANSACTIONAL
OPERATIONS
Figure 5.2 A layered approach to information systems design

Starting in 1978, UBS built up an integrated, online data-processing

system, code-named 'Abacus'. The computer network designed to link
central resources to all UBS offices has been quite successful and of
significant help in the bank's operations. Data processing is based on
Unisys 1100/94 systems installed in two centres (Zurich, Lausanne) and
Nixdorf branch-office computers and terminals. Some I 0,000 terminals
are online. A similar project started in 1983 for the international
branches, based on IBM technology, code-named Al. Built over the
same period (1978-80), the domestic data network of the Union Bank
of Switzerland required over 1,200 private lines (leased from the Swiss
Post, Telephone and Telegraph, PTT), all running at 9.6 kilobits per
second (KBPS). Now newer technology is replacing this network, that is,
UBINET.
In 1984 the Union Bank of Switzerland undertook a fundamental
project aimed at redefining office automation (as practised to that date),
integrating the new definition with management decision support
systems (DSS) and enriching the resulting structure with expert systems.
As this project reached its conclusion (in 1985) the management and
office support system (MOSS) was born.
MOSS, AI and Abacus are the data-processing and databasing
solutions for UBS. Each has its specific area of application. The services
which they provide are made available to the end-user through
UBINET, the integrated communications system. Six major parts
compose the UBINET project stucture. They are identified in Figure
5.3. Table 5.1 presents a user-oriented classification of UBINET
services.
Table 5.1 User-oriented classification of UBINET services
User class Description
l. Voice telephone PBX co-ordinated voice lines,

evolution toward teleconferencing
2. Intelligent workstations/casual Managerial use, electronic mail,
user database access, DSS
3. Group computing e.g. Manager, secretary, assistant- or
dealer team
4. Intelligent workstations/profes- Professional engaging in consulting,
sional (heavy) duty multiple sessions. Different
information requirements, DSS,
expert systems
5. Terminals for operational and Fixed connection to one dedicated DP
transactional data processing system/network
6. Special purpose applications For instance, forex dealers
UBIN ET PROJECT STRUCTURE
UBINET
H UBINET-SNA
I
UBI NET-DCA
- U BINET-INTERNATIONAL
f--- UBINET-VOICE
H UBI NET-SWITZ ERLAND
y UBI NET-INHOUSE
Figure 5.3 Ubinet project structure
It takes knowledge and technology, not just information, to make a

profit with the new banking products. UBINET is designed to help in
this direction. System Architectures are not made in the abstract. They
are established to support - through technology - the knowledge our
organisation needs to be successful in an increasingly competitive
market.
UBINET is also designed to act as an integrator. This decision was
taken in reflection of the fact that a major trend in communications is the
growing proliferation of sophisticated private networks and gateways to
ever more complex public networks. This trend is caused by the desire of
organisations to increase productivity, especially at the white-collar
level.
UBS management is aware of the fact that in the 1990s, telecommun-
ications will be to business, industry and finance what distributed data
processing was in the 1970s and personal computers in the 1980s. Top
management also appreciates that the demand for value-added services
can be expected to soar since high technology in telecommunications
will be used:
e as a cost savings mechanism;
e for strategic, competitive purposes.
When coupled with deregulation, the development of advanced net-
works will increase the incentive to invest in additional features,
including sophisticated, non-commodity equipment and software. The
overriding need is to use large-scale computers and communications
systems for excellence in customer service.
COMMUNICATIO NS CHALLENGES AS SEEN BY TOP MAN-

AGEMENT
There are two major trends expressing the communications challenge at

UBS. First, the bank is growing very fast. Domestically the growth rate
of transactions and resulting data handling exceeds any expectations.
Internationally, in all major locations the business of UBS is booming.
To fulfil resulting requirements, standard off-the-shelf solutions are not
suitable. New innovative ideas are necessary. For UBS to remain
competitive the new solutions have to be better and to be implemented
faster than ever before. Neither data processing nor the network can be
permitted to become the bottleneck to the bank's development. Meeting
growth objectives is the first challenge.
The second challenge is information dissemination. To gather
information and to dispatch it, powerful communications networks and
communications architecture are required. This management decision
brought into perspective the third challenge.
Today in most financial institutions and industrial organisations, the
responsibility for communications is dispersed and therefore ineffective.
e Voice communications, including commitments in PBX, is a
separate department, often under the director of administration.
e Data communications typically belongs to the data-processing

division.
e Telex and other message services are under the executive responsi-
ble for office systems.
This sort of dispersal of responsibilities might have made sense thirty

years ago, but at present the communications field is unified. Therefore
dichotomies are counter-productive. They do not permit the proverbial
long hard look at the communications problem.
Electronic mail can be used (and should be used) instead of telex.
Electronic mail is also a cost-effective substitute to one-way voice
communications. There is as well voice mail and computer-based
teleconferencing. The PBX itself is a digital computer and, at the same
time, it is the gateway for other countries to the public telephone
network.
These are among the reasons for ensuring that all communications
functions are under one executive, and that they are closely co-ordinated
with data processing. This was precisely the decision of the Board of
Management ofUBS when in 1984 it instituted a unified Telecommun-
ications Department.
One of the first missions for the Telecommunications Department was
the aggressive expansion on the network oriented to the international
market. To cover the rapidly growing need for worldwide communica-
tions, management decided that a high performance and high quality
network had to be built.
The UBS Board of Management also underlined that stringent
security considerations should characterise investments in telecommun-
ications. The classical value-bearers of a bank: paper money, coins, gold,
shares and other financial documents - which had been stored in the
bank's safe - are today in the second plan. At the front line is money
stored in databases and transmitted over networks. Security exposure is
therefore extremely high. Only the highest security measures can be
enough. This policy has been followed to the letter. One example is the
data lines of UBS: all are protected with security cryptographic
equipment. UBS also participates in project OASIS (open and secure
information systems, a project of Eureka), because of the emphasis it
places on security.
Of course, in a basic sense, financial institutions have always been
concerned about security. Their security needs exceed the requirements
of most other users and go much further than the prescriptions of data-
privacy laws. But UBS:
e has been a leader in security implementation;

e was the first bank in Europe to implement security on all of its lines;
e currently has more than 10 per cent of its annual data-processing
expenditure associated with security requirements.
Current studies extend the encryption concept to workstations. With
distributed databases and intelligent workstations, protecting the
information elements on the hard disk of the workstation has become as
important as encrypting the lines.
All this is an integral part of the prevailing UBS information strategy.
The latter can be best described by looking at the bank's computers and
communications design organisation. The structure is reflected in Figure
5.4. The strategy has to cover:
(1) A corporate communications architecture;

(2) Implementation of new tools for management and office support
(MOSS);
(3) Continuation of the development of existing Sperry/Nixdorf-based
operational system.
As stated, the goals have been to enable the user to access operational
systems (transactions), information centres (internal and external), as
well as execute personal programs (decision support) from one single
intelligent workstation.
The need for a system architecture has been emphasised. This
contrasts to customary policy, but the UBS Board of Management
appreciates that a system architecture helps determine how and in what
form information technology will be implemented to achieve the bank's
goals. The system architecture provides guidelines for planning and
designing as well as for implementing, interconnecting and maintaining.
It should not be confused with computer software, hardware or the
communications network. The system architecture addresses the needs
of the users and of the business itself.
There should be a strategy for the computer systems architecture. This
evidently includes strategic planning and directing activities to achieve
goals. It is difficult to use the technology properly when there is no clear
business purpose in mind. Without a strategy that produces a desired
business goal the technology is going to waste. This is the UBS policy.
The essential first step is to begin using technology as an enabling
device. At the request of the Board of Management, flexible object-
oriented solutions were studied with the goal of serving four strategic
issues:
(I) UBS clients The decision has been to offer services to the client
base in the most effective manner, both in absolute terms and in
regard to competition, in all areas of operations.
(2) UBS employees Sophisticated clients depend on communications
- and so do the employees and the bank as a whole. High
technology should be at the service of both clients and employees.
That is the sense of personal computing.
(3) Communications, computers and artificial intelligence A leading-
edge organisation must move far beyond DP and WP (word
processing) into environments enriched with expert systems. The
emphasis is on immediate implementation of artificial intelligence
technology in a practical, useful sense. The application of informa-
tion technology in general, and of AI in particular, should help in:
(4) Swamping costs Technology should be used to produce
individualised services at low costs. This should definitely be a
fundamental goal.
As old man Rothschild advised his sons before dying: 'In life it is
better to be rich, happy and healthy, than poor, miserable and ill.' The
message is applicable both in a personal and in an institutional sense.
The four strategic issues we have just outlined are the key to its successful
application.
DEVELOPING THE CONCEPT OF A COMMUNICATIONS

ARCHITECTURE
Following the elaboration of an architectural concept, the analysis of

existing systems and the planned functionality together define the
necessary relations and communications needs. This definition has been
at the origins of the telecommunications project which started in 1984
and led to UBINET.
Like any other major organisation, UBS saw over the years a growth
in the number of networks which were in existence. Such networks were
not necessarily compatible. In 1984 the analysts counted nineteen
different networks. Therefore the salient problem was one of finding a
uniform communications architecture which would enable the different
systems to communicate with each other. In other words the first major
decision which was made regarded the necessity of instituting one logical
network. All physical networks would integrate in this logical network,
and all attached resources (workstations, servers, hosts, PBX) should
address each other any-to-any.
DESIGN ORGANIZATION FOR COMPUTERS AND COMMUNI CAT IONS AT UBS
STEERING
COMMITTEE
CONCEPT
TEAMS
I I I I
CONCEPTS FOR DOMESTIC MANAGEMENT INTERNATIONAL TELE-
BANKING OPERATIONS AND OFFICE COMMUNI CAJ IONS
OPERATIONS
AUTOMATION <TRANSACT I ONAU SUPPORT SYSTEM STRATEGY
'- -
-DOMESTIC APPLICATIONS
- MANAGERIAL SUPPORT
-INTERNATIONAL
APPLICATIONS
- TELEBANKING
00
Figure 5.4 Design organisation for computers and communications at UBS
With this perspective, a project team under Mr Ulrich Rimensberger

(UBS director of Telecommunications) elaborated and compiled a
request for proposals. It has been addressed to major telecommunica-
tions companies (Northern Telecom, Nippon Electric Co (NEC), IBM,
Telenet, Siemens, Bolt, Beranek and Newman (BBN), Philips eta/) who
were invited to propose the backbone network- and its architecture. For
that purpose, the UBS analysts defined four different alternatives and
asked the vendors for proposals.
The several alternative possibilities which have been studied by the
UBS specialists for implementation boiled down to the following three:
(1) A pure, native SNA as de facto industry standard;

(2) ISO/OSI as an open standard, using X.25 transport;
(3) The use ofSNA at the communications layers and ofX.25 on the
transport layers.
A thorough evaluation of the proposals, closely related to the system

architecture for the management and office support system (MOSS), led
to the decision for alternative (3). The strongest argument was the
availability ofSNA (in contrast to OSI). As a transport system, X.25 was
taken as a first step to OSI, the longer-term goal. The overall
communications architecture also included the existing Sperry DCA
implementation.
The reference to OSI needs some better explanation. !SO's model for
open system interconnection is a described standard, but it is not defined
in detail. Nevertheless, the lower three layers of ISO/OSI have by now
accepted standards. The major contribution of OSI to the computers
and communications at large, and to networking in particular, has been
the concept of the layered structure. This has become today a guideline
in system design, including software engineering. ISO/OSI itself is a
reference model with which many vendors say- even in good faith- that
they comply, while in reality to do not. It is difficult to comply with a
recommended standard if the latter lacks precise definition, as is the case
with OSI.
Of the eight vendors who participated in the competition to which
reference has just been made, one proposed his own network architec-
ture. The vendor was IBM and the proposal was SNA. All the other
seven vendors offered solutions only for the three bottom layers. This
was not satisfactory in terms of compatibility which means portability of
text, data and programs without interfacing and conversions; without
having to change the software and reinvent the wheel. This is the true
sense of an open environment, and the fact remains that it is not properly
supported through current offers. Manufacturers of computers and
communications are simply not tooled to provide wares fitting an open
environment.
There were other interesting findings in the course of the UBS
networking study. The associated analysis and design have themselves
been executed in two rounds: the first was: request for information; the
second, request for proposals.
The first round was quite helpful on three counts: first, it established
what exists in the market that could satisfy the communications
requirements as defined by the systems specialists ofUBS. By so doing, it
helped focus the request for proposals on solutions which could be
immediately available for implementation.
Second, the request for information phase permitted the limitation of
the range of alternative suppliers, As a result a more detailed analysis
could be done on those proposals retained for further investigation
during the second round.
Third, the market responses from the first round put in motion an
important process of tuning the interfacing and interaction between the
communications study and MOSS. This fine-tuning concerns data
processing, databasing, and networking. It has been further perfected
during the second round (request for proposals) as some of the vendors
bid both on the projected UBS network and on MOSS. In this manner,
in parallel to the elaboration of networking solutions, the definitions
necessary for the MOSS architecture were prepared.
Four different solutions came up for the final decision. These were:
e Sperry (Sperry proprietary solution, including Sperrylink);
e IBM-hosts plus Nixdorf branch computers and workstations;
e IBM-hosts plus Wang branch computers and workstations;
e IBM-hosts plus IBM workstations.
Functionality, flexibility, and cost effectiveness have been the overriding

requirements for an able choice. These were the guidelines given by UBS
management. The systems specialists translated them into five groups of
technical criteria:
e database management system;
e office and document functions;
e coexistence of new functions with existing ones;
e performance at the workstation level;

e network functions.
The evaluation of these criteria on the basis of pre-established standards

aimed to give the decision basis. It achieved its objectives.
Following the outcome of these thorough factual and documented
studies the steering committee proposed to the Board of Management of
UBS the following course of action. First, the goal should be an open
system allowing adaptation of the most suitable products, especially at
the workstation end. IBM-PCs and compatibles were chosen for this
purpose, with an effective link to all existing mainframes (some forty-
four of them in Switzerland alone) a basic criterion.
Second, the communications architecture will be SNA. Office com-
munications and management-support functions will be based on
Distributed Office Support System (DISOSS). The decision regarding
IBM standards opened the whole market ofiBM-compatible products
(hardware and software) for workstations, database management,
fourth-generation programming tools and application software.
Third, continuation of the development at the transactional level,
featuring Unisys/Nixdorf systems, will remain a goal of UBS. This
permits continuity of operations as well as safeguarding major invest-
ments in software development which in mid-1985 represented 4,000
man-years of effort and some 13.5 million Cobol statements.
To realise what was decided, four major projects have been formed:
two of them were already existing, but have been restructured. The other
two were new. The four projects are: Abacus (the domestic operational
system); Al (the international operational system); MOSS (man-
agement and office support system); and UBINET (UBS integrated
corporate network). The logical network philosophy dominated the
formalisation of these projects. It also reflected management's apprecia-
tion that a well-planned and properly executed system architecture is
essential for using computers and communications technology as an
enabling mechanism - as well as moving the financial institution
aggressively into the future. Above all, there must be a strategy:
e Where do we wish to go?
e What is it that we want to reach?
e At what cost?
e Within what timetable?
Having answered these questions in an able manner, we must look at the
mechanics. In fact, this was the objective of structuring Project
UBINET.
STRUCTURING PROJECT UBINET: THE CONTRIBUTION OF

COMPUTER-AIDED DESIGN
The corporate network of UBS is privately owned and operated. While

today it primarily supports the operational systems Abacus and AI, the
information services MOSS, as well as auxiliary services, it is projected
to cover the oncoming integration of voice, text, data and image. Hence
it will be multimedia oriented.
The UBINET interfaces have been designed to assure adaptation to
existing (and coming) standards, enabling the Union Bank of Swit-
zerland to realise the open vendor policy which has been decided by top
management. This facilitates a degree of compatibility for future
systems planning, which would be essential for competitiveness. It also
means all types of information can easily be distributed and shared.
------ ------
------
------
------------
PERSONAL
PERSONALPERSONAL
PERSONAL
PERSONAL
PERSONAL
PERSONAL
PERSONAL
PERSONAL PERSONAL
PERSONAL
PERSONAL
DEPARTMENTAL
CENTRAL
CWSJ
-------
SW/HW PERSONAL
PERSONAL
RESOURCES OS, DBMS

APPLICATIONS
Figure 5.5 In-house communications system

We said that UBINET is composed of three integrated systems: the

international network, the domestic network and the in-house commun-
ications system (ICS). Figure 5.5 outlines the constituent parts of the in-
house communications system, enabling it to act as the hub of corporate
telecommunications.
In the course of study and design (before too long, also for
maintenance purposes) UBINET benefited from the use of computer-
aided design (CAD). The goal has been both to improve productivity
during the project phases and to guarantee the integration of commun-
ications capabilities in building and operating a self-contained, self-
standing system. At UBS Telecommunications, CAD applications
include:
e network overview
e layout studies
e network connectivity analysis
e wire diagrams
e zooming on network segments
e design of X.25 nodes
e colour graphics.
Computer-aided design has also been very helpful in evaluating
telecommunications alternatives, from a global aspect to details, for
instance, moving communications equipment around the building. It
has been of assistance to the designers in simplifying changes in layout as
well as in keeping track of new distribution of facilities.
The acceptance of CAD by the telecommunications engineers of the
Union Bank of Switzerland was assisted by the prevailing level of
computer literacy in the Telecommunications Department. Man-
agement made available seventy personal computers - one per staff
member. Most are equipped with project management tools.
Future plans include a What You See Is What You Get (WYSIWYG)
approach, improving upon the current solution which supports no direct
correspondence between monochrome video and colour printer. It
takes, of course, more than a colour monitor to provide WYSIWYG.
CINDY stands for computer-integrated network documentation
system. It is an ongoing project at UBS aimed at combining graphical,
text, and data information which today is on separate databases. The
creation of an integrated engineering database is seen as a key element
for long-term operations and maintenance of UBINET. 'Without
integrated database we will lose management control,' suggests Rimens-
berger. The high~resolution colour monitors, graphic tablets, enlarged
' !
UBCT (B) PIO Sf'C i
UBLN (3)
UBFE (7} SINSAI'mE

UBTO (6)
- LTB. S«/B«<JPS -Q-SA~T

Ej~TFN- ffi UBINET INTERNATIONAL
- - L TB. NAX.IB. /IKIIP$ :t> KCNZEN71IA TC1I
OAT.: 18.09.871 OPWN-SN5 FILE: UBINElWO
00
Figure 5.6 Network drawing made through CAD -.1
network design studies (beyond graphics), and integration of bill of

materials (BOM), point to the direction of coming developments.
CAD is also instrumental in easing the job of updating current plans.
'Every time we go to a meeting, we come back with changes,' suggested
one of the design engineers. Change is part of the nature of a modem
network.
Figure 5.6 is made through CAD. It presents the nodes ofUBINET-
Intemational in four continents: Europe (London, Zurich, Frankfurt,
Luxembourg); America (New York, Toronto, Chicago, Los Angeles,
Houston, Panama); Asia (Tokyo, Hong Kong, Singapore); and Aus-
tralia (Sydney). Notice that this network is peer-to-peer at the packet
switching levels. The pilot network, including New York and London,
has been operational since October 1986. It has been realised in record
time as this was a 1986 project.
Higher level peer-to-peer communications radically changes the
design concept and associated protocols prevailing in the past. With
traditional data processing, dumb terminals were linked to the host in a
hierarchical manner and through vendor-specific procedures. The peer-
to-peer structure alters this approach, assuring interconnection through
standardised interfaces. The result has been a uniform open network,
permitting authorised users easy access to both corporate computer
resources and public information services. Circuit and packet switching
are supported at each UBINET node which also contains gateway(s) to
other networks. The following paragraphs describe current status.
The Unisys DCA network is fully operational. SNA will provide
communications host-to-host, PC-to-mainframe, PC-to-PC. The goal is
LU 6.2, APPC logical unit 6.2 advanced peer-to-peer communications.
The interconnection of all available computer resources is the
cornerstone to the logical network philosophy ofUBS. It evidently goes
beyond X.25 interfaces. The higher protocols are those of the hosts:
Unisys, IBM, DEC- including terminal emulation native to the wares of
the mainframe vendor. As Huschke underlines, the further goal is the
establishment of a UBS-wide protocol.
UBINET-Switzerland forms the domestic carrier. It was also realised
in 1986 and is based on purely digital lines, either 64 kilobits per second
(KBPS) or 2 megabits per second (MBPS). We will look at precise
statistics in the next section. Using multiplexers, all the old analog links
of Abacus have been transferred to the digital network. This brings an
outstanding availability, and also remarkable cost savings.
UBINET-Switzerland is in fact already (on a private basis) on the
integrated digital network (IDN), permitting an easy migration to
ISDN. By contrast, UBINET-International is based on packet switch-

ing. X.25 is the standard interface. As the next step, UBS will integrate
voice and data on the same network and will then virtually have a private
ISDN. A pilot network, Zurich-Geneva is already operational.
This is the right point to underline that because of the limitation of 144
KBPS (64 + 64 + 16 KBPS) the projected services of ISDN will not
cover all needs. Already today UBS is running private circuits of 2
MBPS and 34 MBPS between its main computer resources. Broadband
communications is definitely required to serve the current needs- which
can be reasonably expected to grow in function of future applications.
As stated in the introductory paragraphs to this section, UBINET-
Inhouse is the crucial point for future telecommunications. The Inhouse
Communication System (ICS) forms the hub of corporate telecommun-
ications and will provide both in-house communications and gateways
to the private and public wide-area networks.
To define the long-term strategy for in-house communications, the
Telecommunications Department carried out intensive studies during
1986. Major vendors from all over the world have been invited, in a first
round, to propose their solution, covering all functions of an integrated
in-house communications system. The UBS request for information
included packet and circuit switching, gateways to public and private
networks, cabling, plain telephone sets, communications hardware and
software for interconnecting intelligent workstations - as well as a
proposed migration path for system solutions able to cover the next ten
years. Established by the UBS Telecommunications Department, the
target configuration asked for an integrated switch, providing circuit
switching with 2 x 64 KBPS lines plus packet switching of at least 1
MBPS. The cabling has to be integrated within one topology, to assure
the development and implementation of one logical network.
After analysing the suppliers' answers and, therefore, confirming
what is available in the market, UBS Telecommunications defined a
target configuration. The system is based on integrated switching nodes:
distributed, peer-level, non-hierarchical, able to provide flexibility,
expandability, reliability and survivability. All these issues are crucial to
a bank's communications system. Each node/switch provides circuit and
packet switching plus what the specialists called the virtual LAN (for
instance, Ethernet), but integrated in the packet-switching node and
over the same wiring. Adherence to recommended standards X.25 and
ISDN was strictly observed.
The consolidation of suppliers' proposals led to the following
conclusions:
e the envisaged target configuration is feasible

e but not all required products are yet available:
e therefore, a migration path is required.
The resulting migration path retained as basic elements digital PBX for
voice applications and casual data users (for instance, managers), and
also an X.25 switch for the professional data users (heavy load). Figure
5.7 identifies the timing of the transition.
Integration of packet and circuit switching is expected by the end of
the 1980s. The virtual LAN is projected as a commonly accepted
standard for the 1990s. The availability of products which can be readily
implemented - rather than general breakthroughs in technology - can
accelerate or decelerate the projected deadlines.
OPTICAL-FIBRE LINKS: THE SEARCH FOR CAPACITY AND

DEPENDABILITY
A discussion on global network policies and applications perspectives

tends to make transparent some basic decisions which, however, greatly
influence future developments. One of them is the decision that new
buildings and all new networks of the Union Bank of Switzerland will be
wired in optical fibres. In fact, there is already a significant amount of
optical fibres used in UBINET. From the new computer centre at Flur
(in Zurich) to the nearest PTT city office the connection is through
optical fibres.
As Figure 5.8 demonstrates, three lines of 2 MBPS, each leased by
UBS, interconnect the Lausanne data-processing centre to the Zurich
data-processing centre at Flur Sued. For security and reliability reasons,
these lines are fully independent of one another- even geographically.
Furthermore, as per standard UBS policy implemented since 1977,
transmission over all communications lines is encrypted.
The Flur Sued data-processing centre of the Union Bank of Swit-
zerland in Zurich is interconnected to the PTT city office at Flur Sued
also through a bundle of2 MBPS optical fibre links. There is also an end-
to-end connection between the Flur Sued computing centre and the
bank's test centre. It is provided over the PTT office through 2 MBPS
lines. Hyperchannel software operates direct on fibre at 34 MBPS.
By contrast, the mainframes at the Flur Sued, Flurhof, and Flurpark
UBS computer centres, some 44 ofthem, are linked together by means of
a Hyperchannel local area network, operating at 50 MBPS and
UBINET IN-HOUSE MIGRATION PATH
ANALOG PBX I I DIGITAL

PBX ,........_
I
CIRCUIT
I AND CIRCUIT
( CJ--?; PACKET
~
AND
~ SWITCHING PACKET
X.25
PACKET SWITCHING
CJ~I SWITCHING ~ PLUS LAN
,A"
( )( )~I B~
I I
PRE 1987 ESTABLISHED PLANTI 1987 1990 1993-95
PHASE 1 PHASE 2 PHASE 3
Figure 5.7 UBINET in-house migration path 1.0
- 2 MBPS, 8 MBPS, 34 M BPS BACK BONE
- 64 KBPS ACCESS LINES
Figure 5.8 UBINET, Switzerland
supporting through software five ofthe seven ISO/OSI layers (up to and
including session control). This runs on coaxial cable.
Table 5.2 dramatises transmission capacity growth which took place
in the first nine months of 1987 in connection to the domestic network.
This is also a good example of the optimisation of tariffs- provided there
is demand for communications services to meet the higher capacity goals
of the data pipe. A 64 KBPS circuit offers 667 per cent greater
bandwidth than the now classical9.6 KBPS, but costs 250 per cent more
money. Thus a greater datapipe can be obtained on isocost basis at a
ratio of 2.67: I, on the premise that the network is managed in a way to
anticipate growth. Typically such growth is driven by departmental and
personal computing demands.
Circuit optimisation can be carried also to the level of the 2 MBPS
datapipes which, as stated, support 30 channels of 64 KBPS each.
Prevailing tariffs stand at I 0 times the 64 KBPS cost. Hence, even by
using only one-third the 2 MBPS bandwidth, there can be an economic
solution. Such an approach does however require a thorough technical
and economic study.
UBS has currently under development a metropolitan area network
Table 5.2 UBINET-SWITZERLAND, the all-digital domestic network
Installed as per
Line speed 1.1.87 1.1.88
LINK/I multiplexers 246 282

34 MBPS trunks 1 2
8 MBPS trunks 1
2 MBPS trunks 10 14
64 KBPS lines ll3 190
9.6 KBPS extensions 1.238 714
(MAN) based on fibre optics. Partly installed and partly under

installation, this fibre-optic connection forms a logical ring interconnec-
ting all buildings in three metropolitan areas: Zurich, Geneva, Lugano.
Interbuilding installations are on links leased from the PTT. The
network features redundancy for increased security and dependability.
For instance, Schanze- the new stock exchange Department building
of UBS- is connected to various public offices through fibre optics. The
same will be valid for Broad gate 3 in London- the new building for UBS
Securities and Phillips and Drew - through accords to be made most
probably both with British Telecom and Mercury.
At Broadgate, a fibre optics installation has been extensively studied
for in-house communications (within the building) but technology is not
yet ready for it. The topmost risks were:
e observance of schedule: UBS communications designers had twelve
months to realise Broadgate;
e technical:
e financial: a technical and economic study has shown that fibre
optics will be twice as expensive as protected twisted pair. But the
state of the art and economics are changing.
PRIVATE BRANCH EXCHANGES AND IN-HOUSE SOLU-

TIONS FOR OPTIMAL PERFORMANCE
When we underlined the wisdom of establishing a system architecture we

said that it represents design principles that define a relationship of, and
interaction between, various parts of a network, including the all-
important organisation of functions. System architecture starts with a
look at the organisation as a whole to determine the best way

communications and computers technology can be used to support the
business and its mission.
Whether we talk of local or of wide area networks, the goal is to
produce products better, faster and cheaper. In the case ofUBS, banking
products and services are the focal point. But banking products are
complex. Therefore the system architecture was not just looking at the
individual functions, but the relationships between all the functions
making up the business.
A properly designed building distribution system for telecommunica-
tions had to fulfil these objectives. The mission of an in-house solution is
the transmission network connecting voice and data-communications
devises, incorporating switching equipment and providing gateways to
outside communications (public and private networks). An in-house
distribution system goes beyond the cabling and associated distribution
components such as connectors, jacks, plugs, adapters and transmission
electronics. It includes switching equipment and communications
devices, and also management subsystems. It incorporates voice and
data terminals (workstation), but it also necessitates an increasing
amount of software support in order to function properly.
Alternative approaches characterise solutions which have been
provided to in-house communications systems. The use of private
branch exchanges is one of them - particularly digital PBX. UBS has
today installed and in operation 27 digital PBXs on a worldwide basis:
20 SL-1 by Northern Telecom, 5 MD 110 by Ericsson, l Rolm and I
Plessey. The last is at Broadgate. They are all used for voice communica-
tions.
Data communications on a digital PBX is a process often suggested by
vendors. It has been tried by the UBS Telecommunications Department
for the casual user, but it has not been very successful, though an
application is running at UBS New York with 14 workstations on it.
This is an experience worth communicating.
Leaving aside the fact that it took more than twelve months of steady
effort to make the PBX-WS link really operational, this project revealed
major gaps in PBX software. Pure connectivity - on a line basis - is
available but no software products are running on it. What is more, the
personal computers' software and the PBX switching software, both
from the same vendor, do not work together. PBX-WS tests have been
made with Rolm, SL/1 and MD 110. The difficulties encountered in
making effective PBX-WS connectivity contrast to the relatively easy
process of providing X.25 links for workstations. It comes therefore as
no surprise that the X.25 road was chosen as the primary avenue ofWS
connectivity, as we have already seen in Figure 5.7.
Not only connectivity criteria but also other considerations have to be
taken into account in making strategic choices. For instance, the
building distribution system must be independent of the equipment it
serves and still be capable of interconnecting different communications
devices. For example: analog and digital switches, text and data
terminals, host computers, and so on. It must also be flexible with regard
to handling and moving workstations as operational requirements
impose. Given that the building distribution system should support
voice, text, data and graphics applications, the telecommunications
specialists of UBS recommend use of a star topology which can be
grouped into five subsystems:
e backbone or riser;
e horizontal wiring;
e backbone closet;
e workstation wiring;
e equipment wiring, including the main telecommunications equip-
ment room.
The backbone subsystem provides the main cable routes in the building
and consists of a combination of standard twisted pair, optical fibre and
coaxial cabling; also associated support hardware: broadband or
baseband local area networks (LAN), or, for dedicated links, solutions
like IBM host-to-cluster controller.
Particular attention has been paid to the gateways and therefore to the
PBX. With voice orientation in mind, the product choice has been in
principle: SL/1 and Meridian by Northern Telecom; MD 110 by
Ericsson; and ECS 10000 by Siemens - following the request for
proposal to which reference was made in the opening sections of this
chapter. The criteria used for choice have been:
e technical
e vendor-oriented
e financial.
In terms of the PBX evaluation technical criteria included: cabling (2
wires, 4 wires for digital telephony); voice/data integration; 2 MBPS
possibility (PBX to PTT central office); reliability (MTBF, MTTR);
restart/recovery (particularly in connection with software); multitenant
service. Under the last heading were considered tenant groups by
number oflines, as well as functionality, for instance, one operator for
several PBXs. Particular attention was paid to supported software

features such as resilience, robustness, adaptability. Considered impor-
tant was the architecture which was observed in PBX design, and its
ability to handle both in-house networking and intersite networking
requirements.
Other technical characteristics focused on interface to paging system,
the handling of packets (X.25), and further interface types, for instance
to ISDN.
Given the interest in tariff optimisation and the fact that deregula-
tions have brought alternative solutions (at least in the US and in the
UK), an important technical issue is whether the PBX can act as action
switch. Call-detail recording, online telephone book, direct dialling-in
(DDI) are other examples of wanted technical features. The same is true
of software for administration (traffic statistics, bit error rate) and
automatic alternative routing.
Technical requirements definitely include the supported range in
number of parts (minima, maxima), optimal capacity (in number of
ports), traffic capacity (as defined by Erlang), and three major blocking
factors:
e by hardware/channel
e by hardware/switching
e by software.
Modularity, footprint, power consumption and airconditioning
requirements are further examples of the technical requirements which
have been examined.
The emphasis on technical references is just as valid regarding vendor
plans for broadband connection, cable management, and network
control centre (NCC) capabilities- current or to be provided in the near
future. Finally, telephone company approval of the PBX by country is a
subject which rates quite high in the list of requirements by UBS.
The last reference leads into vendor-oriented criteria which also
include: survivability of vendor, the product's own chances of survival,
completeness of proposal, user references, and vendor's experience in
PBX product line. Critical is the local maintenance support, the quality
of local representation, as well as local activities in product develop-
ment.
Economic selection criteria focus on price per analog port; idem per
digital (voice/data) port; necessary overhead (operating management);
software cost (if special features); cost of upgrades; maintenance cost.
The effect of existing investments in PBX at UBS throughout the world

is also a key economic criterion.
An integral part of optimal performance is the minute attention paid
to network management. UBINET is supported by a network control
centre (NCC) operating within the Telecommunications Department in
Zurich, backed up by stand-by facilities. Supported NCC features are
shown in Figure 5.9. The current effort aims to expand and tune
UBINET to face the challenges of the next ten years.
The policy of the Union Bank of Switzerland which has been outlined
in this chapter has been based on the belief that networks are
fundamental to the achievement of the electronic office, as well as to the
support of high quality client service. This is the ultimate goal.
NCC COMMUNICATIONS
-SECURITY CONTROL -SESSION CONTROL

- JOURNALING - FLOW CONTROL
- REMOTE DIAGNOSTICS -VIRTUAL PATHS
UBINET in-house migration path

-MAINTENANCE - ROUTING
- PERFORMANCE -DATA LINK
EVALUATION - PROTOCOL CONVERSION
-CAPACITY MANAGEMENT -SPEED C!)NVERSION
-ADMINISTRATION
TRANSPORT
-NETWORK ARCHITECTURE
Figure 5.7
-GATEWAYS
-PUBLIC AND PRIVATE LINES
- LONG HAUL NETWORK
-LOCAL AREA NETWORK
-PBX
-MODEMS
The office system of a bank is not a series of individual people working

independently of each other, but a network of staff working together
towards a common goal. Computers must be made to do the same. This
is achieved by networking, provided management has the right vision
and, on the side of technology, the appropriate system architecture
assuring the implementation guidelines.
6 Four Generations of
Payment Systems in Japan
The new banking products financial institutions offer to corporations
and consumers may be the greatest service ever presented to society, but
unless they can present it to potential customers- and prove that there is
a market for that service - it will not do them much good.
Products and services must respond to customer requests, and also be
cost effective. This means that innovation should dominate, solution-
selling must be the focal point, and manual work must be automated.
The network is the answer to the automation of banking services and
their distribution to the customer-base.
To survive and grow a bank does not need to do anything spectacular.
It should just do everything right. In the age of the knowledge society,
doing things right amounts to investing in.
e human capital and
e high technology.
That is precisely what Japanese banks have done.
As in many other countries in the Western world, the Japanese
payment system has been built around the banking public's strong
propensity to use cash. In Japan, cheques are in use between corpora-
tions, but they have a low percentage level in payments from enterprises
to individuals and in consumer transactions. For payments between
enterprises promissory notes and sometimes bills of exchange are used.
More recently, electronics have become the preferred medium. We have
been talking of the importance of networks in banking. There exists no
better example for documenting such a statement than the Japanese
financial industry and banking public. The experience is so extensive,
and the results so important, that it will take three chapters to describe it.
When this is done, the reader will have the image of the 1990s today.
The Japanese experience is reflected in the impact that computer-
based message and transaction systems have had on the way business is
done in that society. This can be roughly compared to the impact that the
telephone had on business practices over the last 100 years. Online
communications is the key to this statement. The Japanese banking
networks effectively connect users separated by long distance through
private or common carrier lines. As elsewhere, they create a communica-
99
tions and computers aggregate which finds its analogy in the telephone
network: each individual device can contact and establish links with any
other device connected to the same network. Unlike elsewhere, the
software is in place. That's what makes the difference.
BACKGROUND AND FINANCIAL INFRASTRUCTURE
Some of the reasons for the significant advance by Japanese financial

institutions may be historical. The attempt made by the financial sector
in the 1960s at popularisation of cheques was without success. From the
1970s onward, banks switched towards broader usage of electronic
payments by the banking public. In this they found a positive response.
An ordinary deposit account is an interest-bearing demand deposit,
but cheques cannot be drawn from this account. Its popularity however
has been high since the end of the 1950s. Some 98 per cent of the
households in Japan have deposit accounts in one of the deposit-taking
institutions.
Electronic payments systems have developed through direct deposit
with or direct debit from ordinary deposit accounts. Popularisation of
electronic payment was further promoted through the introduction of
the integrated deposit account (Sogo) in 1972. The all-purpose Sogo
account combines ordinary deposit and time deposit intended as
savings. When the ordinary deposit account has no balance, an
automatic overdraft is supplied on the collateral of time deposit. The
Sogo account sharply reduced cases in which direct debit cannot be
made because of insufficient balance in the ordinary deposit account. It
also facilitated conversion of bill payments to direct debit.
Amendments in the banking law are both necessary and instrumental
in revamping the banking system. As Figure 6.1 suggests, such changes
originated at the Central Bank and the Ministry of Finance. Some were
put immediately into effect, such as bond dealing and precious metals
trade. Others were submitted to the Electronic Banking Committee for
study.
Just as important have been the revisions of the tele-communications
law; the deregulation of the Nippon Telegraph and Telephone (NTT);
and the building of an Integrated Network System (INS) to cover the
Japanese islands. The intensified competition by non-banks and the
increasing requirements of the banking public added to the impetus for
change in banking practices. These have been quite significant inputs,
both stimulating and accelerating the changes which took place. Many
Four Generations of Payment Systems in Japan 101
AMENDMENT AMENDMENT COMMITTEE OF

AMENDMENT AMENDMENT ELECTRONIC
BONO DEALt NG,
BANK! NG
PRECIOUS METALS
SELLING, ETC.
AMENDMENT OF
BANKING LAW
VALUE ADDED STUDY OF
CORPORATE AND
VALUE
VALUE
CORPORATE
CORPORATE
VALUE
REVISION OF PUBLIC
TELECOMMUNICATION LAW
NTT INS PLAN STUDY OF

SECURITIES
AMENDMENT
AMENDMENT
AMENDMENT
INTENSIVE COMPETITION VALUE
VALUE
VALUE AMENDMENT
WITH NON-BANKS VALUE
OtVERSIFICATION OF MEASURES FOR

USER NEEDS RELIABILITY AND SECURITY
Figure 6.1
of the results did not show till the third generation online system. Once
the wheels were put in motion, the new financial landscape followed.
These references are important in as much as they provide the
background for the automation of payment systems which, quite
evidently, comes in stages. At the consumer level, Japanese banks
invested in automated teller machines not only to rationalise the
banking business and reduce costs, but also to cope with the cash-
oriented behaviour of the Japanese consumers. Today, Japan has more
ATMs than most other countries in the world, both in absolute numbers
and per capita. Financial institutions have installed A TMs in all of their
branch offices. Joint utilisation of ATMs is also widespread.
The popularisation of A TM has played a major role in the spread of
direct deposit of payroll.
e Wide use of direct credit.
e pre-authorised direct debit and
e debit/credit cards
reduced the everyday carrying of cash by Japanese consumers. The
Japanese credit public acceptance of direct debit had two aftermaths:
first, a greater efficiency than collecting cheques; second, the utilisation
of bills whose settlement dates are fixed. This minimised the problem of
cheque float, and made it easy to switch from the use of bills and cheques
to credit transfers through the banking system.
Such are the background factors which propelled telecommunications
in banking for financial payments in Japan. Technology has, of course,
had its impact.
THE JAPANESE GENERATIONS OF ONLINE SYSTEMS
The online system of Japanese banks started in the mid-1960s. Initially it

concerned real-time processing of ordinary deposits and withdrawals.
However, online developments brought about a marked improvement
in banking services. As a result, online solutions have been made
possible in all major lines of the banking business.
e The first generation online system (1 GOLS) was introduced in
Japanese banking in 1965.
This capitalised on the banking habits of the public, and the possibilities
offered by technology. In the mid-1960s, with 1 GOLS, Japan was well
ahead of any other country in the world. Italy followed with online
banking around 1969-70. Other European countries, as well as the
United States, moved into online banking systems only in the 1970s.
Chapters 1 and 3 have already documented that I GOLS is practically
synonymous with the private online system. Its key contributions are
that it presented new concepts which contrasted to batch - and that it
marked a major transition point towards integrated computer networks.
As everywhere else, the sophistication of 1 GOLS was relatively limited.
It included single activities: current accounts, savings, later on forex. But
it provided a vehicle on which to ride more applications.
This first generation implementation aimed at putting online the then
traditional internal banking operations, which classically have been
supported offline - whether through computers, punched card equip-
ment or manually. It reached this objective.
e The second generation online system ( 2 GO LS) came into operation
in 1975.
The accumulated experience with I GOLS made feasible significant
improvements. Within ten years, many functions had been substituted
by, or otherwise integrated into, a second state online solution.
Japanese bankers underline that 2 GOLS was an integrated online
GENERATIONS OF ONLINE SYSTEMS CGOLSl
[-- 4TH GOLS ~

~ [_~~
~ [~-- 2NO GOLS ~
i 1ST GOLS--~~~~>
0
1965 1970 1975 19BO 19B5 1990 1995
Figure 6.2 Generations of online systems (GOLS) 0

......
-
system. Such integration happened at three levels, with the customer

information file (CIF) structured around 1973 (Figure 6.2). CIF was the
first basic step on integration. It permitted one single reference to client
accounts, rather than one per application area. The second step towards
integration was interlinking of debits/credits of different accounts (for
instance foreign trade, current account) among themselves and with
general ledger. Third was that customer services began to be offered
online outside the bank's walls.
ATMs were the first equipment to qualify for the role. A rational
study underlined the wisdom that 2 GOLS is characterised by integra-
tion of various accounts in the processing of banking transactions. To a
lesser extent, this was valid in handling office work. The processing of
accounts and accounting was done with minimum input, through the
principle: one entry, many uses. This system has greatly contributed to
the reduction of banking costs, enabling increased business to be
processed with fewer personnel. It has also had far-reaching implica-
tions in expanding banking business by online automated teller
machines (ATMs) and other terminals linked to central resources.
In step with the 2 GOLS development, an interbank online system was
put into service:
e Zengin came into operation in 1973.
e In 1981 linkage with Swift was established.
This completed the online operation of banking business, both in Japan
and overseas. In 1981 Japanese banks were well launched into the
transition to a still more sophisticated online system. They also worked
to extend 2 GOLS throughout the banking industry. As Table 6.1
demonstrates, at the end of 1982, all medium to large financial
institutions had online systems. The smaller ones operated joint systems.
e A fully fledged third generation online system ( 3 GO LS) comes into
operation in 1987.
Since 1980-81, led by the major banks, the Japanese financial industry
has been making progress towards the third stage of its online system.
This stage is now nearly completed and it has multiple goals. First, it
aims to raise maintainability and expandability, facilitating connection
with outside systems and services. Subgoals are for the further
improvement in efficiency and fully automatic operation.
Japanese technologists identify electronic banking with this third
generation online system. They consider it of greater capability than
previous structures, and it will get still more sophisticated with expert
Table 6.1 Online systems at Japanese financial institutions (1982 statistics)
Total Number having Percen-

number adopted online systems tage
City banks l3 l3 100.0

Long-term credit banks 3 3 100.0
Trust banks 7 7 100.0
Regional banks 63 63 100.0
Sogo banks 71 71 100.0
Credit associations 456 Independent sys- 128 28.1
terns
Joint systems 322 68.2
systems and other artificial intelligence constructs. But this will be a

further generation of online solutions. Figure 6.3 highlights 3 GOLS
concepts and activities which are currently supported.
The way the Japanese bankers themselves look at this subject is to
consider the third generation online system as a major upgrade of the
second generation to a higher level of sophistication. 3 GOLS features:
e Kanji and image processing (a major domain);
e distributed information systems (DIS);
e decision support systems (DSS) which is one of its important
subjects;
e information centre implementations;
e costing and cost management- a difficult issue; 1
e profit management by defined area;
e effective customer management;
e integration and control of business holdings;
e support for clients in a full information technology sense (from
sales of banking services to cost control and profit accounting);
e customer mirror information;
e quality control of banking services
These are services of the highest level of sophistication to be found at any
bank, anywhere. They have been made possible through steady
improvements to the basic concept of online, real-time processing and
the conceived management decision functions.
Other banking services supported with the thir-d generation online
system reference are home banking, electronic tellers, optical disks, and
the handling of ancillary services. Equally important is to emphasise the
communications functions:
1 At least at Sumitomo Bank this covers costing of 8,000 different items.

e electronic funds transfer;

e EFTjpoint of sales systems;
e steady domestic network expansion of value-added nature;
e networks for international branches;
e other networks supported as a public service.
Among the latter are Zengin; the Japan debit card service, NCS; the
credit card authorisation centre, CAFIS; the city banks A TM network,
BANCS; balance advice through voice input/output (telephony) and
facsimile (ANSER).
MANAGEMENT
MANAGEMENT
MANAGEMENT
MANAGEMENT EXTENDING
MANAGEMENT
MANAGEMENT MANAGEMENT
OF
MANAGEMENT
MANAGEMENT
MANAGEMENT
MANAGEMENT
MANAGEMENT
MANAGEMENT
MANAGEMENT
MANAGEMENT MORE
MANAGEMENT EFFICIENT
MANAGEMENT
MANAGEMENT MANAGEMENT
Figure 6.3
Public service networks are typically supported by NTT and made

available to clients of all Japanese financial institutions. With the
exception of videotex (Captain), they have been very successful. Now
developments point to:
e The fourth generation online system ( 4 GO LS) which will incor-
porate artificial intelligence (AI) and fifth generation computing -
parallel engines with inference capabilities.
Work on expert systems, the first practical implementation of AI,

started in 1985. By 1986 all major Japanese banks were well launched in
the field - some at the prototyping and experimental stage - but many
with valuable ongoing applications. Expert systems will be fully
incorporated into coming fourth generation online systems.
The 4 GOLS itself is launched in some of its phases, with 1987 the year
scheduled for intensive development. It will take up to 1995 to complete.
Here are some characteristics:
(1) Artificial intelligence implementation;
(2) Personal sequential inference engines;
(3) Parallel computers of 1,000 to 10,000 MIPS class;
(4) Further expanded 3 GOLS functionality;
(5) Image processing (a 3 GOLS achievement developed to perfec-
tion; image-lifting; icon definition);
(6) Live teleconferencing;
(7) Global money transfer capabilities online through exchanges of
choice;
(8) Full text and data capture at client site;
(9) Enhanced client/bank relation;
(10) Terminalisation of the client base.
These 4 GOLS value-added capabilities will be built over the 3 GOLS

structure, as described in Figure 6.4. They will enhance every area of
current implementation and provide major competitive advantages to
the bank which reaches its goals first. For instance, topics (9) and (10)
aim to significantly improve service and sales to customers, help better
marketing and ensure customer control. An example of embedded tools
are those of loan management: expert systems support the banker;
calculate terms and conditions; evaluate risks; outline contractual
clauses.
The emphasis placed on sales of banking products should be brought
into the correct perspective. With 4 GOLS, new computers-and-com-
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Figure 6.4
munications-based tools will respond to customer calls, direct the bank's

sales activity, optimise conditions, respond to specific requirements and
needs. They will make it feasible for the consumer to save money without
unnecessary loads. In an aggressive sales environment, the banking
terminal at the saleman's briefcase will have AI supports. An expert
system will be checking customer requirements and suggesting solutions.
Just as important will be the impact of 4 GOLS through the

improvement ofterminalised operations inside the bank. Expert systems
(Esystems) will help the financial officer, from checking requirements to
giving advice. Such equipment will be designed to help explain minimum
procedures.
e from banker interactivity with the Esystem
e to actual implementation in making client proposals.
This is a new generation of online, integrated Esystems. The Japanese
banks expect to have some of them ready in 1987, but the complete range
will require another two to three years, as it involves an enormous
software development.
CUSTOMER TRANSACTIONS AND CONSUMER PAYMENT

SYSTEMS
The direct debit system was first adopted in Japan in 1955, when NTT
introduced it as part of its rationalisation of telephone bill collection.
Since 1963 it has been applied to the payment of public utilities bills,
including water, electric power and city gas, as well as television fees.
By late 1986 more than 80 per cent of telephone bills, 78 per cent of
electricity bills, 74 per cent of gas, 65 per cent of the water service and 64
per cent of TV fees were paid through the direct debit services offered by
the Japanese banks. This simplified not only payments but also
collection. As it is practised in Europe, enterprises such as NTT and
power companies, instead of sending bills directly to users, present the
bills to banks in which users have accounts. Acting upon requests from
users (depositors), given appropriate authorisation, the bank debits the
amount equivalent to the bill from the depositors' accounts
automatically.lt credits them to the deposit accounts of the enterprises.
The direct debit system is also widely in use for monthly repayment of:
e housing loans;
e credit card bills;
e insurance premiums;
e payroll credits, automatic transfers of various types of dividends;
e payment of pensions, and so on.
The spread of direct credit of payroll has produced a big impact on the
settlement system as a whole.
In Japan the real success story in customer transaction systems is
written through the ATM network. Five networks are today in

operation. Table 6.2 identifies them by name, gives their starting date,
and reflects on the banks behind them. Mutual banks were the first to
utilise their cash dispensers co-operatively in November 1978. Success-
ful A TM implementation is attested in their ability to offload teller
operations and the way they infiltrated the banking habits of the
consumers. Japanese banks have reached a substitution rate of up to 80
per cent of teller operations through ATM.
Table 6.2 Co-operative ATM systems by Japanese banks
System name Date started Participating banks
SCS Sogo Bank Cash Service data All of mutual banks

communication system November 1978 Started with 16 banks
SICS Six-Interbank Cash Service
data communications system March 1980 Six city banks
TOCS Togin Online Cash Service
data communication system April 1980 Seven city banks
ACS All-chigin Card Service
data communication system October 1980 All 63 local banks
Credit and Loan Associations
data communications systems November 1980 Credit and loan associa-
tions
While client access for transaction purposes started at the current

account level- and the whole online-type operations had the same start
-the focal point has shifted. By gaining experience with online account-
handling, financial institutions now look at market information and
economic analysis as key ingredients of a valid information system. The
transition is shown in Figure 6.5.
Point-of-sales payment systems started developing in 1972-73. These
were mainly offline experiments conducted between banks and super-
markets in more than ten places in Japan. However, none of them led to
practical application of POS.
EFT/POS came into the limelight again in the early 1980s. The most
important reason behind the renewed POS interest is that an online
connection had become possible as a result of the liberalisation of
communication (online) regulations. EFT/POS also benefited from the
relaxation of administrative controls over banking. The first practical
Four Generations of Payment Systems in Japan Ill
TRANSACTION T
TRANSACTION
R
- FOREIGN
A
EXCHANGE
N -SECURITIES
TRANSACTION TRANSACTION
s -LOANS
A - PORT FOLIO
TRANSACTION
MANAGEMENT
TRANSACTION DECISIONS c - OTHER
T
TRANSACTION
0
TRANSACTION N
TRANSACTION
Figure 6.5
EFT/POS implementation in Japan resulted from the collaboration

between a supermarket in Aichi Prefecture and a city bank in December
1984. This system is based on cash cards for online real-time processing.
Registers installed at the supermarket are linked through communica-
tions with a computer at the bank to settle payments for purchases.
The Sumitomo Bank and the Mitsubishi Bank underlined that the
design of a successful EFT/POS system is far more complex than the
typical online banking network has ever been. What is required of an
EFT/POS system is not only to put together four parties with diverse
interests:
e the network systems operator;
e the financial institution;
e the traders;
e the consumers;
but also to enable coping with such factors as liberalisation of financial
business, lifting of restriction on communication methods, generalisa-
tion of business scope, diversification of business-handling procedures,
and oncoming of high-grade information society.
EFT jPOS must above all be well adapted to future business strategy
problems. But it must also be able to cope with expansion of applicable
networks, diversification of bank-counter business procedures, promo-

tion of labour-saving efficiency at the trader's site, and variation of
product services, as well as the enhancement of system security
measures. Other requirements are improvement of outside-company
interlinking ability as well as increase of system access points, and the
upgrading of inside-company network systems.
The time zone for the utilisation of the EFT/POS is between 10.00 and
19.00 hours, irrespective of the bank's business days and business hours.
However, when the system is used on a bank holiday, the amount of
purchases is limited and offline settlement will be made on the following
business day.
In April 1985 an experiment started between some city banks and
supermarkets on EFT/POS using IC cards (chip-in card). This
experiment aims at studying and testing offline use of IC cards for
shopping. Here are the highlights.
Using the IC card writing machine at the window of the bank, users
record a given amount on the IC card. The bank will debit their accounts
after card usage. Bills of purchases using the IC card are sent from the
supermarket to the bank, either online or by a courier (on the following
business day) and the amount is withdrawn from the user's deposit
account. A housekeeping procedure requires that part of the outstand-
ing balance of the ordinary deposit account is reserved for IC card use.
The debited amount is transferred to the account of the supermarket.
The limit for IC-card payment is a previously recorded amount, which is
reduced with each use. However, the payable amount may be increased
when necessary through the procedure which has been described.
The foregoing discussion demonstrates that while in electronic
banking services the Japanese are ahead of every other nation, this
cannot be started as far as the POS implementation is concerned. Here,
many countries are still at a formative state of EFT jPOS, none having a
clear lead. A system flow chart for EFT/POS is given in Figure 6.6.
What all countries have in common is that the POS experience proves
very difficult in taking off, not in a technical but in a marketing sense.
Several problems will have to be solved to help EFT/POS develop and
spread satisfactorily:
(1) Standardisation of the handling procedure City banks have recen-

tly decided on the standardisation of EFT jPOS handling. It is
believed that all financial institutions' POS procedures will be
unified on this basis.
(2) Provision of benefits to the systems partners The partners are
FLOW CHART FOR EFT/POS
POS TERMINAL
BANK LEASED LINE MERCHANT g

DISTRIBUTOR'S
ACCOUNT POS TERMINAL
ACCOUNT
ACCOUNT
J
YOUR
ACCOUNT
ACCOUNT
ACCOUNT
I
I c
............
KEYPAD
ACCOUNT
ACCOUNT
CARD
READER
I
SETTLEMENT OF PAYMENT RECEIPT
CREDIT AND FINANCE

I I CASH CARD
I NFOR.MAT ION SYSTEM
BY NTT
-VERIFICATION OF TOTAL
-POSSESSION OF
MERCHANDIZE
Figure 6.6 Flow chart for EFT/POS
....
w
three: the banks, the traders, the consumers. So far there is no

overwhelming evidence that there are benefits for all three parties,
or such benefits are not clearly perceived.
(3) An equitable sharing of expenses from research and development
(R&D) and implementation, to direct debit The IC card's way to
compete rests on the chosen procedure to debit after presentation,
which closely enough emulates float. But the IC-card solution is
not moving for other reasons. Direct debit done online is being
resisted by consumers precisely because of float reasons.
(4) A well-rounded service operating twenty-four hours per day, non-
stop Today, in Japan, government regulations see to it that the
ATMs operate only at limited hours, not twenty-four hours per
day, seven days a week. On the contrary, EFT/POS needs twenty-
four hours per day, non-stop. Many stores work around the clock.
The department stores work on Sundays.
At the same time, the area where traders benefit the most is not the
payment side itself, as Japan is a cash society and there is very little
cheque fraud. The major benefit from an advanced-type application of
computers comes from zero inventories and the implementation of an
integrated system from receipt to check-out, as well as from the online
connection to suppliers and the automation of buyers' lists.
EFT/POS is not the only technology still behindhand. Also difficult to
materialise in Japan (as everywhere else) is home banking. 'Financial
products for end customers are not as diverse as they should be,' a senior
banker told me. 'Furthermore, consumers prefer savings accounts and
need simple, easy ways of dealing with the bank.'
ANSER: THE NETWORK FOR RESPONSE TO FINANCIAL

QUERIES
In the mid-1970s statistics in the United States indicated that about 27

per cent of customer requests handled by the teller are simple queries of
the type: 'What's the balance of my account?' or 'Has this deposit been
made?' These findings were instrumental in suggesting that the connec-
tion of ATM must be done online to the bank's database. It also
influenced in its way the home banking product.
For a number of reasons, home banking has not been really successful
in any country, but the Japanese seem to have found a low-cost solution
with user-friendly interfaces. It went into use in August 1981, when NTT
developed the ANSER service. ANSER (answer network system for
electrical request) made full use of audio response and speech recogni-
tion technologies through telephony. In so doing, it helped automate
such services as advice to customers and enquiries from customers,
which formerly were performed by bank staff. Today, conventional
audio advice and enquiries regarding bank transactions are provided for
many types of client guidance. Such information primarily involves
moments of funds (debits, remittance, transfers) and balances.
ANSER has grown to a nationwide network, realising improved
customer service and helping the banks rationalise their business. At the
bottom line are labour savings and better client service.
The following are milestones in the development of the ANSER
system:
e August 1981: Service in the Tokyo area. The terminals are touch-
tone telephones and data telephones.
e December 1981: Voice recognition service. The terminals are dial
telephones.
e March 1983: The voice recognition service is offered in ten cities
in Japan.
e March 1984: This service is extended to cover thirty-five cities
throughout Japan.
e Apri/1984: A value-added feature supports facsimile terminals.
e December 1984: An experimental INS model system is set up for
home banking, using Captain (character and pattern telephone
access information network system) terminals. Pay-by-phone is
added.
e March 1985: This service is extended to cover seventy-four cities
throughout Japan.
e January 1986: Personal computer terminal service began m
Tokyo and Osaka.
Technologically speaking, ANSER is basically composed of
individual menus for advice from banks to customers, as well as queries
from customers to banks. There are forty-six types available, so that
each bank has a free choice to suit its particular needs and those of its
clients.
ANSER services (Figure 6. 7) cover a diverse spectrum including
terminals that customers can use: dial, touch-tone, data telephones and
facsimile. Table 6.3 sums up the facilities which are being supported. The
system connects online computers of the financial industry and NTT's
ANSER centre by circuitry. Service is provided to seventy-five cities
throughout the country. Bank management selects the cities it wishes to
use the service.
STRUCTURE OF ANSER NETWORK
0 '\
-
SERVICE THROUGH ANALOG TERMINAL
DIAL
[ TELEPHONE TOKYO
AUDIO
TOUCH-TONE TOKYO
TOKYO
jDATA ANSER CENTER
PRINT
LTELEPHONE
MERCHANT
MERCHANT
FACSIMILE TOKYO
IMAGE [ PC
CENTER
MERCHANT
CAPTAIN VTX
MERCHANT
CENTER TOKYO
TOKYO
CENTER
SERVICE THROUGH CENTER CENTER
DIGITAL
CENTER CENTER
TELEPHONE
CENTER
DIGITAL
IMAGE
FACSIMILE CENTER
CENTER
MERCHANT
MERCHANT
CAPTAIN VTX CENTER
CENTER
CENTER
CENTER CENTER
CENTER
MERCHANT
MERCHANT
MERCHANT
Figure 6. 7 Structure of ANSER network
Table 6.3 Services offered by ANSER
A Terminals
e Dial telephone
e Touch-tone
e Data telephone
e Facsimile (Gil, GIII, mindfax)
e Captain terminal (videotex)
e Personal computer terminal
P Services
I. Transaction advice
1.1 Remittance advice
1.2 Collection advice
1.3 Automatic withdrawal advice
1.4 Transaction processing
1.5 Details on credit and debit
1.6 Details on credit only
1.7 Details on debit only
2. Information and guidance advice
3. Transaction queries (remittances, collections, automatic withdrawals,
credit and debit particulars)
4. Repeated transaction enquiries
5. Queries on account balance (same day, previous day, the last day of the
previous month, etc.)
6. Remittances and transfers (to another account, same bank, or different
bank)
A couple of Japanese financial institutions were to comment that the

ANSER network is the most attractive service to the banks and to their
clients. The bank's responsibility is limited to the online database. This
cuts costs and lowers the break-even point. Today the Japanese banking
industry makes money with ANSER even if the client pays only ten yen
(about six US cents) per call. 'In as much as the banks have interest to
integrate into one system all customer information accessible by
different media,' another banking executive told me, 'we consider
ANSER a good solution. Besides, nothing forbids to develop our own
value differentiation services for our clientele.'
Here are in a nutshell the functions of all the installations at the
ANSER centre. The audio-response control equipment connects to
bank systems and performs control functions, as well as editing,
receiving/sending messages, and so on. This permits handling of
transaction advice and all types of query messages. The audio-response
equipment controls all kinds of media conversion for the various
terminals, such as automatic response and receiving/sending messages.
It reacts to automatic response calls and incoming messages, handles

input of speech and provides print to terminals.
The speech recognition unit is speaker-independent (unspecified
speakers' speech). It distinguishes numbers (0-9) and specific words
(yes, go ahead, no, once more, absent).
The facsimile response unit edits received data on a screen designed
for this purpose, and outputs to terminals: CCITT Gil, 3 min.; Gill,
1 min; minifax. Since January 1986 this service has ensured connec-
tability with 17 different organisations and 190 types of equipment.
The personal-computer procedure control unit manages connection
procedures with personal computer terminals, sending and receiving
data. The videotex relay equipment (VRE) interconnects videotex and
ANSER networks, sending and receiving all types of messages such as
screen information. It also accumulates and edits screens for the Captain
system.
Queries from customers are accepted online, and messages are sent via
ANSER to the bank's computer. The latter:
e checks the customer by the account number, personal identification
code, etc.;
e compiles a reply message to the query;
e sends the reply message to ANSER.
ANSER checks the message, converts it to speech, and advises the
customer. Facsimile queries go through the same procedure. After
switching to facsimile, the output result is printed through Gil, Gill or
minifax. Figure 6.8 shows the flow of processing of telephone queries.
Table 6.4 is a flow chart of speech output messages in an interactive
session.
Similarly, the ANSER personal computer centre is called by tele-
phone. The same number is used for all banks in each region. Query data
is stored on disk through keyboard input. The same input items as for
the telephone are used, following guidance on the personal computer
screen. When data is necessary on multiple accounts and multiple banks,
the NTT centre takes care. The customer can switch circuits to output
information on financial transactions on the display or printer.
A study is under way to develop interfaces for facsimile and personal
computer terminals to handle straight-line, curved-line and circular
graphs, as well as coded information from banks. ANSER will be able to
convert graphs and provide all types of information guidance.
Through shared facilities, ANSER improves equipment utilisation
and provides advantages of scale as a nationwide network structure. It
PROCESSING OF TELEPHONE QUERIES
, - - - - - - - -ANSER
---------l
I AUDIO RESPONSE I
I AUD 10 RESPONSE CONTROL I BANK
1 EQUIPMENT TDIII\IC:IIrTII"11\I EQUIPMENT 1 COMPUTER
I C\MI"''""'""'"'IIVI"t QUERY
r
I QUERY I DATA
I RESPONSE '\
I QUERY
le -
<I TO QUERY I REPLY
I REPORT OF ICOMPLETION
~ COMPLETION I CONFIRMED '
I '\
I
I I l!t
I I '~
L _ _ _ _ - - - - - - - - - - - - - - _J
I
' ,_, ,.
'-
DATABASE
li'inuro F.,. ~ Prni'P~~;na nf tPIPnhnnP lliiPriPs '- ~
- - \0
-
Table 6.4 Speech input/output messages in enquiries business (terminal:

touch-tone telephone)
Bank
computer ANSER Customer and audio input/output
centre
Call centre
This is the xxx Telephone Service Center. Please say
your code.
Input service code.
~-- You are enquiring about a transfer. Please state your
branch number.
Input branch number.
~-- Please state the type of account and account number.
Input type and number of account.
Please state your secret code.
Input secret code.
~-- Please state the number you want.
-----+- Input desired number.
------+- One moment please. (Sound signal)

There have been x transfers.
No. xxx, a cheque from xxx, for the amount xxx.
This was deposited on xxx, from xxx banks.
No. xxx.
The above x transfers total xxx.
Please state your confirmation code.
Input confirmation code.
Thank you very much.
enables support for diversified terminals catering to user needs. It also

features expansion of service menus without large enhancements of
bank systems. As a nationwide network, ANSER offers services to
seventy-five cities throughout Japan, enabling customer queries and
bank advice to be performed for the price of local telephone calls.
NTT has plans for expanding ANSER. Different types of value-
added business are being studied so that the system can respond swiftly
to the diversifying and increasingly sophisticated needs of Japanese
banks and their customers. One of the stated goals is reliability in
implementing expanded functions, as well as the aim to make electronic
banking vital both to households and to industry.
7 Top Performers of
Japanese Banking Industry
There is an ongoing competition in the Japanese banking scene radically
altering the landscape within which financial institutions operate. As top
Japanese bankers have discovered, traditional management techniques
developed during the industrial era are inadequate in a knowledge
society. In the information age management requires new rules which
are interactive and permit communications to take place at the four
corners of the world instantaneously. Reaction times to competitive
developments and market changes must be short. This calls for both a
top networking solution and artificial intelligence (AI) constructs (see
Chapter 10).
Among the reasons which led Japanese banks into the development
and usage of high technology networking is that the service life of
existing solutions is approaching its end. This includes a saturated limit
of processing capacities, excessive expansion of data volume, very large
databases, interactivity, accelerated complication and duplication of
processing methods, as well as other reasons. Response to customer
demands has led to overly sophisticated software structure and an
intense burden on coping with needs for new product services. Ongoing
systems reached the limit of technical ability, with several applications
resting on outdated software and hardware. This led to the development
of new systems capable of flexibility responding to variation of
environmental conditions.
The above situation reflects the requirements for and problems of the
new generation of online systems, which in Chapter 6 we named 3
GOLS. It also points to some of the fourth generation online systems
characteristics. It will not escape the serious reader's attention that the
problems and requirements we are talking about are quite similar to
those encountered by European and US banks. The difference is that the
Japanese solved them first. Hence we can learn from their experience.
There are six case studies in this chapter. The first four are city banks:
Sumitomo, Mitsubishi, Dai-Ichi Kangyo, and Fuji- in that order. The
last two focus on securities firms: Sanyo and Nomura. The Nomura
case-study centres on its networking subsidiary. All six are first-class
examples.
Comparatively speaking, with about 10 million PC installed in the
121
United States, there are few personal computers in Japan. Nevertheless,

it is possible to buy stocks from Yamaichi Securities by using Famicom-
the most popular of the computer games. Nomura Securities too
planned to introduce its service on Famicom and says it will probably
introduce a home computing system before long.
Working with Daiwa Securities, Sony has come out with a software
package on a floppy disc that makes stock charts and does portfolio
analysis. Users of the program can also receive online real-time stock-
price information from Daiwa.
SUMITOMO BANK
Among technology-conscious Japanese financial institutions progress-

ing at a fast pace in the implementation of increasingly more sophis-
ticated systems, the Sumitomo Bank is one of the best examples. Its
electronic banking solution is embodied in the BRAIN service: its
proprietary Bank Report and Information Network.
The concept is technology integration: telephony, intelligent termin-
als, PC at client site, facsimile, voice answerback. A senior executive said
to me: 'Using these media, we offer uniform level of service. Any one of
our customers is able to access our network through any of the
aforementioned media.' Customer choice is made on the basis of his own
criteria, depending on the merits and demerits each medium presents to
him. Network concepts have been developed in co-ordination with the
Japan Bank Association, particularly in terms of formats being used.
Figure 7.1 shows the overall system solution.
Not only banking transactions but also economic and financial
information are supplied through BRAIN. It puts clients in contact with
the bank's mainframes, so that they obtain information instantly. It
helps them manage their cash and assets more effectively. And it reduces
operations related to bookkeeping and banking transactions procedures
in client treasury departments. Data delivered by Sumitomo is directly
loaded to the client's computers, and he can transmit data to the
Sumitomo computer, to avoid manual operations related to banking
transactions. Large volumes of data, such as lots of credit transfers,
details of export bills bought, and so on, can be automatically obtained
online.
Table 7.1 outlines available online information services at the
Sumitomo Bank, provided means, and corresponding areas. The best fit
for one-way delivery by the bank (labelled I) and the preferred
interactive approach (labelled 2) is indicated.
Top Performers of Japanese Banking Industry 123
CLIENT CHOICE
w
cr
::::>
1- BRA INS
u
w
1- MULTI MEDIA
:J: SUPPORT
u
cr
<!
INFRASTRUCTURE BY
SUM ITOMO BANK
PRODUCTION RANGE
Figure 7.1
The volume of transactions is one of the elements guiding client

choice. Sumitomo has 120,000 clients using the query system through
the telephone (touch-tone, voice input, computer answerback); 25,000
fax clients; and 1,500 PC clients. The Sumitomo customer base includes
300,000 companies, one-third of them being very active in transactions.
As an assistance to its clients, the bank offers applications software.
There is a 70,000 yen entry price plus service fee and phone cost. The
service fee runs at about 20,000 yen per month, and it has been available
since November 1984. 'Simply offering information does not motivate
the client company to buy the service,' suggested one of the Sumitomo
bankers. 'Today, corporations have their own good system. Therefore,
we support the link between the client's system and our system. Our
product is a personalized information service.' JAIS (Japan Information
System), a Sumitomo affiliate is doing the personalisation of the PC -

mainframe linkage. It is done at a fee and this is the reason for the
aforementioned 70,000 yen entry price. It covers the specialised software
to be developed.
The way Sumitomo executives see it, the next battle in electronic
banking will be the connectivity of very sophisticated PC and the
Table 7.1 Available online information services by Sumitomo Bank
Media
Personal Data
Services computers Facsimile Telex Telephon
Transaction iriformation
Transfer, credit entry 2 2 2 2
Credit/Debit entry 1 2 2 1
Balance (chequeing and savings 1 1 1 1
account)
Details of time deposit 1
Details of foreign transactions 2 1
(import/export bills, etc)
Advice on export 2
Data transmission (payroll, local 2 1 1
tax, etc)
Securities information
Market price info/bonds 1 1
Short-term financial information 1 1
Surnitomo's advice/bonds 2 2
Economic and financial data 1
analysis chart 1
Investment analysis info. (yield, 1 1
spread)
International financial
Market, major currencies FX 1 1
Interest rates 1 1
Sumitomo's FX quotations 2 2 2
Today's Tokyo FX market 1 1 2
International FX money market 1 1 1
Impact loan rate 1 1
Foreign currencies deposit rate 1 1
Note: 1 means one-way

2 means interactive
associated services they will call for. The corporate market would
benefit. Since the PC is jud~ed too expensive for home banking and
clients will not pay for the service, Sumitomo does not offer it to the
public. But it works on a very low cost, terminal to market, at less than
10,000 yen (about $60), and ensures not only queries on debits/credits,
but also integrates the IC card ofCassio. The Sumitomo is thinking that
the low-cost solution is the better approach for consumers. The current
device is aimed at mid-range clients: low device cost, low service fee, is
the guideline. Parallel with this effort, there is intensive marketing: 'In
developing new media we first must assure good market size,' a
Sumitomo executive said.
At the branch office level, Sumitomo is working to make AI available
for advice to clients. Among the applications are:
(1) Simulation and optimisation of individual's fund.
(2) Judgement required for loans the bank makes to clients.
(3) Other branch level implementation, for instance, operations
control.
Sumitomo Bank is an active user of optical disks for specific applications

areas, such as property management and the registration of documents
stored in safe. It also experiments with a half-megabyte laser card for
coffee shop and restaurant, and with the chip-in card. But cards are
tested strictly in internal use.
MITSUBISHI BANK
Working both on its own and in collaboration with the Mitsubishi

Research Institute (MIRI), Mitsubishi Bank is well launched in artificial
intelligence and in networking solutions.
One of the prime knowledge engineering projects undertaken with
MIRI is ZEUS. It focuses on
e exchange rates
as a tool to assist human thinking. Another expert system developed to
assist the professional is the:
e Investment Advisor.
Other expert systems projects are in the areas of:
e consumer loan management;
e criteria for evaluation of a customer's financial situation;

e conditions for loans (with automatic checks on standard
procedures).
The Mitsubishi Bank has 250 branch offices in Japan and 8 million
accounts. It handles 1.5 million transactions per day and masters 1,400
ATMs online. Its active database stands at the 375 gigabytes online.
Optical disks are being used for personnel filing and for the management
of the documentation centre. The current programming library involves
20 million lines of code; 600 analysts and programmers expand and
maintain it. Among the upcoming problems is the development of an
intelligent database structure through the use of expert systems.
Costing is another area of leadership, leading toward the restructur-
ing of the front-ending operations to the client base. Figure 7.2 gives an
example at the branch office level. A bank-wide reference is the
aggressive selling of electronic banking.
A top priority today is the completion of the third generation online
system. As we underlined, the integration of the different lines of
banking business (current accounts, loans, portfolio, foreign operations,
overseas and so on) has already been covered by 2 GOLS. The third
generation has brought as services:
(1) The conversion of all account processing into online. Here the
ambitious goal is to practically replace 65 per cent or more of batch
activities.
(2) Connection to external (client) network to promote electronic
banking. Current supports offer and receive information to/from
client, provide security indexes retrieved from anywhere in Japan
public database information and so on. This means about 100 large
public databases and many of smaller size.
Other more general examples on 3 GOLS implementation have been

given in Chapter 6. 'Nevertheless,' a senior Mitsubishi executive
commented in conversation with one of the authors, 'since 1981/82 the
contents of the 3 GOLS project have changed. Deregulation progressed
faster than originally projected. Twice during the past few years we had
to review the implementation schedule.'
One of the 3 GOLS specific aims of which Mitsubishi Bank is proud is
the dealer system. It has been completed and publicly announced. Today
it serves 125 dealers in Japan. The next step is to integrate the overseas
network into the dealer room, with
- PROMOTION OF -REDUCTION OF TIME DEPOSIT TELLERS
SELF-SERVICE BANKING
- DOUBLE ENTRY FOR TELLERS AND
~INCREASE OF ATM BACK OFFICERS
- REDUCT ION OF <MANAGER'S AUDIT, SEAL VERIFICATION>
MANUAL COSTS
~PROMPTING OF ATM USE ~ I
ATM l
CORNER I LOBBY
I I I I I TRANSFER I DEPOSIT ITIME DEP.
I TREASURY I TREASURY
TREASURY
BRANCH
MANAGER
I SALES GENERAL
- VARIETY OF TRANSACTIONS AFFAIRS
~ OA FOR INFORMATION
PROCESSING ~--____._-___,
-50% TO 80% OF MANAGER
VERIFICATION ARE POSSIBLE
AT TERMINAL PROCESSING
~MEANS GOAL EXPERT SYSTEMS
Figure 7.2
-..c> IMPLEMENTATION
N
-.1
-
e expanding capacity;
e improving worldwide security;
e providing back-up routing
Already the current dealing room implementation sets out to satisfy the
varied needs of customers. Apart from greater efficiency, the goal of the
global dealing room is to enable the Mitsubishi Bank to enhance its
international status.
Circuit capacity exceeds 600 lines, providing a basis for further
expansion. But the more significant increase in capability will be the
incorporation of artificial intelligence, to which reference has been
made. The inference construct under development runs on a Cray
computer, one of the largest presently available in terms of computer
power.
Finally, since 1985 the Mitsubishi Bank has been doing two
experiments in Tokyo with the IC card. Some 3,000 cards have been
issued with 200 read/write units. The 1987 evaluation was not in favour
of the IC card. Reaction has not been positive, one of the major
questions being standardisation.
DAI-ICHI KANGYO BANK
Dai-Ichi Kangyo has 353 domestic branches and 41 overseas. It employs

about 18,000 people. Its 1986 total assets stand at 38 trillion yen (about
$235 billion), making it bigger than Citibank. The total deposits exceed
28 trillion yen (more than $170 billion).
Like every other major Japanese Bank, Dai-Ichi is very active in the
closing phases of the third generation online system, which came into
full operation in 1987. Four issues distinguish Dai-Ichi from other
financial institutions:
(1) It was the first bank to hit one trillion bytes of disk memory
online. As of September 1987, Dai-Ichi had 400 drives of 2.5 Gbytes
each. This enormous database was running under four database
management systems (DBMS): AIN (Fujitsu); ADN; (Hitachi) and IMS
and DB 2 (IBM). Dai-Ichi was also actively using optical disks, still on a
test basis, stand-alone. The first online application started at the
branches in 1987. Management considered the trillion-byte disk
memory as the necessary transition to effective use of an online
environment with corresponding elimination of magnetic tapes. In 1983
the number of magnetic tapes handled per day was at the 3,000 to 4,000
level. In 1987 it was half that number.
(2) A very large volume of transactions were processed with short

response time. Like many other dynamic financial institutions, Dai-
Ichi experienced a sharp increase in the information volume - both
messages and transactions. This led its specialists into focusing on
database management and the appropriate tools. This increase in
volume of transactions is expected to continue well into the future. Not
only does the quality of customer service demand it, but also the bank
converts many of its current batch applications into online. Further-
more, the online handling problem is compounded through the
implementation of electronic mail and associated message-switching
volumes. This led management to a two-tier solution: immediate
delivery when needed, and night service for the rest.
(3) An integrated packet-switching network with main nodes in Tokyo,

New York, London and Hong Kong. The high feature of this global
network is the integration of voice, facsimile, text and data into one
entity. It is one of the first implementations of its type in the world.
Correspondingly, the domestic network is one of the largest, having
exceeded 10,000 online terminals. It is precisely these terminals which led
to the explosion of the transaction volumes.
Figure 7.3 presents the concept of an integrated system at Dai-Ichi.
ATM and banking terminals are in all branch offices, feeding into
departmental computers. The network integration system is composed
of central resources and the bank's own network. The others are value-
added networks of which we have spoken.
(4) Handling new types of banking products for instance, progressing

from securities to combined deposits and securities. 'Conventional
solutions were oriented to simple products,' a senior executive told one
of the authors. 'Now we have complex products. The market demands
them, and we must provide the proper computers and communications
infrastructure.'
Service statistics are impressive. In 1986 they represented:

e 770 thousand customer visits per day, including ATM operations;
e 10.7 million current deposit accounts;
e 6.5 million debit cards issued;
......
DEPARTMENTAL w
0
COMPUTER
,---
DEPARTMENTAL
NETWORK
.___..J CLIENT OR
NETWORKNETWORK
NETWORKNETWORK
NETWORKNETWORK
TERMINAL NETWORK
INTEGRATION NETWORK
ACCOUNT
LEDGER SYSTEM
FILE NETWORK NETWORK
NETWORK
NETWORK
NETWORK
VTX
NETWORK
CREDIT CO. NETWORK

DEPARTMENT
NETWORK STORE
NETWORK
MAINFRAME I f NETWORK
NETWORK
NETWORK NETWORK
NETWORK NETWORK NETWORK
*DIGITAL DATA EXCHANGE
Figure 7.3
e I ,500 installed cash dispensers and A TMs;

e 96.2 million transactions per month, of which
e 78.8 million are real-time transactions.
The number of ATM transactions per month stands at 9.6 million, but
80 per cent of cash withdrawals are on ATM. Statistics regarding
electronic banking services are given in Table 7.2.
Table 7.2 Electronic banking services at Dai-Ichi Kangyo
Number of Number of Access

Media customers transactions network
Mainframe computer 142 DDX, public

l 058 281
Personal computer 689 Public,
ANSER
Facsimile 19 559 776290 ANSER
Telephone 124986 l 088456 ANSER
Videotex terminal 128 199 ANSER
Total 145 504 2923 226
Electronic banking transactions range all the way from simple

deposit/balance queries to much more complex cash management/
treasury operations. In Japan any bank will offer this whole range of
services. Every year the load increases at significant pace. Hence the plan
to cut costs by going all the way into electronic banking. Table 7.3
outlines the supported services by Dai-Ichi, through mainframe com-
puters, PC, facsimile, voice and videotex.
At the same time, corporate policy promotes debit cards. Some 6.5
million debit cards (out of a total population of 120 million debit cards
issued in Japan, including those by the Post Office Savings organisation)
have already been issued for 10.6 million clients. They serve for cash
withdrawals through A TM, cash purchases at traders, and so on. A no-
change strategy has provided consumer incentive.
THE FUJI BANK
At the Fuji Bank, the term electronic banking has been used for about six
years. During that time it has conditioned management thinking. It has
also helped to explain the third generation online system and its
functions.
w
N
-
Table 7.3 Electronic banking for business and households
Communications media
Mainframe Personal Facsimile Telephone Videotex
computer computer terminal
Electronic funds transfer + + + +
Financial information services
Interest rates information + + +
Foreign exchange information + + +
General finance & monetary information + + +
Business & investment information - +
Transaction data reporting
Credit advice + + + + +
Account transaction detail + + + +
Foreign exchange transaction detail + +
Account balance inquiry + + + +
Batch data receiving service
Direct crediting of wages and salaries + +
Payment and transfer + +
+ indicates supported services
- indicates non-supported services
Top Performers ofJapanese Banking Industry 133
Fuji is one of the two Japanese banks actively experimenting with

two-way cable TV (CATV) for electronic banking. (The other is
Sumitomo.) Fuji is also very active in organising the infrastructure for
point of sale. While, like the other leading Japanese banks, it has EFTI
POS experience, management considers it to be still limited because
online is not full scale: the system does not work on Sundays and
holidays. On weekdays (Monday to Friday) it works 09.00 - 19.00
hours; on Saturdays 09.00-14.00 hours. This is a Reserve Bank of Japan
constraint, expected to be relieved.
Similarly, home banking operations - videotex variety - are on an
experimental basis only. The system is developed but not utilised. 'It is
more difficult to use videotex than POS, because the users must make
investments and pay the costs,' a senior executive said to one of the
authors. 'Also in a small neighborhood, there are many banking
branches available.'
By contrast, the Fuji Bank is going strong in applications connected to
the ANSER network. There are 70,000 clients using the telephone query
system, 25,000 using the facsimile service, 500 with PCs, and about 200
mainframe-to-mainframe connections.
Facsimile and telephone service make money for the bank, which is
not the case with the PC and mainframe connections offered so far, for
competitive reasons. But they are not far from break-even either.
Income from the PC implementation comes from three sources:
(1) At the time of the contract: 50,000 yen (about $310);
(2) A fixed rate per month (10,000 yen to 15,000 yen);
(3) By number of transactions. This is agreed case by case. There is a
range of tariffs.
Since PC and mainframe solutions are not very far apart in terms of
supporting software, Fuji believes that it will need about 10,000
connections in terms of break-even. To bring this time nearer, the
specialists decided to use the same computer at the centre dedicated to
mainframe-PC connectivity with the clients.
Furthermore, in March 1987 the joint CMS (center for mainframe
and PC implementation), involving thirteen City Banks and three other
financial institutions, came alive. The membership is expected to grow.
CMS will focus on multibanking cash management, addressing itself to
corporations. Three services will be provided:
e on us only;
e full powers, as integrator bank;
e joint statement through CMS Japan.
Today's mainframe and PC implementation supports an on-us-only

solution. However, it goes beyond transaction information and into
financial analysis and rates.
Like all leading Japanese banks, Fuji actively works with debit cards
but not with smart cards. An experiment is planned with chip-in card,
but current evidence from other experiments does not make man-
agement so enthusiastic. 'We are not yet at the stage of determining if it is
promising or not,' said an executive. 'Though the chip-in card is a known
entity, it is unknown yet if it is applicable in banking.' This has been a
widespread reaction among the financial industries. There is very little
motivation for Japanese banks to introduce the smart card. And even
less evidence that it can be successful.
But the management of the Fuji Bank is very positive on artificial
intelligence. Past the stage of studying, learning, experimenting, it has
entered that of expert systems promoting. One of the far-sighted
projections is that AI will be introduced in software development with
the fourth generation online system. There are end-user implement-
ations in software development (starting at the beginning of 1987).
Work on the 4 GOLS itself starts immediately after completion of 3
GOLS (1987) with characteristic major improvements in key areas: The
principle is:
e very high level advanced information systems for customers.
'The 3 GOLS helped us realize an infrastructure,' said a senior executive.
'It provided external links to clients, supported applications such as
assets/liability management, and structured the International Online
Information System of our bank.'
The 4 GOLS is planned to reach at least three goals:
(1) Upgrade key 3 GOLS characteristics;

(2) Emphasise responsiveness and quality, making the bank a fully
fledged service industry;
(3) Automation of software development.
Even the expert systems which are chosen for first implementation -
loans, investment advisers- are there to give a high level sophistication
to customer services.
Something similar can be written on the automation of software
development. 'Everything today is highly mechanized, but software
development is largely manual. AI will be used very much for software
development,' stated the Fuji Bank executive.
SANYO SECURITIES
At Sanyo Securities, the focal point has been the use of artificial
intelligence in promoting its competitiveness in the market. Develop-
ment work is done by a wholy owned subsidiary, Sanyo Extended Data
Systems, which also has the responsibility for all data-processing
activities. 'We have many offers from IBM and other companies to
install expert systems for us,' said an executive, 'but we chose to take our
own road. If we define as an Enduser Expert System one the broker can
work with, then we have SIRNIS.'
SIRNIS stands for Sanyo Investment Research New Information
System. It is a front-desk system, not for the back office, though the
back-office itself is highly automated.
e At Sanyo one marketing executive has only 0.6 back-office persons
for support.
e At Merrill Lynch, for every front-desk salesman, there are about
2.0 back-office operators.
The difference between 0.6 and 2.0 is made up by advanced information
systems design and expert system support.
Sanyo Securities' top management is highly oriented to online
interactive implementation. The Chairman has a WS on his desk, and he
established the policy that every executive must have and use an
intelligent WS. 'It is a matter of corporate culture,' he emphasised in
talking to one of the authors.
The President of Sanyo Securities is in his early forties, a graduate of
Keo University and computer expert. He was instrumental in establish-
ing the expert systems culture. Sanyo is the only security house whose
president is a computer expert. 'At our company, we try to increase the
number of marketing and front-desk people,' a senior executive
suggested, 'to help the client and sell security. The number of customers
who visit our offices is growing very fast. With SIRNIS, even less-
experienced operators can give consultation advice.'
To sign on SIRNIS, the user must employ both his identification and
his password. Then he accesses a menu featuring fourteen services which
divide into two main groups:
(1) Investment information

N: Point news
M: Market report
I: Industry report
R: Stock issues
B: Bonds
G: Sokoneken (a system provider of the same group)
S: Investment selection system (SISCO)
F: Futures
P: Portfolio
T: Telequote (given by Tokyo Stock Exchange)
K: SOR (SIRNIS one key request for abbreviation)
(2) In-house communications system
L: Electronic mail
C: Spais (Customer information system)
D: TDOS (Sanyo directory)
Each of the fourteen services heads a routing structure. For instance,

the menu for point news provides for selection of information:
(1) Forecasts;
(2) Business performance;
(3) Technical analysis;
(4) Credit transactions;
(5) Trends, as seen by other security companies;
(6) References on financial instruments;
(7) Packaged news on securities.
There are also two housekeeping routines:

0: Help and prompt pages
E: End.
Three of the foregoing items in the point news menu (Nos. (1), (2), and
(3)) are fully tuned to Sanyo policy. The others are a polyvalent client
service.
Designed specifically for SIRNIS, the expert system addresses itself
not to individual issues but to trends: stock exchange sessions,
variations. The object is to focus management attention.
Another expert system has been implemented which selects stocks. It
has been designed by Sokoneken. Its goal is bottom price range
evaluation. The Sokoneken expert system selects stocks which are at
bottom prices, through the use of the 'Stock Diffusion Index' (internally
developed, and the property of Sanyo). It also flashes the price trend.
Through an artificial intelligence construct, the wave of stock price
Top Performers ofJapanese Banking Industry 137
variation is analysed. The stock diffusion index varies between 0 per cent
and I 00 per cent. Three bands are defined:
e 80% to 100%
e 20% to 80%
e 0% to 20%.
If the individual stock fluctuation is kept in the 80 per cent to 100 per
cent band no action is taken. But if it drops just below 80 per cent then
this is a sell signal. If it keeps between 0 per cent and 20 per cent it stands
low. But if it breaks over 20 per cent then this is a buy signal.
This expert system runs on an IBM 3090 with VF (vector facility);
hence it is a large-scale system. Top traders from Sanyo Securities and
the Sanyo Investment Institute activity collaborated in the knowledge
engineering work.
The Sanyo Investment Institute has also been active in the develop-
ment of other expert modules regarding indexes integrating into
SIRNIS. For instance, COMRES for investment analysis. It forecasts
stock prices four months from now. Within a given range and
established confidence intervals, this four-month forecast has proved to
give 70 per cent accuracy. Its expertise focuses on the Tokyo Stock
Exchange and addresses 18,000 stock issues.
Also impressive is the Radar Chart (Figure 7.4) for individual
company performance. It evaluates any chosen corporation against the
industry to which it belongs, taken as a whole, and against itself over a
given period. The criteria (axes of reference) are:
(I) Overall performance

(2) Productivity
(3) Growth
(4) Stability
(5) Efficiency
(6) Profits.
It can also provide comparisons of an industry sector's performances

against overall results, presenting time windows over several years as
chosen by the financial analyst.
Still another online operating financial analysis chart evaluates
related industries for investment purposes and dissimilar or similar price
trends. If the correlation proves strong, it uses a Bayesian process: 'A
given B'. Two years' data on stock prices (on a daily basis) are used for
RADAR CHART
OVERALL
PERFORMANCE
RADAR CHART PROFITS
I
I
I 19B7
I
I
I
I
I
I
I
GROWTH --- ----- 19B7

EFFICIENCY
STA BILl T Y
EVALUATION AGAINST OWN PERFORMANCE

AT A DIFFERENT TIMEFRAME
Figure 7.4 Radar chart
this analysis, through Sanyo's database. This analytical service, like the
AI constructs which were described, is available only to Sanyo
executives. But some of its graphs can be provided to customers through
the marketing people of Sanyo.
A simple but effective analytical online service is ranking of stocks.
This system focuses on the 100 top companies who incur increasing
profits. They are listed automatically and the list is kept up to date.
Another expert system, Passport, was developed for individual
investors. It runs on PCs and started operating in April 1986. It gives
advice and also accepts orders for stock as input. Passport is capable of
analysing an investment portfolio and shows similarities to SIRNIS,

though it features a reduced menu:
•• portfolio
data
•• news
stock
•• funds
mail
• splits .
Finally, Sanyo Securities has an expert system in operation designed
for profit and loss calculation in stock selling. Examples of its expertise
are:
e buyjsell stock recommendations
e project trend
e commissions and tax.
It also calculates minimum price to avoid incurring loss. Prices, tax and
commission rates are steadily updated.
While these references are all applicable in Tokyo today, a similar
implementation to SIRNIS and Passport will be operated by Sanyo for
the New York Stock Exchange. In Tokyo the system operates twenty-
four hours per day, 365 days per year.
Just as important is Sanyo's push in global networking. Today its
customers work online to its database through PCs. The information is
free of charge, provided the client keeps a reasonable account. The
minimum basis is 3 million yen (less than $20,000). Automatic bank
transfer is included, through an agreement with the Mitsui Bank.
NOMURA COMPUTER SYSTEMS
Nomura Securities has a wholly owned subsidiary specialising in

information processing and value-added networking. The subsidiary is
known as NCC which stood for Nomura Computer Center, though the
title now is Nomura Computer Systems.
NCC launched the first online system in 1975, and the second online
system in 1979. It provides for host-to-host and terminal-to-terminal
packet switching (at 48 KBPS). The NCC VAN (value-added network)
uses two different high-level protocols to fit two different mainframe
resources. On the Hitachi side, the architectural solution is SNA; on the
Univac side, it is an SNA emulation. For both, the object is assured

application-to-application control through proprietary software, with
considerable experience since cut-over data.
Since 1986 NCC has launched its third generation online system, with
the goal of presenting 3 GOLS efficacy as well as integrating customer
networks and Nomura's own non-compatible networks. Also, they
provide a backbone for intelligent terminals.
'With the 2nd generation, the terminal system is very simple,' stated a
senior executive. 'Just dumb terminals.' With the third generation we
must:
e care for intelligent machines;
e provide sophisticated service;
e handle account management;
e employ powerful terminals from many vendors;
e attach these terminals as well as mainframes to the in-house system.
'Besides, the applications must be both terminal independent and
vendor independent.'
The next target of NCC is any-to-any. This they achieve without
degradation of response time which now stands at less than three
seconds.
In system design, NCC follows a model by NTT which differentiates
functionality into horizontal and vertical value-added networks, the
latter being enterprise groups (Figure 7.5). The horizontal VAN is
financial-industry oriented, hence, more generic.
NCC also acts as consultant and system integrator. One of the better
examples on implementation is for the Seven-Eleven 24-hour Super-
store. Seven-Eleven has 6,000 POS terminals. General Merchandise
Storesjltoyo Caio, another chain, features 8,000 POS with scanner. For
both organisations, the technical solution provides:
e EFT/POS
e inventory control
e ordering
e sales analyses
e special studies - for instance by merchandising/marketing type.
At Seven-Eleven, the solution features zero inventory. There is no
storeroom. All merchandise is in racks. Delivery takes place three times
per day. With 8,000 online terminals, the network built for the General
Merchandise Storejltoyo Caio handles 12 million transactions per day.
Seven-Eleven has 5 million transactions. These are two of the ten
separate networks operated by NCC in Japan. A network built and

operated for the parent company, Nomura Securities, is another
example.
I MAGE OF VAN
~-----------HORIZONTAL VAN------------.,
I
I
INFORMATION I
I
I CENTRE
I I
I
COMMUNICATIONS COMMUNICATIONS I
CENTRE CENTRE I
I
I
I
r --------------------------------1--,
~~!!
L _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ - - - - - - - - - - __ _j I
I
I
• RETAIL SALES I
e MANUFACTURING • TRANSPORT I
e DISTRIBUTION • WAREHOUSE
I
• SERVICE • WHOLESALE
• COOPERATIVE
I
L _______ -- ---VERTICAL VAN- ___________ _j
Figure 7.5 Image of Van
All account executives are attached to the Nomura network, each with
his workstation. The system is being expanded so that every employee
will have his WS. The dual goal of the new design is to:
(I) Develop the best system for account executives, managers, profes-
sionals.
(2) Integrate all information sources into one intelligent terminal -
both in-house information and outside information (financial,
market data).
The new implementation will feature several types of WS: for traders,
analysts, managers. These will be enriched with expert systems.
NCC already has expert systems in production. At least two were
identified:
(1) Network operations For problem determination; diagnostics;

evaluation of system parameters; configuration analysis.
(2) Securities This includes both market evaluation and portfolio
management. A special team is assigned to expert systems develop-
ment. Other AI constructs are in an experimental state.
'Since we believe this is very important for the future we work with great
interest in this field,' underlined a senior NCC executive. 'We also train
our people in expert systems, both in Japanese and in American
U ni versi ties.'
In network design, the goal is to achieve one logical AI-enriched
solution. A number of physical solutions will integrate into it. The top
logical layer would be very practical, applied to the problem but flexible,
as requirements change very fast.
In the past, NCC seems to have experienced stability problems with
very large monolithic networks - as any other firm. Hence the decision
to focus on flexibility requirements and reconfiguration capability,
integrated into one logical any-to-any construct. Artificial intelligence
will play a key role in this solution.
8 National Payment
Systems, Research on
Artificial Intelligence and
Progress in Integration
There are three subjects in the realm of financial networks modern
technology has made indivisible: first, the national payment systems in all
its phases- from the level of the automatic clearing house to that serving
corporations and end-users.
Second are the interconnect facilities provided by the public auth-
orities, in other words, the telephone company (telco). Given the
capillarity of the telephone network, this is a key factor in the success of
online systems in general and financial networks in particular. Tele-
phony is an enabling mechanism, provided that the proper investments
are made and vision used in its expansion.
Third, value-added services are very important to keep and augment
the financial network's attractiveness. The concept of value added
changes with time. What is today an add-on feature becomes standard,
and new facilities pop up to provide competitive advantages. This is
discussed in the section on the Mitsubishi Research Institute (MIRI) in
this chapter.
There is great emphasis today on the use of artificial intelligence (AI)
in banking and networking (see Chapter 9). The range of AI applications
is wide, going from end-user level implementation to application plans
of new information media, measures to improve system reliability,
global outline servicing of new product services, as well as a number of
research themes.
The use of AI in Japanese banking is significant today, but can be
expected to intensify in the years ahead. Both the refinements now in
process in connection with the oncoming fourth generation online
system (4 GOLS), and the advances made by the fifth generation
computer (5GC) projects, call for it.
Financed by the government, the fifth generation computer project in
Japan has already produced significant results. One of them is the
personal sequential inference (PSI) engine. It has been developed by the
143
Institute for New Generation Computer Technology (ICOT) with the

collaboration of eight Japanese manufacturers who now make
improved models. Financial institutions have favourably reacted to the
advent of PSI. Most significantly, NTT, the telephone utility, adopted it
and improved upon the first model. The day is not far off when Japan
will have intelligent networks, further enhancing its financial industry.
NATIONAL PAYMENT SYSTEMS IN JAPAN
As the presentation of ANSER (Chapter 6) and of the nationwide A TM

network help document, the development of electronic banking is
closely related to the quality of the national telephone network. New
media network utilisation by financial industries - banks, securities
firms, insurance companies - will be the greater if the quality of the
telephone system is first class. A number of value-added networks
develop using the telephone system as their infrastructure. Figure 8.1
identifies five network structures supporting financial services in Japan:
ANSER, Captain, CAFIS, FDIC, and other value-added networks
(VAN).
In other words, the national payment system is based on two pillars:
public VAN supported by the telephone company; and private,
company designed, implemented and maintained networks. In the
latter, telco provides only the wire. Figure 8.2 presents an integrated
image of electronic banking based on these networks including Swift and
Zengin.
Zengin is the national clearing house for Japanese banks. We have
already discussed ANSER. CAFIS stands for credit and finance
information switching system; FDIC: facsimile data conversion and
interface control equipment; BANCS/NCS: bank cash service by all city
banks in Japan/Nippon Cash Service.
Based on this structure, the financial industry has developed a number
of expanding services: funds management, tax payment procedures,
charges/fees collection, cashing systems, wider card utilisation, EFT/
POS, ATM joint utilisation systems.
To a substantial extent this has been achieved in partnership with the
national telephone company (NTT) which, with deregulation, has
become a responsive, market-oriented organisation, with noteworthy
accomplishments and progress in many areas. Here are four examples:
(I) Research and development Priority has been given to bolstering R

& D operations. In 1986 about $900 million, or 2.7 per cent of
BANK A MANUFACTURING
I
z II AIM n INDUSTRY
0
CENTRE
f-
<!
~ MANUFACTURING MANUFACTURING
_j
MANUFACTURING MANUFACTURING DISTRIBUTION
i=
:::> MANUFACTURING INDUSTRY
BANK B
~~~
...., CENTRE
MANUFACTURING
MERCHANDIZING
MANUFACTURING MANUFACTURING
MANUFACTURING
MANUFACTURING
MANUFACTURING
CREDIT CARD
MANUFACTURING
SEC U R IT IE S t---;,___ _ _ _ __J ENTITIES
COMPANY
CENTRE
MANUFACTURING
MANUFACTURING CONSUMERS
MANUFACTURING
I
INSURANCE MANUFACTURING
PUBLIC
COMPANY MANUFACTURING
MANUFACTURING AUTHORITIES
CENTRE
Figure 8.1
Vl
-
""""
HOUSEHOLDS HOUSEHOLDS HOUSEHOLDS
-
~
HOUSEHOLDS
HOUSEHOLDS
HOUSEHOLDS
HOUSEHOLDS HOUSEHOLDS
HOUSEHOLDS
HOUSEHOLDS
HOUSEHOLDS
HOUSEHOLDS
HOUSEHOLDS
HOUSEHOLDS
HOUSEHOLDS
HOUSEHOLDS HOUSEHOLDS
INDUSTRIAL SECURITIES TRAVEL CREDIT

MERCHANTS
CLIENTS FIRMS AGENTS ENTITIES
Figure 8.2
National Payment Systems, AI and Integration 147
operating revenues, were invested to support R & D projects. 1987

saw a substantial increase in R & D expenditures. This reference is
particularly to projects aimed at upgrading digital technologies,
expanding the range of telephone and non-telephone services,
developing basic and applied technologies necessary for establish-
ing the telecommunications systems of tomorrow.
In the background of the R & D effort in the service industry is
the able, punctual service to diverse customer needs associated with
a growing range of service requests. In the past, development steps
focused on continued enhancement of the present systems, but this
has proved to have its limits. As a result, new departures have been
chosen and high technology is used to provide efficent media for
new services.
(2) Sales promotion NTT sought to increase telephone-related reven-
ues by upgrading its sales promotion activities, both inland and
abroad. NTT sets up subsidiaries in the United Kingdom and the
Netherlands. It also markets engineering and consulting services
overseas.
(3) Cost reduction In line with efforts to cut costs, NTT reduced the
number of personnel by approximately 10,000 in the fiscal year
1986.
(4) Network digitisation To increase the quality and diversity of
service, NTT continued to focus on digitising the telecommunica-
tions network. Apart from the increasing R & D work on digital
technologies, NTT embarked on a plan to provide digital telecom-
munications services to all major metropolitan areas of Japan in a
few years. Table 8.1 quantifies the digitisation of the Japanese
network at early 1987 and gives an estimate for 1989.
Table 8.1 Digitisation of the NTT network
Percentage digitised
1986 1989 (est.)
% %
1. Switching equipment
1.1 Su bscri her terminals 3 11
1.2 Relays
*Telephone offices 85 100
*Terminals 11 17
2. Transmission equipment
2.1 Circuits 17 28
Emphasis is placed on technologies able to facilitate the realisation of

high-speed, broadband telecommunications. These include digital tran-
smission, video coding, and digital switching. A 1.6-gigabit per second
(GBPS) fibre-optic transmission system operates, sending as much
information through a pair of optical fibres as is transmitted through
23,040 conventional telephone lines.
Management attention focuses on improving competitiveness. Soft-
ware capabilities are enhanced to develop more sophisticated and
diverse telecommunications services. NTT actively pursues work in
artificial intelligence. Knowledge-engineering projects are in process,
building knowledgebanks and implementing voice recognition systems
capable of comprehending natural speech. Other projects include
advanced electronic component technologies, such as large-scale-
integration microlithographic techniques.
AI technology is actively applied in the development of computer
networks which Japanese business and industry consider the leading
edge into the information society. Among the key concepts, we
distinguish:
(1) Intercomputer communications Emphasis is on intelligent termin-

als (PC) to be linked among themselves and to libraries (public
databases). For instance, the DEMOS Center by NTT, a publicly
offered service, and the DRESS network. Both offer public database
capability. A layered architecture has been adopted to assure orderly
transition from leased-line or company operated and maintained
(COAM) networks to the integrated service. DRESS applications have
expanded to encompass:
e business transactions between companies;
e reservations in the service industry;
e various query services.
The service provides networking as well as data collection and
distribution capabilities, and features the use of new data input/output
equipment capable of distributed processing.
Manufacturers, wholesalers and retailers can all be interconnected.
These services are known as: super network. An integrated shop service is
also available. There are also new features for home shopping which
permit reception of orders from household telephones in combination
with an automatic voice-answering system. A number of data-process-
ing services, including online real-time processing, remote batch proces-
sing, data collection/distribution and file transfer services, can also be

provided through DRESS.
DEMOS furnishes high-level technical calculation services through
program libraries set up to calculate building structure, for computer-
aided design (CAD). Also available through DEMOS is a software
storage and distribution. The DEMOS network links a wide range of
computers, from PC to Cray. Other public databases offered by
commercial firms and research institutes are themselves linked to
DEMOS. About 100 public databases are today accessed online.
(2) Simultaneous code conversion and interpretation This function is

supported by NTT network centres. It is valuable to communications of
connected systems at bank computer centres and client sites, as such
centres are typically non-homogeneous in equipment, software and code
structure.
(3) Specialised value-added services for the financial industry, such as

BANCS and FINE BANCS provides, bank by bank, a multibank
report for city bank clients. It integrates cash management services
in the banking industry. Its software allows transfer between banks
(swaps). This particular part has been actuated with the new
banking law (spring 1987).
FINE is an enterprise banking network connecting banks and
companies. This system assures online use of computers in
companies and banks: general purpose machines, personal com-
puters, facsimile equipment, etc. Services provided by FINE
include:
e information on financial trading;
e economic and financial market data;
e information on fund settlements;
e news on the use and management of capital and assets.
Various banking transactions and information provider functionality
formerly carried out manually are now processed online using this
system.
Deregulation has been instrumental in inducing change at NTT. 'In

the past, we have a government mentality,' said a senior executive.
'There were also government restrictions on policies and usages. Now
we have a new structure, competitive wages and incentive bonuses.'
EXPANDING THE INTERCONNECT FACILITIES: INS
We said that greater sophistication of banking services largely

depends on further advances in the telephone system. A public telephone
network grows by stages, each adding to those already supported. The
way NEC looks at this subject, developments in telephony should
distinguish between the telephone system proper and the higher-up
layers. According to this Japanese classification model, the telephone
system comprises:
(1) Digitallines;
(2) Satellite transmission;
(3) Optical fibres;
(4) Optical subscriber lines (business use);
(5) Integrated digital Centrex;
(6) Digital telephone set;
(7) Advanced multibeam satellite systems;
(8) Ultra-large capacity optical fibres;
(9) Optical subscriber lines (residential use);
(10) Fully integrated workstation;
(11) Completion of information network system (INS).
Items (1) to (8) are available today to be followed by (9) and (1 0). INS, in
Integrated network system (Figure 8.3) is scheduled for 1995 as a full-
blown operation.
The higher-up layers address facsimile, electronic mail, data commun-
ications and teleconferencing services. They are intense in software
support and involve:
(1) Integrating text and digital communications;

(2) Faster, more polyvalent digital facsimile;
(3) Interconnecting facsimile, telex/electronic mail and digital com-
munications;
(4) Video conferencing;
(5) Video telephone;
(6) Broadbank switching equipment;
(7) Integrating all services into the end-user work-station.
Points ( 1) to (4) are already realised. Full integration of all communica-

tions aspects will materialise with INS.
Integrated data communications and computers represents an
aggregate involving many wide area computer networks, local area
.------,-=-=--~
FRONTEND PROCESSORS ________ __
-- )
CD- ATM-ET
FRONTEND FRONTEND
) FRONTEND
FRONTEND FRONTEND
FRONTEND
POS <SINGLE, THEN INTEGRATED FUNCTION) FRONTEND
FRONTEND
FRONTEND
.-------) FRONTEND
CM-HB FRONTEND
<VOICE, FAX, PC)
.--------)
FRONTENDAUTOMATED
FRONTEND FRONTEND
FRONTEND
......
Vl
Figure 8.3
FRONTEND
computer networks, and parallel computer architectures. This forms a

fully integrated computers-communications network. While data com-
munications and computers, especially computer networks and parallel
computers, have in the past developed independently from each other,
advances in both technologies bring them together. This integration is
sustained by the rapid development of semiconductor devices. To
achieve it, it is necessary for all component computers to conform to a
common distributed-system architecture.
Table 8.2 outlines a long haul to chip-level classification. Every
higher-up layer builds upon the functionality of those beneath it.
Interfacing is assured by programming the component parts to co-
operate in the communication of information and in the execution of a
common task.
Table 8.2 Successive layers in a distributed information system
Average inter-computer
Computers located in distance
Wide area network Continent IO.OOOkm

Country l.OOOkm
City !Okm-IOOkm
Local area network Site I km-lOkm
Building lOOm-! km
Room lOrn-lOOm
Computer architecture Cabinet I m-lOm
Circuit board lOOm
Module lOrn
Chip lm
In these distributed systems, among the most important issues are

communications and addressing of information, parallelism and ins-
truction execution. Solutions are usually based on control flow architec-
tures enhanced with operating system concepts. A large-scale system
may employ a variety oflong haul and local area networks which tend to
be functionally indistinguishable. Wideband communications come at
an affordable price as technological innovation achieves reductions in
cost. This enables the largest possible use of the most convenient services
at the lowest feasible charge.
But while tariff reductions are necessary, they are not enough. In an
advanced information society, highly varied information must be
provided through equally versatile media. That's what the banking

industry needs for itself and its clients. Digital lines can be used for
telephone, facsimile, data and image functions, with an integrated
communications network to offer upgraded services both handy and
easy to use. The background reason is effectiveness:
e As the network is integrated, a variety of services are available
online.
e Improved transmission speed and upgraded quality allow swift and
accurate communication of large amounts of data.
e Multifunctional communications-processing can be structured to
greatly simplify the storing, managing and processing of informa-
tion.
e The smooth link between the network and computers permits easy
operation of separately located computers.
e Costs correspond to the type of communication, thus a rational
communications service is provided.
In this sense, a communications system must be providing complex and
varied information services economically. The integrated network
system is an innovative electronic communications solution integrating
communication lines for telephone, facsimile and data communications,
which so far have been independent.
Responding to such fields as video communications, which require a
large data capacity, is becoming increasingly difficult. INS is digitised
with such advanced technologies as optical fibre cables, digital switching
systems, and VLSI (very large-scale integration) so that larger amounts
of varied services can be transmitted simultaneously with more speed,
higher quality, and more economy. The difference between the existing
telephone network and INS is shown in a nutshell in Figure 8.4
INS is constructed in stages, first utilising existing facilities to full
advantage while gradually introducing new technologies as they are
developed. NTT has already begun its basic investment by:
e laying an optical fibre cable backbone from the northern end to the
southern tip of the Japanese main islands;
e introducing digital switching systems;
e Developing the INS model system which entered service in
September 1984 in western Tokyo.
There, customers are being offered a chance to actually use digital
telephone, ultra-high speed facsimile, new Japanese language teletext,
teleconferencing, video response and so on.
EXISTING NETWORK
TELEPHONE TELEPHONE
TELEPHONE NETWORK
FACSIMILE FACSIMILE
FACSIMILE NETWORK
~...-_TE_L_E_x_....~H TELEX NETWORK H TELEX
DATA DIGITAL DATA DATA

TERMINAL EXCHANGE NETWORK TERMINAL
INTEGRATED
INTEGRATED
I NS
9i:MMUN 'CAnO'S
ATELLITE
TELEPHONE TELEPHONE
FACSIMILE ~ FACSIMILE
DIGITAL VI OED
VIDEO
TERMINAL NETWORK TERMINAL
DATA DATA
TERMINAL TERMINAL
TELECONTROL AIR ROAD TELECONTROL

ROAD
MOBILE COMMUNICATIONS
Figure 8.4
All this has an evident impact on financial networks. By integrating all

existing facilities from voice and data to text and image, INS will become
a very modern, highly competitive network, enhancing services offered
in the present day and also integrating diverse systems into one
homogeneous aggregate.
The Japanese industry stands to profit. The same is true of manufac-

turing, merchandising, the consumers, and the Japanese economy at
large.
INTEGRATION STUDY FOR FINANCIAL NETWORKS
Integration is a key word in computers and communications, but its

definition has changed in the course of the last two decades. This is not
unusual in this profession. The definition of artificial intelligence, for
instance, has tremendously changed since 1958-60 when the term was
coined.
The concept of integration first appeared around 1970. To put it in
perspective we must recall that at that time the first online applications
in a banking environment were already established. An example is the
first generation online system in Japan. Another example is an online
network which one of the authors made, at about the same time, with
Istituto Bancario Italiano, Credito Commerciale and Banca Provinciale
Lombarda.
Whether in Japan, in Italy, or anywhere else in the world, in 1970
networks were hierarchical structures. Typically, they featured central
mainframes, multidrop or point-to-point lines, non-intelligent termin-
als, a start/stop protocol, and polling/selecting as line discipline.
Starting with current accounts, applications were taken in charge, one
after another. They were not integrated.
So by 1972-73, the concept of integration started filtering into system
design. The thinking was that contrary to massive batch implementa-
tion, online operations would do best when they integrate with one
another, for instance, foreign trade and current accounts; current
accounts and general ledger and so on.
The Japanese second generation online system is a good example of
this original definition of integration. However, this definition has been
made obsolete by the implementation and operation of the third
generation online system. The definition of integration will be changing
again with the fourth generation online system, that is, from this year
onwards. It will be complemented through artificial intelligence
capabilities.
Taking the Japanese environment as frame of reference, here are the
network interconnections which count in the transition from 3 GOLS to
4 GOLS. The basic concept is network-wide functionality, with
transparent connections providing an integrated aggregate:
(la) Interbank money transfer system (Zengin);

(lb) Swift and bank's own global network;
(2) Shared network systems: NCS (Nippon Cash Service); BANCS
(banks' cash service); ANSER (automatic answer network system
for electrical request); CAFIS (credit and finance information
switching system) and so on.
(3) Access to private and public databases, exploited through shallow
expert systems.
(4) Online connection to the client base from corporations to
professionals and consumers.
(5) Large-scale communications systems integration to be implemen-
ted by the telecommunications authorities (NTT in Japan)
supported through Network Control Centres, enriched by expert
systems.
(6) Multifunctional, multimedia work-stations operating online to
the network with any-to-any capabilities.
By way of example, Figure 8.5 identifies the Zengin system. Some 700
financial institutions with 20,000 branches are connected to it. The
Zengin system provides for interbanking integration. It operates online,
handles the flow of funds, and acts as catalyst in funds settlements.
Typically, the payer makes an application for transfer at the branch
office of a bank. The transaction may concern:
e cash;
e ordinary deposit;
e payment of bills;
e transfer order - domestic or abroad.
In a paper-based environment, this would have involved transfer slips,
mail, clearing: in short, costly exchange of documentation.
This approach, prominent in the pre-computer era, has been
preserved with batch computers and, ironically, with the first and second
generation online solutions. The latter, let's recall, called themselves
'integrated'. To do away with it, it has been necessary to establish the
online clearance system like Zengin, CHIPS and CHAPS are other
examples providing a necessary inter-banking integrated infrastructure.
It has also been necessary to support and apply standardisation. In
Japan this is promoted through the adoption of standardised data
communications protocols by the Federation of Bankers association. It
is also given a boost through the utilisation of ANSER for electronic
banking services. CAFIS has led to the standardisation of the EFT/POS
system.
ZENGIN SYSTEM
NIPPON BANK
------ ------ ---·-- ------ ------ ----l

1 CREDIT
NIPPON
NIPPON
!CO-OPERATIVES
II
NIPPON BANK I
I
I
I
I LABOUR
TRUST BANKS
!ASSOCIATIO NS
-------~-...1
REGIONAL BANKS SOGO BANKS CREDIT NOCHU NOKYO KEITO
~
700 FINANCIAL INSTITUTION S <APPROX. 20,000 BRANCHES>
~
Ul
-..l
Figure 8.5 Zengin system
-
This last reference leads us to the next level of the integrated system's
definition- 1987/88 standard. We have already described ANSER.
Today, the clients of seventy-one Japanese banks are connected to it, as
well as stockbrokers and other terminal equipment. At the same time the
nationwide cash dispensing system interconnects and integrates
BANCS (the ATM network of 13 city banks), ACS (of 63 regional
banks), SCS (of69 Sogo banks), Sinkin (of 419 credit associations), and
SOCS (of 7 credit banks).
While BANCS points to the right direction as far as consumer
integrated services are concerned, there is still in Japan a debit card
problem to be solved. Today each bank issues its own. While the debit
card from city banks can work through BANCS, this is the ATM
network for city banks only. Other banks are now expected to tie in,
eventually grouping together in competition with the Post Office.
On the other side, there is an integrated direct debit/credit data
exchange system (Figure 8.6). By using the Zengin standard protocol,
city, regional, Sogo banks, the NOKYO system, and other contributors
attach to it.
AN EXTENDED NOTION OF INTEGRATION
As we have seen, the subject of integration has tremendously evolved in

the years since 1972. We cannot live with old images. Furthermore, this
subject cannot live with old images. Furthermore, this subject has not
only grown towards internetworking but also expanded internally, for
instance, in the direction of data capture. A good example of this is
written character recognition employed by Sumitomo Bank for funds
transfer services. The customer can write the beneficiary, using an
electronic pen on an ATM device.
This extended notion of integration is vital to the banking industry in
producing and marketing new products. New banking products require a
homogeneous infrastructure provided through integration. Still, their
success can be very different, depending on the branch office in which
they are launched. A study by the Mitsubishi Bank has found that the
reason for such variation is discrepancy. Not all branch office managers,
professionals, personnel and salesman have deep experience with the
product. As a result, some do well, others do poorly, still others do
nothing.
This finding has led to the implementation of quality circles at the
branch office level. It works both bottom-up and by bringing together
DIRECT DEBIT/CREDIT DATA EXCHANGE SYSTEM
FINANCIAL INSTITUTIONS
DIRECT DIRECT DIRECT DIRECT DIRECT DIRECT
DDX AT 9 600 BPS
DIRECT DIRECT
1----------- -----
DIRECT DIRECT
<EXTEND TO FINE)
DIRECT DIRECT DIRECT DIRECT DIRECT DIRECT

DIRECT
CORPORATE OFFICES, SHOPS, OTHER MERCHANDISING CHANNELS
Figure 8.6 Direct debit/credit data exchange system ......

Vl
'-0
the people concerned, for instance, the tellers. Typically, a quality

control circle in banking will go over product description, discuss the
material, find out reasons for marketing failure. One case identified the
catalogue as too difficult to understand. And if the tellers cannot
understand it, how can they explain it to the customer?
In one case (at the Sawa Bank), a going rate of20 transactions per day
improved to 100 transactions per day and person through quality circles.
A similar reference was made regarding banking products which take
care of direct sales.
But there is more in terms of accomplishments. The technical side of
the solution has been an accelerated integration of supports to provide
to all banking personnel a homogeneous environment, as well as end-user
interfaces and management by exception. With the third generation
online system, tellers are helped by integrated customer information or
display. They are both better informed and more at ease in proposing
products. At the same time, if the customer makes a large withdrawal,
the information flashes on the manager's desk; he can then personally
handle the case.
These are examples of integrated information processing today. They
are available in Japan with 3 GOLS. But the Japanese banking industry
is still moving ahead. 'We have reached a state where we must go beyond
realtime and into client advice. From third generation online to
intelligent dialog,' said a senior executive at the Mitsubishi Bank. The
concept of integration has moved from the processing level to the user
interface, employing expert systems as tools. When we talk today of
having an integrated environment, we must remember that evolution. It
underlines the merging of AI constructs and data-processing applica-
tions.
Assessment of technological opportunities, forecasting of further
developments, and management of information assets have become
essential capabilities of successful banking. They will continue to grow
in importance for the foreseeable future as the need to generate new
business opportunities becomes a more critical factor in the financial
organisation's ability to compete and survive.
The integration philosophy is important for yet another reason.
During the last five years product and process lifespans have shortened
markedly. Innovation has become a key factor in economic success. The
quickening substitution of old technologies by new ones provides many
opportunities. Older, established economic entities are continuously
threatened by such change. But innovation can be successfully applied
when there is the right infrastructure. And such an infrastructure has to
be integrated.
To be successful, a bank needs considerable assets:

e human resources
e high-quality services
e innovation
e advanced technology
e financial might
e a market to focus on.
Within this perspective, decisions must be fast and unequivocal. The job
must be done. To stay on top, a financial institution must keep on
breaking barriers. Multimedia integration is one of them. Enriching
current applications through artificial intelligence is another.
As Figure 8.7 outlines, this is what the Japanese INS model set out to
achieve. The goal is integration of services. The product will be available
to all financial institutions and industrial organisations. Those who have
already integrated their own corporate information system will derive
the most benefit.
WORK AT THE MITSUBISHI RESEARCH INSTITUTE
Another organisation devoted to the development of one logical network

is the Mitsubishi Research Institute (MIRI). Projected particularly for
managers and professionals- as well as the handling oflarge distributed
databases, - the new network structure will also incorporate the
personal sequential inference engine (PSI-X) by Mitsubishi Electric.
Since its establishment in 1970, Mitsubishi Research Institute has
been engaged in information-processing services. Its computers and
communications network, known as the Mitsubishi Computer Complex
System (CCS) is installed in central Tokyo. Established with the goal of
serving as a think-tank, the Institute focuses on meeting the needs of a
post-industrial information society. Among its missions is to help
provide solutions to increasingly difficult and complex social, economic,
industrial and technological problems.
For the any-to-any architectural solution, MITI is currently studying
MAP (manufacturing automation protocol, by General Motors) in
collaboration with a number of the customer organisations. One of them
is the Mitsubishi Bank. The goal is to provide uniformity and integration.
An ongoing study has documented that currently available LAN
solutions are not sufficient to reach that objective. But it is not yet
established if MAP is the best choice. An alternative is a MITI project
known as Interoperability Study.
INS MODEL SYSTEM
HOMEOFFICE AND HOME BANKING
-
~
INDUSTRIAL FIRM MERCHANT,
PROFESSIONAL CONSUMER ANSER BANK
TRANSACTIONS
AND BALANCE VOICE• TRANSACTIONS
TRANSACTIONS
~ 4
VOICE HOMEOFFICE CUSTOMER

FULL FINANCIAL
INFORMATION
u FILE
u FILE
TRANSACTIONS
VOICE•
r;;;} TRANSACTIONS
LEDGER
TRANSACTIONS.
uFILE
BALANCE. NOTICES
TRANSACTIONS
J<EYPAtr' TRANSACTIONS
PICTURE
GJ PICTURE
u FINANCIAL
u
FILE INFORMATION
FILE
Figure 8.7
In the one as in the other case, MIRI and its clients explore ways to
normalise and integrate diverse vendor proposals. Once a solution is
found, it is expected to be used in Japan and also internationally. The
any-to-any solution aims to integrate diverse networks operating at
different levels of the ISO/OSI protocol and incompatible among
themselves:
e DIA/DCA
e X.400
e TCP/IP
e X.25
e BSC, S/S, etc.
Current evidence suggests that von Neumann-type computer tech-
nology and its software cannot support this solution. The problem is of a
logical nature and- according to the MIRI reference- it can be handled
nicely through PSI and other fifth generation computers. The target date
is 1990-91. So far, however, there is proof that some functions of PSI
are most convenient in terms of cost and performance. This work is
evidently enhanced by the leadership Mitsubishi Electric exhibits in the
development of intelligent exchanges, one of the implementation areas
of PSI-X.
MIRI is also very active on AI constructs. It has developed ZEUS- an
expert systems shell now being sold on VMG (VAX line) and Unix
environments. ZEUS is also implemented under MVS. The develop-
ment of ZEUS has been part of a multiclient study project which started
in 1984 and was completed in 1985. Today there are many applications.
This is a telling example of how early the Japanese started with expert
systems.
Today, ZEUS has sixty clients among the leading Japanese City
Banks and Trust Banks. There are at least three examples of projects
using ZEUS-I and ZEUS-2.
(1) As a consultant for using utilities software in a computer produc-

tion environment (IBM and Cray machines). The expert system
serves for choice of routines and advises on how to use them, for
instance, how to prepare a job control language (JCL). The expert
system also automatically generates the JCL program for using the
selected utility.
(2) In troubleshooting, in computers and communications aggregates.
The expert system provides diagnostics, then gives prescription
advice.
(3) Financial industries' implementation. The expert system forecasts

exchange rates between yen and dollar or other moneys. It also
experiments on forecasts regarding US-Japan interest rates, and
relates exchange rate to interest rate forecast.
Acting as adviser to the financial institutes using this system,
MIRI has done an independent verification, comparing system
projection. Results are evaluated through correlation which ranges
from very good to average. This solution acquired a lot of interest
from Japanese banks.
Also using ZEUS, MIRI conducted an internal project on potential

impact of computer-aided instruction (CAl). The chosen subject was
training on computer-related skills (analysis, programming, and so on).
In other developments, MIRI is currently running an expert systems
project for a credit card company. This will cover the client's whole
network and see to it that applications are properly screened on whether
to give a credit card or not. Today this work is done through a loan
officer- efficiently, but in a subjective manner. The expert system will
classify, then analyse, past data to define the applicant's risk. A profile
system will be used for scoring.
The expert system will not only help identify certain groups but will
also analyse behaviour:
e The inference motor has been developed using the concept of
enthropy. 1
e It has been enriched with the banker's (human) experience, which
reflects the function of what the loan officer thinks.
The officer's subjective experience is inserted into the expert system, and
can change marginal cases in the outgoing quality range established by
the expert system. In this sense, the score given by the expert system may
be good, average, or bad. Just as important are certain combinations
which integrate the human response.
The expert system balances risk and profit, reflecting on the intended
card usage: shopping, cash. Response may be different based on
projected use.
The expert system can also be used as a marketing tool, for instance, as
a direct mail evaluator.
MIRI also leads a multiclient project known as the 'AI Study Group'.
It features over forty industry members and includes: problem defini-
I. See D. N. Chorafas, Statistical Processes and Reliability Engineering

(Princeton; D. Van Nostrand, 1960).
tion, steady bi-monthly seminars, workshops, and demonstrations of

results. It is also planned to organise a special-interest group.
AI technology investigations, development of AI techniques and
tools, AI-based application systems implementation are fields in which
MIRI focuses its expertise. In addition, based on the combined
technologies of software engineering and knowledge engineering, it
carries out various projects on information systems such as analysis,
planning and architecture design.
As far as its work on AI is concerned, MIRI is currently doing a great
deal of research on PSI- the personal sequential inference engine. Most
particularly, it works on an operating system (OS), SIMPOS, for the PSI
engine. Projected in the image of UNIX, SIMPOS capability is growing
and is currently superior to UNIX. In 1987, a similar project started in
America. Led by Carnegie-Mellon University, Project Mach is based on
Unix 4.3 BSD.
Let's recall that PSI is an original ICOT development which has been
further expanded in capacity by the leading Japanese computer
manufacturers. It is a fifth generation personal computer (one man, one
station), whose place is that of a logical, highly intelligent workstation.
Together with Mitsubishi Electric, MIRI works on a mesh parellelism of
PSI, particularly on data-flow requirements and inter-process interac-
tion. Another current project is the use of a PSI-LAN solution for
parallel processing. Being fifth generation computer-oriented, each one
of these projects has a significant potential in financial industries'
implementation.
9 Advanced Networking
Solutions by American
Banks
American banks have been among the first to utilise online financial
systems, particularly in a global sense. Morgan Guaranty's MARS was
already operating in 1974; Citibank has Marty; Chemical Bank has
ChemlinkjBanklink; Manufacturers Hanover Trust Company (MHTC)
has Geonet. These are private worldwide networks, developed and
operated by the financial institutions to which they belong.
Geonet presently operates in more than thirty countries. It not only
interconnects the MHTC operations in these countries, but also helps
the bank's executives to keep in contact. If a Manufacturers Hanover
Trust executive travels, he has a portable computer with him. A message
system is at his service. From his hotel or office he signs on to the
electronic mail service by MHTC in New York City through Geonet,
Telenet, or any PTT connection. Geonet has gateways to Telenet and
other networks as well (Figure 9.1). Current studies at MHTC focus on
general customer access to the network and are part of a developing
strategic plan. A similar statement can be made about other leading
financial institutions in the United States.
Quite understandably, the now-developing sophisticated private
financial networks will attract most of the coming investment in high-
technology products and services. This will surely have a broad impact
on other sectors of the banking business, for instance, marketing.
A bank cannot stay one-dimensional, and marketing is the means to
change this old image. Not surprisingly, marketing is king in the banking
industry. Financial institutions concentrate on marketing to provide
efficient, imaginative solutions to their sales problems.
As competition stiffens, the keys to success are:
(1) Management skill
(2) Marketing expertise
(3) An aggressive technological push
(4) Low-cost production and distribution facilitation
(5) A valid, highly competitive infrastructure.
The able employment of computer and communications technologies is
properly linked to the development of the right infrastructure. But an
166
Networking Solutions by American Banks 167
Figure
Figure Figure
Figure
9.1
Figure
FigureFigure
Figure
Figure
Figure
Figure
Figure 9.1
advance once acquired will not be there for ever. Because of strides by
competitors its life cycle is increasingly short. This is an important
message.
INNOVATIVE NETWORK BY BANK OF AMERICA: THE CON-

CORD CENTER 1
In the late 1950s the Bank of America was at the forefront of computer-
aided accounting methods: ERMA was the tool. The application was
data-processing oriented. At that time, there was a limited necessity for
1. This and the following section are based on a contribution by John T.
Critchfield, then Vice-President Network Engineering, Bank of America, to
the 3rd International Symposium on Electronic Banking, held in West Berlin
at the International Congress Center, June 1986.
communications. The three decades which have since elapsed make a

great difference. Today, like all leading banks, Bank of America places a
great deal of emphasis on moving away from the mainframe toward
intelligent workstations. With this, PC-to-mainframe links, and the
networking concept as whole, became a basic requirement.
At the same time, with the speed of evolution in market perspectives
and in technological support, Bank of America understood that a
change in the traditional organisational structure was necessary. In 1984
a major unit was created to centralise the responsiveness to technology
growth and customers' requirements. It was tuned to a quick reaction
capability. The unit was called BASE, or Bank America Systems
Engineering.
BASE is composed of both technical and management experts in the
disciplines of computer systems and telecommunications engineering. A
unique feature of the organisation is the attention to professionals from
the engineering disciplines who now have the responsibility to deliver the
financial products developed by the systems personnel in a quick and
cost-effective manner. BASE was organised, fine-tuned, and began to
set forth into this new environment of systems development and
deployment of new products through innovative network techniques.
As a result, significant changes are underway.
Bank of America made a commitment several years ago to provide a
campus-like environment to its BASE personnel so that their develop-
ment of innovative financial products and delivery media could take
place efficiently. To build this campus, six city blocks in Concord,
California, were acquired and work started on the construction of the
campus in 1984. This project has been completed and houses some 5,000
personnel of BASE. Located 35 miles (55 km.) east of San Francisco,
where the bank's headquarters are, the Concord Technology Center
serves as a major hub for the Bank's utility network and as a contingency
back-up site for the Bank's production data centers in San Francisco
and Los Angeles and later on, the centers in the United Kingdom and
Hong Kong.
The campus uses several techniques of connectivity including fibre
optics, coaxial cable and copper pairs. The Concord Center is connected
to San Francisco via two fibre optic links, 135 MBPS each, that are
completely diversified in their routing. In this manner, they provide total
redundancy to the Center's connectivity in the Bank's global network.
A digital PBX was selected for the campus to provide distributed
modules in each building. Future changes in this system can be
accommodated through software, not through extensive wiring chan-
ges.
The building cabling system selected was the IBM Type-2 twisted
pairs, some shielded for data use which terminate on IBM patch panels
on each floor.
e Connectivity to a terminal is through the use of coaxial cable
connection.
e Connectivity between buildings is by multimode fibre optic cable
and multiplex (optic) distributed to each building and to each floor
and others for telephone use.
Every possible work location has been incorporated in this wiring
system, so that more than 4,500 personnel can have their individual
terminals as well as a telephone, which can be either digital or analog.
The entire campus enjoys the design benefits of a structured, flexible and
expandable wiring system that will support various local area network
topologies.
While the Concord Technology Center is an important part of
technology policy at Bank of America, the Strategic Information
Resource Committee (which oversees expenditures on technology) also
focused on other innovative solutions to the competitive environment
the Bank is addressing. Projects which are interlinked but distinctive
include:
e An international banking service which links around 100 countries
with common communications vehicles and databases. This service
is composed of a number of products.
e Cash-management products, designed to give the big corporation
money managers access to many of the Bank's wholesale services
through automated delivery systems. These systems interface with
the well-known money market networks.
e Automated teller machines, some on national networks which have
allowed a reduction of bank personnel and have lowered transac-
tion costs.
These services are targeted at 80 per cent of the Bank's retail
customer base and will gradually incorporate newer features such
as electronic mail and information about investments available to
customers.
e Up-scale financial products designed for the person who needs to
invest and use allowable 'tax shelters'. The services are available
through home computer services media.
e Private banking services, a marketing strategy and service which
provides financial counselling to selected retail clients with substan-
tial assets invested with the bank.
e Creation of a digital utility network, which will permit the delivery

of these products to major centres and branches of the bank. This
network will employ a new architecture.
There are innovation benefits to be accounted for. Not only does the
Concord Center serve as contingency back-up for other centres the Bank
has around the world, but also the many individual data and voice
circuits the Bank leases can be eliminated as the banking units migrate to
the new utility digital network.
Deployment of the new utility network will use the latest tech-
nological components and provide both a physical and logical network
management system. The system allows better uptime and users will
enjoy improvements in their connectivity.
The cost of this technology deployment is more than US $500 billion
over the 1986-90 period. The commitment involves a common
approach towards handling customers' (retail and wholesale) services
and requirements in common internal procedures which are automated.
The aim is to extend these procedural interfaces to the customer so that
the customer participates in the efficiency these products can provide.
To accommodate him, BAC is building six new data centres around
the world. Each will accommodate a broad range of automated services
for corporate customers, including corporate loan accounting, foreign
exchange and money trading, demand deposit accounting, electronic
money transfer, treasury management, payroll management and other
domestic or local accounting products, as they are needed. All of these
financial products are available to the customers through the
availability of computer-based products. The networks that provide
these products are the backbone of the banking business.
STRATEGY TOWARDS A DIGITAL UTILITY NETWORK
Having determined the strategy for the financial products, Bank of

America needed also to have a strategy for the delivery of these products
to their customers. This is about four years into its development; it has
been tested as a prototype in early 1986, and will be placed in a
production delivery environment by 1988.
The new digital network will be deployed in California first and then
extended to the Bank of America units throughout the world. The
strategy for this deployment has several requirements:
e For data communications, any end-user can have the ability to
access any other appropriate end-user or application through what

appears to be the users as a single data communications network
utility.
e Voice and data communications will remain as separate systems
until technology permits full integration. However, limited voice
and data integration will continue to occur at the physical-facilities
level until that time.
e This digital utility network will allow the deployment and delivery
of new products and rapid growth of existing products through the
exploitation of a common network.
An architecture was selected for this utility network that had several
components: centralised network facility (CNF), distributed network
facility (DNF), centralised applications facility (CAF), and distributed
applications facility (DAF). These provide application interface and
control.
The system architecture ensures resource sharing, logical separation
of business and network functions, standardisation and user-viewed
functional attachment. It also provides for management by a network
operator of application sessions, network sessions as well as man-
agement of the physical network links.
The objective of the digital utility network is to improve the quality,
reliability and availability of network services for the Bank's teller
terminals (10,000 plus), automated teller machines (1,200 plus), IBM
3270-type terminals (30,000 plus) and other devices within Bank of
America units. This is achieved through the use of digital transmission
facilities and related equipment.
The network management and control system will ultimately be able
to detail network cost on a usage-sensitive basis. It will give the
operators the ability to quickly diagnose and rapidly respond to service
interruptions throughout the network, from the application level to the
terminal and the telephone instrument level.
The network integrates voice and data on the major routes which
operate at T-1 speeds (1.544 MBPS) or greater through dynamic
allocation of bandwidth. Bank of America refers to this high-speed
portion of the network as the backbone. Its contingency operation is
accommodated at a significantly reduced operating cost, as opposed to
adding necessary switching and circuits to the physical existing net-
works.
Implementation of the utility transport network is accomplished
using IBM as a vendor project manager. IBM has the responsibility for
systems integration which employs an imposing array of other vendors

such as Network Equipment Technologies for the utilisation of their
integrated digital network exchange (IDNX), Pacific Bell for man-
agement of the transport deployment and Doltz Network Corporation
which provides high-function concentrator switches.
IBM and Bank of America are working together to fine-tune a
network system called network management and control, which addres-
ses both the physical and logical network under communications
management configuration (CMC). This provides for the architectural
orchestration of the selected network equipment and ties in the presently
installed Rolm CBX within the voice network of the Bank.
IDNX will be installed at the Bank of America data centres in Los
Angeles, San Francisco and Concord. Other IDNX will be placed at
strategic geographic concentration points on Pacific Bell premises. A
total of nine IDNX will be deployed in California's portion of the utility
network. Their purpose is to consolidate both voice and data, provide
compression techniques and dynamic allocation of bandwidth, thereby
minimising the number ofT-1 spans required in the backbone network.
The Doltz equipment at the branches will act as concentration points
and will permit fan-out to the data lines while preserving the images of
the automated teller machines and the teller terminals to the front-end
processors at the data centres. The T -1 backbone network will be treated
as a commodity, thereby realising lower cost for a carrier service. The
network will also include provision for dynamic alternate routing in the
support of contingency operations, should either the Los Angeles or San
Francisco data centres be impaired. The concord Data Center, normally
used for development work, would take over the production work in
such a contingency.
Large branches will also serve as concentration points to combine
voice and data on to the backbone network. Network management
services will be provided by using personal computers to gather status
information from critical network components and to communicate this
information to the communications management configuration (CMC)
system, located at the Los Angeles, San Francisco and Concord data
centres. The CMC operators can thus manage the respective portions of
the voice and data network under their control from one point, and
provide restoral services as well as dispatch repair services. This same
concept will apply to network management as it is deployed outside
California. Major data centres are operating in New York; Bromley,
UK; Toronto, Canada; and Hong Kong. The backbone network
topology provides alternative routes between all major locations with
the ability to dynamically re-route traffic in the case of failure of a circuit
or the loss of an entire data centre. The number of T-1 is minimised

through the use of a 2 to 1 voice compression technique on the backbone
links.
The key to the architecture of physical and logical network man-
agement and control is IBM's application-to-application session type
LU 6.2. This is sometimes defined as program-to-program communica-
tion. As discussed in Chapter 4, LU 6.2 provides functionality in the
ISO/OSI layers 5 and 6 and meets the service specification the Bank used
for the utility network architecture. LU 6.2 is also the basis for other
IBM product directions, including their local area network (LAN)
architecture.
Bank of America installed a local area network test facility within the
Concord Technology Center. This facility will have several LAN and
will test LAN configurations prior to deployment to the branches where
the LAN will be connected to the digital utility network.
Finally, the new architecture of financial products and of their
delivery system allows a reduction in network expenditures. The Bank of
America had been increasing its network expense upwards to 20 per cent
annually. The telephone bill or corporate communications expense
(data and voice) for 1984 exceeded 156 million US dollars. The
incremental cost of a state-wide utility network will cost more than 28
million dollars, but the return on investment more than meets the
required corporate return rate.
MEETING THE TECHNOLOGY CHALLENGE AT MANUFAC-

TURERS HANOVER TRUST COMPANY
John Critchfield's discussion on Bank of America's Systems Engineer-

ing (BASE) brought into perspective the reorganisation needed to
ensure that technology is put to work to create profits. While BASE
addresses itself to the global computers of the bank, another leading
financial institution took a different approach. It distributed its data-
processing resources to the divisions, but kept centralised, directly under
the Chief Executive Officer, the high technology responsibility.
Manufacturers Hanover Trust Company (MHTC) has been recently
restructured. The new organisational structure is reflected in Figure 9.2.
It involves five strategic business sectors:
(1) International
(2) Corporate banking;
(3) Retail banking;
MANUFACTURERS HANOVER TRUST COMPANY
D v s 0 N S
INTER- INVEST- FINANCING

NATIONAL CORPORATE RETAIL MENT <CIT>*
I II
DATA PROCESSING /MANAGEMENT INFORMATION SYSTEM
IEJ
I II I
CORPORATE: HIGH TECHNOLOGY,

INTERACTIVE SERVICES, EXPERT SYSTEMS
CORPORATE: HUMAN RESOURCE, CONTROLLERSHIP
* SOLD IN DECEMBER 1987 TO AT&T
Figure 9.2 Manufacturers Hanover Trust Company
(4) Investment banking;

(5) Asset-based financing (CIT, the ex-RCA organisation which was
sold by MHTC to AT & T in December 1987).
Each division has been allocated part of what used to be central services
in terms of computer resources. Nevertheless some vital departments
remained centralised, directly responsible to corporate headquarters.
Examples are Human Resources and Controllership, as well as the
corporate computer services, including electronic mail which is run
throughout the world as a corporate utility.
The essence of this divisionalisation is that each of the five new entities
is self-standing and has its own management. It is a profit centre which

reaches its own decisions. The MHTC Corporate Board does not
interfere in the divisional operations. It judges results at the end.
Impressive is a new corporate structure: Strategic Research and
Technology. It underlines the role of high technology in:
e launching new banking products;
e improving those already existing, making them more competitive.
It is therefore worth examining in detail.
Strategic Research and Technology is directly responsible to the
MHTC Corporate Board of Management. It divides into four main
functions, each being allocated to a department:
(I) Technical research This includes subjects such as database

machines, artificial intelligence, and the set-up of pilot applications
within one or more business sectors. Emphasis is on practical
pilots.
(2) System architecture Its goal is assuring business plans on the
implementation of computers and communications (C & C), as well
as establishing future direction.
(3) Database architecture This is primarily a planning function
aimed at locating appropriate new tools and providing corporate
policies for database management.
(4) Policies and standards Its impact is corporate-wide and covers all
technological issues- whether they relate to software or hardware.
This assures homogeneity throughout the different divisions.
Figure 9.3 reflects the outline structure and provides some more detail. It
also underlines the wisdom of instituting one more department:
(5) Technology Planning Its objectives should range from the close
follow-up of new tools, particularly programming tools and
packages, to technology transfer. It should also gather market-
place intelligence to help steadily monitor the status of compet-
ition, its effects on the banking industry in general and for this bank
in particular.
One of the services whose responsibility has been retained at the

corporate level is electronic mail. MHTC started its experience with
electronic mail in 1980. In May 1983, with 3,000 users on the system
throughout the world, it ran an audit which defined that, on average, the
-...1
-
0'1
I srR:TE~~c RESEARCH AND TECHNOLOGY I
STRATEGIC SYSTEM POLICIES
DATABASE I I TECHNOLOGY
TECHNICAL AND
ARCHITECTURE ARCHITECTURE PLANNING
RESEARCH STANDARDS
1. FOCUS ON SPECIFIC 1. COMPUTERS AND 1. DATABASE 1. CORPORATE-WIDE 1. MARKET PLACE

TECHNOLOGIES COMMUNICATIONS PLANNING INTELLIGENCE
2.ARTIFICIAL 2. ARCHITECTURAL 2.RELATIONAL 2. TRANS- 2.NEW EMERGING
INTELLIGENCE SOLUTIONS IMPLEMENTATION TECHNOLOGY TOOLS
3. COMMUNICATIONS 3. NETWORKING 3. KNOW LEDGE- 3.METRICS 3.NEEDED
ENGINES BASES METHODOLOGIES
4.PRACTICAL 4.1 NTEGRATION 4. GLOBAL DB 4.EFFICIENCY 4.TECHNOLOGY
PILOTS PROCEDURES SOLUTIONS TOOLS TRANSFER
5.FUTURE 5.DATABASE 5.VALUE ADDED
DIRECTION ADMINISTRATION SERVICES
I DEFINITION OF CRITICAL SYSTEMS ~I

Figure 9.3 Strategic research and technology
benefits amounted to 36 minutes a day per person attached to the

system. This was an 8 per cent across-the-board improvement in
productivity.
Today, the MHTC Email system has 7,500 active users directly
accessing on a worldwide basis. With about 80 per cent of these users in
the Tristate area (New York, New Jersey, Connecticut), electronic mail
has become a corporate culture. MHTC really depends on it. This is
especially true internationally where the majority of the other 20 per cent
of usage applies. The definition of electronic mail as a critical system at
MHTC comes therefore as no surprise. 'The corporation cannot run
without it,' said an executive.
Systems work on communications currently emphasises defining
requirements for migration to a newer technology, with computer
conferencing in the lead. The direction is that of maintaining a
homogeneous environment, truly compatible across the line, but with
higher sophistication software. This emphasised the need for:
(1) Architectural definition;

(2) Consistency throughout the Corporation.
It also brought into perspective the need to expand the standards toward
a broader environment. Today about 3 per cent of electronic mail users
are non-MHTC people: bank customers, consultants, vendors. Users
are given mailboxes as communications vehicles, instead of employing
the classical telephone network. Quite evidently, this compounds the
challenge of uniform standards. The reference is valid inside the banks.
The equipment outside parties are using is their own responsibility.
An MHTC study however documented that no financial transactions
should be done through electronic mail, or more precisely, nothing that
can put the bank or the customer in jeopardy, for instance, a money
order where $5,000 become $50,000. 'Everyone has become security-
conscious,' the responsible executive commented. Precisely for security
reasons, a front-end processor has now been installed, able to provide 99
per cent of the security definitions, as well as to guarantee compliance
with requirements.
System restructuring also permitted integration with timesharing (TS)
services into an interactive services complex. It includes a single entry
point to Dow Jones, instead of some twenty different entry points which
existed in the past. A similar solution is in negotiation with Telerate and
Reuters. After an agreement is reached, and the details worked out, the
electronic mail system will be fully converted into a management

information system covering all areas essential to decision, from
messaging to information gathering and remote database access.
This growing range of functionality sees to it that at MHTC electronic
mail finds good acceptance. The number of executives accessing it has
grown very steadily since introduction. The increasing range of
implementation of the combined electronic mail/TS services now
features:
e electronic bulletin board;
e access to public databases;
e financial modelling;
e graphics presentation.
The product is steadily updated, the users' requirements identified as
they change with time, and rapid solutions provided for their resolution.
As such, this case makes an excellent example of valid networking
policies.
A HIGH TECHNOLOGY ARCHITECTURE
The Strategic Research and Technology operations at MHTC were

established in January 1986. The background concept was an active
search on value-added solutions applicable in the business sectors the
bank operates. Closely associated with this (particularly in the database
administration area) was the ability to obtain cross-sector information,
both internally and externally. This relates to standards but also
dictionaries, accesses and other problems, some of a massive nature.
Resources and products must be identified in a manner valid
throughout the organisation. New processes and technologies must be
understood well and their effects on the banking business properly
studied. The select team of experts working in this division have no
mission to become experts in every field. Instead, the mission is to focus
on specific technologies which they identify as crucial, and to become
true experts in these selected technologies:
e expert systems
e relational database machines
are two precise examples. Another mission closely related to man-
agement policy is that emerging technologies must be tested in the real
world environment to provide support and direction.
Both the search and the test have as primary purpose to give MHTC
leverage against competition. Management understands that such a

policy has to be implemented through high-level people. These people
are given a critical internal function:
e technology planning;
e consulting;
e technology transfer;
e policing, in terms of applications and their conformity to stand-
ards.
They steadily visit and evaluate vendors who are heavily involved in
emerging technology; look at accomplishments of other financial
corporations; compare these with their bank's state of the art; evaluate
and propose computing and communications architectures; look for
solutions; bring back home good methodologies and approaches.
A good deal of this activity is market-place intelligence. Some
information is found through seminars and newsletters, but most is
obtained through field research. 'We have a tremendous need for all
these areas,' said an MHTC executive. 'Without steady, fresh inform-
ation on ways, means and solutions we cannot support efficient internal
consulting work. But even high grade internal technology transfer will
not be enough without follow through.'
So the search is on for generic solutions which can be used across the
business. Part and parcel of this effort is providing for research pilots. A
necessary supplement is moving the acquired technology into other
sectors, when cross-sector applicability is established. Because the
cutting edge of technology moves so fast, a steady effort is required to
move up the learning curve very quickly. 'As the bank is increasingly
high-technology intense, we have to learn really fast how to deal with the
technological organization and with change,' suggested the MHTC
executive. 'We must learn how to leverage computers and communi-
cations investments and also how to leverage people.'
As an example of high technology at the end-user level, the MHTC
executives chose expert systems. This is an area where MHTC shows a
lot of interest. They are actively pursuing it. One of the focal applications
is loan approval. It has been selected because it has:
e high probability of success
e high visibility.
Another expert systems application is cross-product selling. This is a
massive data problem. The goals with this project include the training of
loan officers. It has been selected because: 'Even the wrong answer by
the expert system is not going to hurt the bank. With classical methods,
cross-product selling is done the wrong way by all financial institutions.

So, we look for improvements.'
Still another Esystems effort at MHTC places emphasis on human
interfaces. A fourth addresses itselfto check processing. It aims to handle:
e investigations;
e reconcilements;
e differences.
Reference has also been made to a couple of Esystems currently used
as pilots, one for the retail area, another in an A TM environment.
MHTC has the right policy. The following can be stated as highlights:
(1) Develop the internal culture needed to build and use expert
systems.
(2) After you have built the system, bring it to the field on relatively
low-cost machines, so that you can afford to spread it around.
(3) Ask yourself: Does the expert system have a staying power?
(4) Evaluate the resulting construct: Can you add to it?
(5) Judge the quality of the work done: Can it help the bank to learn
the technology?
To start its expert systems experience, MHTC brought in people who
had this background. No LISP is used. They focus on Shells. The policy
is to develop on Symbolics then port on to VAX and PC for spread-out.
The only real problem encountered is getting the time of the top expert.
To induce direct user participation, top management correctly
decreed that the user should be assigned the responsibility for support-
ing expert systems. Central operations will help in their development,
but will not do subsequent implementation and maintenance. This is a
sound policy. It makes the whole expert systems effort move out closer
to the user. It makes the user responsible, while it keeps DP/MIS
responsibility for the utility, but not for the application itself, nor for
maintenance.
To reach such far-sighted decisions, senior management must be
aware of the issues. I think this is a policy which can stand a good chance
and it should be tried. It has given first-class results at MHTC.
POLICIES AT NATIONAL LIFE INSURANCE
There is a dual reason for adding the examples of National Life

Insurance and Merrill Lynch. First, policies at National Life Insurance
(ofMontpellier, Vermont) significantly substantiate what we have been

saying all along, i.e., that the automation should be implemented top-
down, starting with the chief executive officer. Second, the case of
Merrill Lynch brings together the drive to automate management
information with the need for building a new information system, and
exemplifies the specialisation necessary at the workstation level. Here
are the facts.
The Chairman of National Life Insurance was to remark: 'After we
examined the course of technology and its effects on us and our
competition, we decided to get in high gear, or we may not be around for
long.' The first decision by top management was to train itself in the
subject; it then defined the guidelines involving three paths:
(1) Automate what you do but do it the same way.

(2) Improve some operational aspects.
(3) Change the whole method by using the available technology
The choice was soul-searching. Said the Chairman:' You can do No.3 if
you master your own business, know well the technology and have
wisdom. Otherwise, forget it.'
Hence the idea of top-management training. After the infrastructure
for appreciating technology was provided, the Board itself saw the point
that the winners will be those companies using technology to solve their
related problems:
e Provide distinct and broad range of products, designed with
understanding of the buyer.
e Assure enough brain power to provide steady innovation.
e Be able to become and keep on being a low-cost producer.
This carried all the way into strategic planning. National Life studies
established the wisdom of client handling through one interface: an officer
equipped with all electronic gear enabling him to investigate financial,
personal and other information. Added the Chairman: 'Originally, the
main reason our company decided to go into PC was to assure our
people become computer literate. Today we see that there is a lot more
that can be done through Intelligent Workstations than we originally
thought.'
This led to the development of a new network concept and the
deployment of intelligent workstations at the agent level. National Life
makes sure its representatives have the technology to fight successfully
against the best of competition.
FINANCIAL NETWORKING AT MERRILL LYNCH
The origin of the financial networking and dealer workstation project at

Merrill Lynch has, in its background, management's realisation that
new departures are necessary. 'The mainframe database has never been
set up to deal with PC,' suggested a senior executive. 'Nothing is right:
access, security, lines.'
If with conventional systems it is relatively easy to hook up on a
mainframe from the head office, it is not so from the field. Some of the
problems have to do with timing; others with the ever enlarging range of
information services being requested.
As a result, in 1984 Merrill Lynch set up a project jointly with IBM to
answer this challenge. The goal is an advanced branch office system. 'The
whole future of the broker's competitiveness is based on this project,'
said the responsible executive. 'Merrill Lynch is more than a brokerage
firm. We are an information company. 1 We need solutions that will bring
us to the twenty-first century.'
The effort involved a dual system:
(1) The Brass Project orients itself to the senior executive's WS.
(2) Broker's Edge is being designed around the requirements of the
account executive WS.
Applications-wise, an estimated 1,000 workstations will be involved in

Class 2 alone (Broker's Edge), downloading daily trades. Here is where
significant improvements will be made relative to current mainframe-
based conditions.
File import/export in a distributed environment, said the responsible
project leader, has a theoretical limit in the broker business of 35
KBytes. With lines typically available around the world, this involves
about five minutes and any bit/byte stream at that level risks great
transmission errors. The solution on which IBM and Merrill Lynch
worked is an information-centre approach able to take report images
and put them in logical database, then create PC-level files to be
transmitted with all security protections built-in.
Because there are problems with current lines, satellite communica-
tions is sought as the solution. Merrill Lynch is building a Teleport in
Staten Island. For financial information error-free transmission is a
'must'. But also accuracy is vital. Among the goals of this project
therefore are:
l. Bank of America and other financial institutions say precisely the same thing.
e How to get goals for account executives;

e How to increase in a significant way account management
capability.
The project is also looking into expert systems. 'In five years' time,' a
Merrill Lynch executive suggested, 'we would not be competitive
without a machine that can interpret the information of the interactive
WS - hence, an expert system.'
Part of the project is oriented toward photographics generator, a big
item in terms of high-resolution graphics for the investment environ-
ment towards which the project addresses itself. The keyword is
advanced technology in the service of the broker and the client. 'What
separates winners from losers is full service,' commented Merrill Lynch.
As of early 1987, there has been a sequel to this study, as it was
announced that IBM and Merrill Lynch will end their ambitious venture
to computerise the financial services industry. The action followed a
reassessment of the financial feasibility of the venture called, in the
meantime, International Marketnet, or Imnet. The failure appeared to be
a setback for both companies, which had staked millions of dollars on
the highly publicised project. During 1986 Imnet discovered that few
brokerages other than Merrill Lynch were willing to pay the price for its
services, which combine analytical software and databases accessible by
satellite from central computers. 'It cost too much, and the market just
evaporated,' one official of the venture suggested. IBM and Merrill
Lynch said the decision to end the project had been made 'at the highest
levels'.
With this announcement Imnet joins a long list of home and office
information services that have failed in recent years. In late 1986 CBS
pulled out of Trintex, a videotex venture with IBM and Sears,
established at about the same time as Imnet. In early 1986 Knight-
Ridder, the newspaper publisher, and AT & T abandoned their $50
million videotex effort, intended to bring news, stock prices and
shopping information to home computers. Times-Mirror, Bank of
America and Centel also dropped their offerings in southern California
(and Chicago).
Financial networks deigned to provide services to other institutions
are not without major risks, as these cases help document. The reference
to Imnet is different to the Knight-Rider, Times-Mirror, CBS-IBM-
Sears offerings, in as much as the others focused on home banking.
Evidence now abounds on the fact that home banking is not taking off.
The customer is not buying it.
But Imnet was developed for an audience of financial professionals,

intended to do much more than provide information. With Merrill
Lynch's own 500 branch offices as the first customers, the system was
considered a serious competitor of Citibank's Quotron. Quotron,
ironically, was a Merrill Lynch subsidiary, prior to being spun off, then
purchased by Citicorp.
Part of Imnet's problem seems to have been that the only product it
installed in volume was System 100, a program for analysis of equities
that was never hooked to the Imnet network. A sophisticated portfolio-
management system, intended for Merrill Lynch offices and marketing
to other brokerages, it was being tested at the time the project was
abandoned. 'The marketplace had not developed as we anticipated,' said
Imnet's director of communications. 'As we began to install the system,
we thought we would find a much more sympathetic marketplace. But to
get wide acceptance, the pricing structure had to change dramatically,
and that shrinks the margin.'
In their decisions regarding electronic banking, financial institutions
are at the crossroads. This is an obvious statement. Less obvious is the
fact that the risk is significant whether they get in or stay out of financial
networks. If they stay out, the possibility is there that one day they
would have to pay for services for which, today, they charge a fee.
10 Artificial Intelligence and
Expert Network Systems
Reference has been often made, particularly in Chapters 7 and 9 to
artificial intelligence (AI) and expert systems implementation. The
impact they now have in banking is unquestionable. Their effects range
from an able assistance to loan officers and account managers to the
design of complex financial networks. But we will first examine the
definitions.
After years of development, expert systems are emerging from the
research laboratories and heading into commerical, industrial and
financial applications. The business use of machine intelligence has
generated considerable excitement, not only among potential users, but
also in the press. There are many reasons for this positive reaction, some
of which have to do with the capabilities presented by already applied
expert systems. But also a good deal of interest invariably centres on
their future impact on management. The oncoming changes can be of a
magnitude which is actually difficult to perceive, yet it has to be
estimated.
Expert systems are software packages that experts in specific fields
enrich with their knowledge. They do so by distilling their expertise into
a set oflaws and entering such knowhow into the system. Top financial
experts produce application programs helping lesser experts to solve
problems in specialised fields by responding to the program queries.
Expert systems give advice and justify the opinion which they offer. An
expert system is a practical solution able to handle complex problems,
tackle issues requiring a high level of human judgement and expertise,
and communicate with its user through an effective dialogue. Expert
systems ask questions, give advice, and justify it.
The building of expert systems is the business of knowledge engineer-
ing. This is the process of capturing and representing knowledge in a
computer-oriented sense. The output must be simple, effective and
comprehensive to the human user.
Compared to these practical concepts, artificial intelligence reflects
both a more theoretical background and polyvalent approaches. It is
concerned with: symbolic reasoning, natural language manipulation,
language translation, problem solving, artificial vision, robotics,
weapons systems, augmentation of human intelligence, and the eventual
creation of machine-based processes of imagination.
185
Intelligence augmented by computers will most likely be the main trend

of the 1990s, but from the mid-1980s to the early 1990s machine
intelligence will be embedded into a number of applications which
become part of our life. Implementations are materialising within a
specific organisational context. We will follow practical examples.
MODELLING HUMAN EXPERTISE
Whether we talk of client investment counselling, loan decisions, risk

analysis or network design, we focus on human expertise which is
applied to a specific, well-defined domain. Knowledge can be classified
according to the role it plays in a problem-solving process. That's the
beginning of expert systems work.
Knowledge management rests on simple foundations: completeness,
power, simplicity and integration. Just as a computer has a database, an
expert system has a knowledge bank. The knowledge bank which we
construct must be complete and consistent. The rules and methodologies
which it contains should complement but never contradict one another.
Behavioural flexibility arises from explicit representation of types of
knowledge which can be mapped into layers, as documented in Table
10.1. It is a concept we know from ISO/OSI. Each layer has a different
applicability, and as in a network systems architecture we can accurately
project a number of layers for an expert systems architecture.
e In the network structure, the lowest layer is physical (cable,
modem).
e In the expert systems architecture, the lowest layer is also physical:
the inference engine, the global database machine.
The inference engine can be sequential, as in the case of a personal
workstation, or parallel. The latter has much greater power and is used
for central and departmental resources.
Above the hardware level are seven software layers. In terms of
increasing sophistication, these are:
(1) Language
(2) Domain
(3) Inference
(4) Learning
(5) Goals
(6) Problem-Solving
(7) Strategic.
Artificial Intelligence and Expert Network Systems 187
Table 10.1
Strategic level
Area to which system addresses itself,
type of users, intent
Problem solution level
Structuring goals,
definition of tasks to reach goals
Goals level
Plans, missions, tasks
generating of hypothesis
definition of actions
Learning level
Metarules, metadata
knowledge acquisition, retrospect
prototyping tasks
Inference level
Rules, frames
induction, deduction
test of hypotheses, diagnoses
Domain level
Facts, states, values
concepts, relations
access to global database
Language level
Analysis, programming tools
organisations of knowledge sources
Hardware level
Inference engine
global database machine
(sequential or parallel)
Strategic is the highest layer. It defines the area to which the intelligence
system addresses itself, as well as the intent, the type of users and, by
consequence, the problem solution and the goals being reached. That is
why these are expressed through layers lower than the strategic.
The goals layer elaborates on how goals can be structured for problem
solution. Hence problem solution as such is higher than the goals layer.
But at the same time the goals level utilises metarules and metadata. In
other words, rules about rules and data about data. It also employs
prototyping procedures. Metarules, metadata and prototyping form a
learning layer immediately below the goals level.
The inference layer is the key to knowledge management. Knowledge
management should ensure a complete development and implementa-
tion environment designed for use in a specific function: financial,
managerial, networking, requiring expert systems support.
The most striking aspect of developments in artificial intelligence does
not lie in any breathtaking announcement but rather in a meth-
odological appraoch. For the first time there is a consensus that AI is a
technology applicable in solving real problems. The object of the layered
solution is methodology. Unlike idealised situations, real problems
require a complete, comprehensive approach. This is valid whether we
talk of isolated instances or of a broader range of applications. Real
business problems also call for powerful approaches. Trivia have no
place in inference rules.
Inference is made in relation to objects according to their roles in
problem-solving. Inference involves testing of hypothesis and diagnosis.
Data is a metaclass.
The domain level features concepts and relations, as well as facts,
states, values. It also accesses the global database through linguistic
interfaces to the hardware level.
With presently available artificial intelligence constructs, the layers of
domain and inference are closely interlinked. In expert system
implementations, we typically combine knowledge sources into an
inference structure, specifying:
e the inferences which can be made;
e the constraints of the possible inferences.
In such work, powerful solutions are a trademark of well-constructed
expert systems. In a banking environment based on human expertise, the
word expert typically indicates a person with extended knowledge in a
well-defined (hence limited) applications domain. The expert system can
do no less.
Next to completeness and power comes simplicity. Simplicity compr-
ises ease oflearning and ease of use. It is heavily affected by integration.
Integration means ease of moving between the various functions of a
product offering, making different components to appear similar to the
user. Such components typically use similar protocols, identical
subroutines and common files. This is a prerequisite for the global
database of the expert system. It is also just as important for the

knowledge bank, the repository of rules and methodologies, but also of
facts, states, values, relationships and controls focusing on a specific
problem solution.
The complete artificial intelligence system is well described by the
eight layers we have outlined. Though the domain of a specific
implementation may vary, as the following sections will document, the
methodology which has been outlined is well structured but also flexible.
As such, it permits multiple use of domain knowledge in a wide area of
problem types. This is important in understanding cognitive modelling
of systems behaving in a man-like manner. Furthermore, task definition
with the described layered structure can support knowledge acquisition
which is today one of the toughest problems with artificial intelligence.
ARTIFICIAL INTELLIGENCE IN BANKING
Given the competitive advantages which it offers, most of the major

banks are interested in AI. Expert systems and natural language
processing are the topmost references. In terms of expert systems
implementation, advisory-type constructs in legal and financial domains
are the preferred subjects. Another is computer-aided instruction (CAl).
Still another is a broad arena of decision-making support in com-
patibility with online systems.
In an industry such as banking, where product differentiation is hard-
won and expertise is actively sought after, artificial intelligence con-
structs can help to offer new and better products at lower people costs.
One of the advantages of expert systems is that they can relieve several of
the routine duties of senior personnel, freeing them to pursue the more
challenging aspects of their jobs. More significantly, by crystallising
rules of expertise AI constructs put the knowledge and judgement of
recognised experts at the fingertips of novices. In so doing, they
supplement their experience and expand their personnel capabilities.
The able use of expert systems helps to make complex services
inexpensive enough to offer. As the preceding section underlined, a key
element in an expert system is its inference engine. Inference is reasoning
from premises to conclusion and works with AI in precisely the same
way the expert's mind works. Inference is structured through math-
ematics. Probability theory and Bayesian approaches, and also the
newer possibility theory, can be used in building the inference mechan-
tsm.
The role of inference is critical in any expert system; and also in human
judgement. Managerial decisions are usually made through induction

and deduction within the manager's domain of knowledge and respon-
sibility. The expert system reacts in a similar fashion within the domain
for which it has been built. By observing and interviewing experts in a
given field, expert systems developers capture the factual knowledge and
rules these experts use to do their jobs. The resulting construct can
perform the function almost as well as the human expert. Therefore it is
not surprising that such systems can relieve professionals of many
routines, freeing them to pursue more challenging aspects of their jobs.
They also may capture expertise used only occasionally and store it for
future reference. This helps a professional to cut down on preparation
time.
Each combination of the inference engine with the other objects in the
knowledge bank becomes a unique application. Together these vital
components act as a real world model of the expertise for the specific
domain. This further underlines the importance of knowledge man-
agement.
The introductory paragraph to this section also made reference to
natural language processing. One of the stumbling blocks the wider
spread of computer implementation has encountered is precisely in the
man-machine communications chores. Able solutions are urgently
needed. The investment expert, forex dealer, loan officer have no time to
learn intricate ways of communicating with the machine. They will be
much more prone to use computer assistance if the approach is user-
friendly and forgiving the possible errors of the user: in short, if there is
an effective human window.
The human window of the expert system is used for man-machine
communication. It is user-friendly and forgiving. It also questions rather
than simply responds to queries, hence it serves to prompt the user.
Through the human window the expert system gives its advice, and
justifies it.
Natural language understanding is crucial to a user-friendly human
window implementation. The user should speak in his or her language:
English, German, French, Italian, Japanese. The system should respond
in this same language, or translate, as we will see in a subsequent section
of this chapter.
The hardware for voice understanding and answer-back is available.
What are needed are the AI constructs and the powerful processors to do
the job. These are provided through fifth generation computers, to
which reference has already been made.
Fifth generation computers (5GC) can be of great help in banking.

They support more efficient and more elegant software. They assist in
solving the current software bottlenecks, and make feasible new, more
powerful applications. The new generation of non-von-Neumann-type
computers is inference oriented. It features easy-to-use programming
languages and a large variety of software. The engines are powerful,
bringing three to four orders greater potential: from thousands oflogical
instructions per second (KLIPS) currently available, to millions of
logical instructions per second (MLIPS) and more. They are machines
able to do much of the programming they need on their own, precisely
through artificial intelligence.
For reasons of competitive edge, the banking industry is faced with
the need to build easily expert systems that can be implemented in
selected problem areas and can run efficiently. We must be innovative in
our work, otherwise the software and hardware we produce will be hard
to cost-justify.
An expert systems must be developed fast and put into action. It
should not loaf in the laboratory. Knowledge acquisition, knowledge
representation, testing as well as system research and innovation in
applications are the key words. Competitiveness is not assured through
hundreds of thousand of logical instructions per second in available
machinery for which applications are not yet available. It is guaranteed
only by means of leading edge applications.
While very sophisticated AI constructs consume lots of computer
power, the current expert systems in banking are still adolescent.
Therefore don't listen to the people who tell you: 'an expert system needs
100, 000 or more logical instructions per second. Otherwise, forget it.'
These are 'guesstimates' for military projects with computer vision and
complex robotics activity. They are not made for business applications,
though simultaneous language translation and very sophisticated
human windows will require as much power as artificial vision.
In other words, very high speed computers are necessary when
intelligent engines run other machines, as with weapons systems. When
an intelligent machines interact with a human person, a PC will do the
expert systems job well, provided the rules are right. This is only the
beginning. In the not too distant future the personal sequential inference
engine will be the new personal workstation, featuring powers of the
order of magnitude not available today. By that time our requirements
will also have changed and such an increase in power will be both
welcome and necessary.
INTELLIGENT FINANCIAL NETWORKS
We said that the personal sequential inference engines will replace

current PC-based workstations, bringing a high quotient of intelligence
under your desk. Such engines will be an ideal fit for very sophisticated
decision support systems (DSS). They will also be much more user-
friendly, featuring voice input and direct input.
Another implementation is a general knowledge acquisition facility,
allowing the human expert to enter rules using a text and graphics-based
language that automatically translates the rules into useful information.
This direct interaction makes effective use of expertise.
Research findings in Japan and in the United States point to the fact
that today an estimated 70 to 75 percent of all essential office functions
have not been automated. They cannot be automated with currently
available data-processing and word-processing (DP/WP) tools, the
same research underlines. What are needed are fifth generation com-
puters and artificial intelligence constructs: in short, a totally new
approach to the way we do our business. While the available PCs are
becoming more advanced, still larger steps must be involved. Here, 5GC
and AI have a major role to play, from the workstation to large central
systems.
As a matter of fact we are not referring to the workstation and the
central resource only. Our reference involves the whole financial network
to be supported through artificial intelligence, including such functions
as simultaneous translation and private branch exchange (PBX)
facilities.
In a multinational banking environment~ it is very important to
benefit through online translation of human voice, to be achieved
through AI constructs. In Japan, NTT and NEC, among other
organisations, work strongly on this subject. The demonstrations which
I have seen- English to French, German to English, English to Japanese
-are convincing.
While large mainframes are today used for simultaneous translation,
small-size fifth generation computers, like the PSI engine, are already
embedded in this process. The NTT project is to integrate them:
e in telephone city centres;
e in PBX installations.
They will handle simultaneous translation chores as shown in Figure
10.1. They will also serve to filter out noise. When the noise problem is
under control a centrex machine can handle the two-way load.
1. Also within several national environments: Switzerland, Belgium, Canada,
the United States.
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can be expected by 1989. This will be followed by the centrex solution,
around 1991. But forecasts come from NTT. Given the increase in voice
translation load, and in order to avoid delays, both central and private
approaches may be followed. Undoubtedly, natural language process-
ing and automatic simultaneous translation will give considerable
advantages to the financial institutions which apply them first. This is an
excellent example of competitive advantages to be gained and business
opportunities not to be missed.
Personal intelligent computers, such as PSI, can act as intelligent
agents of users and provide agile human interfaces. Personal operating
systems for them will be released from supporting main heavy functions
that have been common in conventional large-scale operating systems.
For example, load-balancing, optimum resource allocation, and so on.
Consequently, networks connecting various types of computing resour-
ces and knowledgebanks will evolve into integrated network systems.
Operating systems for integrated networks will be needed from the
viewpoint of network management. They are currently at an advanced
development stage.
Future knowledge-communication network systems will be construc-
ted from various resources, such as inference machines, global databases
and supercomputers, distributed around the network. To manage them
consistently as a total system, more sophisticated and powerful network
management will be vital. A new generation of network operating
systems will be necessary to provide the network user with reliable high-
level services. For instance:
e developing a distributed intelligent knowledge-processing system;
e network-based integration of fifth generation computers for
intelligent processing.
At the same time, the large transmission capacity of future network
media, such as optical fibres, would make possible additional transmis-
sion of network-control information in realising such systems.
Intelligent financial networks will be supported by expert software
doing the housekeeping functions, from day-to-day administration to
troubleshooting. One of the currently available routines is an interactive
rule-based expert system that gives advice about network related
problems. Known as troubleshooting consultant (NTC), this pilot
system, installed in DEC's manufacturing sites, significantly reduces
repair time. NTC relates over 250 symptoms with 200 conclusions and
integrates existing diagnostic procedures in weighing the evidence and
making recommendations.
AT & T has developed and implemented an expert system controlling

the dependability of the telephone network. Designed for cable mainten-
ance, ACE analyses the performance of cable aggregates. It was first put
in action in the Dallas- Fort Worth area.
From the intelligent workstation level to the management of the
network the impact of 5GC and AI on financial information systems is
by now evident. It will leave its imprint on a wide area, ranging from
financial advice to electronic funds transfer:
(1) The electronic bank: directly and autonomously processing bank-

ing transactions, assisted through expert systems interfaces.
(2) Telebanking: conveniently processing online all banking business
directly by the customer from his office, home, or any place of his
choice.
(3) Point of sale: not only purchasing and paying at the store
counter, but also enabling shop management to automate purchas-
ing, ordering, accounting to the level of zero inventories.
In all these activities, AI constructs will serve as intelligence amplifiers to

help us think faster and better than we are able to do. They will provide
an opportunity to enchance ourselves and our competitiveness.
ARTIFICIAL INTELLIGENCE IN NETWORK DESIGN 1
The preceding section presented concrete references on the importance

of AI constructs in the financial industries. The network concept has
been evident throughout the discussion, whether we talk of interest
rates, evaluation and need for optimisation, or of AI implementation in
foreign exchange, money markets, tax consulting, advice on legal
problems, and added skill, for instance, at teller level.
Artificial intelligence can also be successfully implemented in network
design and, by extension, in network maintenance. The first implemen-
tation with this goal in mind, known to the author, has been done by
Bolt, Beranek, Newmann (BBN Communications), the designer of the
ARPA (Advanced Research Projects Agency) network in the late 1960s
and early 1970s. The origin comes as no surprise as BBN is one of the
foremost network specialists.
1. This and the following section are based on the presentation by Charles W.
Stein, then Vice-President BBN Communications, of a paper he and Jeff
Mayerson, BBN Laboratories, prepared for the 3rd International Symposium
on Electronic Banking, held at Intemation Congress Center Berlin, June 1986.
The project started from requirements definition. BBN Communica-

tions divided the requirements which are imposed upon a network
design into five categories:
(1) Technological
(2) User-oriented
(3) Service-intense
(4) Administrative-type
(5) Cost-oriented.
Let's assume that the network being designed is packet switching. This
choice having been made, a number of other technological alternatives
must be examined prior to a network design. An X.25 network admits of
a large number of choices, particularly in the types of equipment to be
used, which must be specified. This list includes specific items for th·.!
packet switches, PAD (packet assembly/disassembly devices), modems
and multiplexers. In addition, a wide number of alternatives are
available for transmission media:
e point-to-point leased lines might be obtained;
e channels for the packet-switching network might be derived from
an underlying network based upon 1.544 or 2.048 MBPS circuits:
e a very small aperture terminal (VSAT) technology might be chosen
to obtain circuits.
While in most European countries these choices are largely deter-
mined by the public telephone authority and vary from country to
country, other countries -like the United States- have a broader range
of alternatives. It is no less true that an international network may
require different technical choices in its multinational topology.
Then come the requirements. Any network configuration must have
sufficient capacity to accommodate all of its users. The user needs must
be accurately stated. If the amount of traffic which is generated by users
is underestimated, the network will not have sufficient capacity.
Performance will be unsatisfactory. If the user requirements are
overestimated, the network will be too expensive. It will not be
competitive.
A statement of user requirements has different components. First,
each user (terminal, computer, or human) must be identified. This
information should include location, expressed in some set of geogra-
phical co-ordinates, and the protocol(s) that the device supports. Then
the traffic which flows between each pair of devices in the network at
peak hours (and peak minutes) must be expressed through metrics. This
is best stated in transactions per second, with the length and priority of
each transaction specified. A statement of traffic should include the
effects of any protocols above level 3 in ISO/OSI. These will contribute
traffic to the network but will appear to the packet-switching network as
under data.
Further, a statement of user requirements must take into account the
extent to which traffic and number of devices will grow over the lifetime
of the network. This means that the lifespan of the network must be
projected, then accounted for.
Service requirements primarily concern performance. There are many
different measures of network performance; which is most important
depends very much on the application.
e In some networks, delay is the most important performance metric.
e In other networks, throughput might be most critical.
e In all networks, reliability and availability play a significant role.
Network design must include a global, deterministic measure,
expressing the number of component outages which are required to
seriously disrupt network service. Reliability is a probability, not an
ability. A typical question pertaining to the reliability of a network is,
'How many lines must fail before the network is divided into two
segments?' Availability is a local, probabilistic concept; for example,
how likely is it that a given terminal will not be able to access its
application?
Not only may different criteria exist in network design, but they might
also be important to different applications, perhaps running at different
times during the day. For example, consider a credit authorisation
network in which credit queries and responses are sent during the day
and settlement traffic during the night. During the day, response time is
most important. Long response times can cause unacceptably long
queues at cash registers and unhappy customers. During the evening
hours, throughput is at a premium. The amount of time a particular
record takes to cross the network is not as important as the amount of
time it takes to complete the transfer of all records.
The fourth class of requirements on the network design are adminis-
trative constraints. These tend to be quite specific to particular
networks, and are worth citing.
A common type of constraint governs where equipment may and may
not be placed. In most networks, any site which houses computers is an
acceptable candidate for a switch location. In some networks, this may
not be the case. For instance, there may be a case where the network
offers pure transport services to users who are customers of the provider
of the network, but not organisationally affiliated with the latter. Hence,
if the computer locations belong to the customer, they may not be
acceptable for switching equipment.
The fifth class of requirements centres on costs. There are a number of
different types of costs which must be understood before embarking on a
network design.
First, the cost of all communications equipment must be known.
These costs include not only the purchase price of the equipment, but
also the costs associated with installing and maintaining it.
In addition, the tariffs used for leased circuits must be determined.
Sometimes these tariffs will be rates published by telecommunications
companies. If the lines are obtained from, say, an underlying corporate
T1 network, then the line prices may be derived from an internal tariff.
With all these factors taken into account, typically network design
consists of trading off the recurring costs of lines with the fixed costs
associated with switching equipment. Supported facilities must be
accounted for and the resulting functionality properly determined. Since
costs and efficiency are determining factors, an important input to the
design process is a decision on how to compare one-time costs with
recurring costs. This comparison is critical in subsequently determining
the ultimate network topology and the services which will be supported.
The number of factors involved in a network design makes advisable
computer usage. A first level can be reached through computer-aided
design (CAD), but CAD also evolves as experience accumulates; in fact
the most sophisticated CAD systems today incorporate artificial
intelligence constructs.
AN EXPERT SYSTEM AS ASSISTANT TO THE NETWORK

DESIGNER
With the aim of addressing in an able manner the managerial, financial

and technical problems described in the preceding section, BBN
Communications developed computer systems using artificial
intelligence technology. These systems are programmed in LISP on AI
workstations. They are the product of a very close collaboration
between the Network Analysis Department of BBN Communications
and the Intelligent Systems group of BBN Laboratories.
The design system has three major components:
(1) Specifier
(2) Configurer
(3) DESIGNet.
Specifier is intended to aid the process of requirements definition. It

allows the user to express what is required of the network in words the
user himself understands, and also provides a natural interface for the
specification of protocols, devices and tariffs. Specifier provides input to
the network topological design system. Its action is intended to facilitate
the specification of user traffic in a network. Designers at BBN have
found that the system, despite its adolescent state, has significantly
increased productivity, since most of the time spent in network design is
spent specifying requirements.
Conjigurer is an expert system which takes as input a description of a
network topology. The topology details, for each network component,
the number of devices connected to the component and the types of
interfaces required by each device. Configurer has a knowledgebank
consisting of the configuration rules of packet switches and PAD. It
generates, as output, a detailed packet switch or PAD configuration,
specifying board, racks, cabling and power. The same modules also
provide a list of parts and the prices for each part. A production
Configurer has been developed and is in use by the BBN Sales
Department to facilitate the generation of proposals.
The third system, DESIGNet, is intended to help designers solve the
topological design problems. It is the most elaborate of the three, being
used as a production system for all network design work at BBN
Communications. DESIGNet is also employed as a research system to
deepen understanding of the design problem. Hence its contribution is
much broader than design proper. It is also a working example of the
benefits to be derived from the implementation of artificial intelligence
in networking.
DESIGNet is intended to serve as a tool for the expert network
designer, addressing the problems which have been described. There is
expertise at BBN on how to do network design but, as in all engineering
projects in all firms:
e Some of this expertise is in the form of rules-of-thumb.
e Other expertise is in the form of heuristics which have been shown,
over the course of many years and many network designs, to
generate reasonable topologies.
Therefore it was thought that artificial intelligence could best capture
the collective knowledge of network designers.
Once this is done, a second impovtant design goal can be reached:

making the system sufficiently modular so that new tariffs, network
devices, protocols and design techniques can be easily added to the
system. The need for the addition of tariffs, devices, and protocols has
been addressed through AI.
A third important design goal is experimental solution to a complexity
of network design problems. The intelligent design system must organise
the information about the network so that it is accessible to the network
designer when needed. At the same time, unnecessary information
should be hidden, so as not to confuse the network designer.
In this implementation, most interaction between the user and the
system is menu-driven. The system provides two displays:
(I) A black-and-white display featuring a number of different panes. A

command pane contains a menu of algorithms and mathematical
models which the user can invoke. A variety of tabular reports, for
example on network. delays and line utilisations, can be summoned
by the user and are displayed in the report pane. A status pane
reflects summary information on the equipment· in the network
design.
(2) A colour display which serves different purposes. Network maps
are shown on the colour display. In addition, the colour display
contains a number of graphs which track the progress of the
network design. For example, one graph plots the cost of the
network as the design evolves. Two other graphs display values of
network performance measures for each candidate topology. By
monitoring these displays, the network designer can ascertain that
he is really making progress towards finding a better solution.
Much of the effort in the development ofDESIGNet has gone into the
presentation of information to the designer, and many innovative
techniques have been developed. Indeed, a major problem in designing
large networks is caused by the complexity of the design. It is often very
difficult to see the design because of the density of lines and nodes.
DESIGNet allows the creation of a very large number of maps.
e New maps can be made in which the network is untangled by
moving objects around on the screen.
e Other maps are invoked magnifying regions of the network.
These maps are not purely passive displays. By employing the correct
commands, the designer can edit any of them and thereby modify the
design. Maps can also be buried, so that they are no longer in view and
can be made visible when needed.
Network objects are represented by simple icons. When a network
object is pointed to, its name appears on the colour display. Thus the
names of objects do not obscure the designer's view of the network. If
more information is needed about the network object than its name, this
too can be obtained by pointing at the object and invoking the
appropriate menu item, for example, the names of all objects which are
homed to a packet switch.
The system employs a feature called 'presentation'. An object can be
asked to present itself, in which case a detailed English language
description of the network object is displayed.
In general, a network object can be manipulated - moved, deleted,
described- by pointing to it on the map or by pointing to its name in any
report. Suppose the designer is presented with information about a
packet switch by pointing to its icon. This information may include the
names of attached PAD. Information about a given PAD can then be
obtained by pointing to its name in the list of the devices attached to the
packet switch. This new information will include the identities of the
terminals that are attached to the PAD. By pointing to the name of a
terminal in this list, information can be obtained about that terminal.
Through the command pane, the designer is able to invoke many
heuristics to solve each phase of the topological design problem. For
instance, a number of clustering heuristics are available for PAD (packet
assembly/disassembly) placement.
The commands DESIGNet makes available for backbone design are
those heuristics which have been demonstrated to be useful to network
engineers. Examples are commands to:
e Create minimum-cost singly and doubly connected networks.
e Link pairs of sites which send large amounts of traffic to each other;
e Connect switches which are very close to each other.
Since, ultimately, the best heuristics are inadequate and must be
supplemented by the judgement of the designer, DESIGNet allows
manual editing of the network topology in all phases. Components are
easily added and deleted by the designer and this is a demonstration of
the flexibility afforded by expert systems, and of an effective man-
machine communication.
11 Using Computers for
Online Auditing
The existence of networking facilities and the online access to databases
offers bank management control abilities over and above the classical
operational aspects. One of the most important is internal audit. Not
only do computers and communications help make the internal auditing
function interactive, but they also enlarge the applications horizon.
Internal auditing can be greatly assisted through the use of artificial
intelligence constructs in a manner quite similar to that described in
Chapter 10.
The assistance computers and expert systems can offer to the internal
auditor should be most welcome because, at the same time, with online
systems the risk has increased. Electronic banking permits, indeed
promotes, direct access to the bank's text and data available through
thousands of terminals and people. Hence, online information systems
increase the possibilities offraud- unless we take the proper measures to
avoid this eventuality. Widely publicised irregularities involving the
manipulation of computer data have induced major information
systems users to implement computer audit techniques specifically
related to databases. Banks have led other industries in recruiting
trained computer auditors and intensified testing to ensure that there are
no loopholes in their existing control procedures.
A computer masterfile audit is necessary, as input and output controls
in themselves cannot guarantee complete protection against errors or
against deliberate data manipulation. Therefore direct verification of
the information on the computer's data files is essential to make sure no
material errors have occurred.
Banks are particularly vulnerable to computer fraud because their
inventory is money. Unlike the inventories of industrial companies,
'money inventories' are homogeneous and immediately negotiable. A
primary objective of the top-management assessment should, therefore,
be the evaluation of the current audit and control practice and the range
of data-processing skills within the internal audit staff. This is in contrast
to past practices where inadequate attention has been given to the
importance of internal controls in developing computer-based informa-
tion systems and in establishing computer operations.
With a growing dependence on internal auditors to evaluate and
202
Using Computers for Online Auditing 203
verify vital data-processing control functions, the quality and quantity

of staff responsible for these activities must be an important concern.
Evidently the interest expressed in internal audit by leading financial
institutions is conditioned by the fact that the calculations performed by
banking computer systems are complex and often poorly documented. It
is therefore difficult to detect unauthorised changes in the programs at
acceptable cost during the course of normal audits.
THE FUNCTION OF INTERNAL AUDITING
Internal auditing is that management function within an organisation

which independently evaluates the adequacy, effectiveness and prac-
ticality of the systems of control and the quality of ongoing operations.
The systems of control comprise the plan of organisation; all co-ordinate
methods to this plan; and the measures adopted within a bank to:
(I) Provide reasonable assurance that assets are safeguarded, informa-

tion (financial and other) is reliable, and errors or irregularities will
be discovered and promptly corrected.
(2) Promote operational control and therefore encourage adherence to
managerial policies, laws and bylaws, regulations of supervisory
authorities, and sound fiduciary principles.
The internal auditor should be accountable directly to the president

or, better still, to the board of directors. Such accountability precludes
the auditor from the organisational relationships which might conflict
with the need for independence. The standards of internal auditing
derive much of their power from the organisation's responsibility to
provide for the right definition and dependence of such an important
activity.
To start with, as a matter of principle, all DP/DB/DC (data
processingjdatabasingjdata communication) functions must be perfor-
med with auditability and accountability. The DP auditor must be in a
position to tell management what happened and who did it. He must be
able to track the usage of particular information resources and report all
activity against these resources; and audit a specific user, by running an
audit trail and logging all activity of that user without disturbing any
other aspect of the security system.
For protection against system entry, the information system should
provide the capability to determine who can use the computer resources
and from what mode of entry; determine and enforce the source of entry;
and ensure different levels of data protection. Examples are access
control for whoever has the authority to access specific data; and
function control for what the requestor may do with the data once the
access is granted.
While the last two paragraphs have been stressing the mechanics of
computer system operations, and many financial institutions can state
that they fully observe them, other issues relate to background factors
and organisational dependencies. The latter constitute the foundations
of accountability, as we will see to a certain degree.
Experience from successful practices indicates that the following
factors relate to independence of the auditing function and are therefore
important to a successful and effective internal audit: first, a written
policy statement specifying the internal audit mandate that includes the
objectives and prerogatives of the internal audit functions- such a policy
need not be either lengthy or detailed; second, the authority to plan and
pursue audit work within the scope of the written mandate; third,
supporting issues are necessary to complement the mandate. They range
from access to and support from top management for internal audit
plans and programmes to a collaboration with consultants from outside
the organisation specialising in the different issues modern internal
auditing should confront. Unquestionably a vital element is access to all
phases of the bank's operations, including data processsing, databasing
and data communications.
The merits of the classical audit function are magnified through
computers and communications. Through online services the auditor
can properly identify critical areas; establish weak points in systems,
procedures and practices; reflect on vulnerability and countermeasures.
He can evaluate the needed control and then, through the usual in situ
inspection, see the control action through and assure conformity (Figure
11.1). Testing and maintenance can be done partly online and partly
through the more classical approaches.
It is evident from the responsibilities placed upon the internal auditor
that his function can't be successful unless middle and junior man-
agement know that senior management supports him. Therefore top
management must examine and establish the place, scope, and extent of
the internal auditing function in a way that leaves no ambiguity to the
subordinates. Internal audit should have a charter which will describe its
role, so that management, too, will have something against which to
measure results. What should such a charter say?
We said that it is very important to have a line of communication to
IDENTIFY CRITICAL
FUNCTIONAL AREAS
ESTABLISH THE
WEAK POINTS
FEASIBLE TO
EXECUTE ONLINE
REFLECT ON VULNERABILITY
AND COUNTERMEASURES
EVALUATE THE
NEEDED CONTROL
IMPLEMENT THE
CONTROL ACTION
THROUGH IN-PLACE
INSPECTION
ASSURE CONFORMITY
BOTH ONLINE
TEST AND MAINTAIN
AND IN-PLACE
Figure 11.1
top management. It should be there when it is needed and not be just a

leverage that is applied imprudently. We also stated that independence
and freedom to enter all areas of bank operations is absolutely required.
There must be training opportunities for the audit staff, and that staff
should be selected on merit and potential. Also the auditor wants
recognition as a professional: he does not want to be thought of as a
necessary evil. Much of the auditor's needs go hand-in-hand with his
capabilities. What is required should not be given without its being
earned, and a capable internal auditor will earn management's respect.
The profile of the internal auditor should reflect the fact that his function
has multidisciplined needs rather than being just a financially oriented

task. Accounting is not the only requirement.
For financial reporting the bank is viewed as a single entity, in terms of
which the financial data are marshalled to show the position of or the
effects of operations on the firm as a whole. For management purposes,
however, the notion that the bank is a single entity is not very useful,
except in institutions of the smallest size and the narrowest scope of
operations.
The decisions of management are not all- not even predominantly-
of the type that can be related to over all data. The auditing
responsibilities must reflect this fact. Extending credit to clients
(individuals and firms), or carrying on collection activities, requires
value judgements. For instance, setting a price for a given product
(service) cannot be done in terms of income statement aggregates, partly
because of the differences in the individual lines of banking service, but
even more because costs are differently associated with the production
of the service than is to be seen in the income statement presentation. If
the auditor is expected to see how efficiently the pricing job has been
done, he must know the mechanism by which the banking services are
casted. Otherwise he cannot audit them.
Some costs are variable with output, and some are related to factors
other than output. The proper appraisal of the cost and of the pricing
effects on market decisions involves much more than mere aggregates of
summary data. Hence the internal auditor must receive a good training
in cost control, and in the usage of the costing system every self-
respecting financial institution should be establishing.
EXPERT SYSTEMS IN AUDITING OPERATIONS
Artificial intelligence constructs can be successfully employed to

examine the financial records of the bank, review the internal control
procedures, and assist the auditor in formulating an opinion on the
adequacy of controls, as well as in flushing out deviations and possible
fraud cases.
To help in minimising the likelihood of irregular practices, expert
systems should be designed to cover all aspects of the corporate system
where auditing is exercised; for instance, at a microlevel, starting from
the initiation to the final recording of its effects. Correspondingly, at
the macrolevel this would mean control of all entries into the general
ledger and corresponding balances. Given complexity and inter-
relationships of the different components involved, it is prohibitive in

cost and time for an auditor to do such work manually or even through
classical computer support. But expert systems offer a new dimension in
control procedures, relieving routine work and permitting the auditor to
work on more imaginative, analytical and organisational matter, for
which he must be trained.
The internal auditor should be trained in organisational perspectives.
It is a common observation that, in all organisation units, authority
should be commensurate with responsibility. The problem is, however,
to establish in some meaningful way just how much authority has been
put in the hands of a given executive, and in what fashion the
commensurate responsibility shall be established. Auditing procedures
are one of the means to reach the end of the organisational control and
establish a reasonable balance.
Another vital subject is auditing DP/DB/DC: until recently, man-
a~ement has not fully appreciated the importance of the internal
auditor's role in data processing; and, indeed, the audit of data
processing is a relatively new activity for most internal auditors. Like
organisation and costing, it requires new and specialised knowledge,
computer programs, and direct access to the database.
Since the needed skills and capabilities are still in a formative stage,
the internal audit manager who wants to upgrade his staff's data-
processing capability should acquire a good range of experience. He
should also be given three specific tasks to accomplish:
(1) Online auditing of the bank's books and transactions In a way, this
is greatly facilitated by the fact that books and transactions are anyway
computer-handled. But this, while necessary, is not enough. The internal
auditor also needs specific authorisation, a complete methodology, and
the corresponding computer programs.
The advice I give to the banks I am working with is that the internal
auditor must check the procedures set to implement the powers of an
officer in the jurisdiction he supposedly controls, by controlling his
approval of transactions. Such considerations go beyond the classical,
but by now obsolete, view that the auditor must only control to make
sure that valuable property of the bank is not misused, lost or stolen,
though it is only natural that means of control should be established:
e to minimise such risks;
e to inspect records as a deterrent to those who might otherwise take
advantage of the situation;
e to identify the person who should be held accountable, and to

report accordingly.
When discrepancies are found through the online control of central
departments and remote branch offices - or there are database
indications that they may exist- the auditor should be visiting them to
perform more classical duties. The existing procedures and the new ones
can nicely blend and support one another.
(2) Audit of the programs to ascertain that there is no computer fraud in

the bank's programming library This is a never-ending activity.
However, two viewpoints exist about the desirability of internal audit
participation in the systems development process. Some internal
auditors think they should review systems only after a development
process is completed. Others, who hold a viewpoint that seems to be
gaining in importance, believe that early participation is crucial to
ensuring that controls are given proper consideration.
It is, however, sure that a better understanding is needed between
internal auditors, top management and data-processing management
regarding the scope and content ofDP/DB/DC audit activities. Vital in
this consideration is to clearly define and understand internal audit goals
and objectives. Software involvement is both helpful and valuable. The
most frequently identified benefits are:
e improved applications system controls;
e reduced fraud/loss exposure;
e increased user confidence in the content of the programs.
Among the programming tools which should be placed at the auditor's
disposal to perform this function are: generalised audit software; tracing
and mapping routines; test data method; tagged transactions, flagging
files and transactions in 'live' operations for later review; snapshots
(picture-taking of selected transactions through their flow); program
source code comparison; program object code comparison; and
automatic tracing and mapping routines permitting analysis of source
language and logic to determine if any program has been altered for
unauthorised purposes.
(3) Audit of the computers, communications, and databasing faculties,

including both the central and the distributed resources While item (2)
was oriented to the development, utilisation and maintenance of the
logical (software) resources, here emphasis is placed on the physical

hardware aspects of information system usage. System performance
monitoring is an example of the needed tool. Both modelling through
simulation and performance measurements (via tracing routines) can
give the internal auditor a lot of information on how the information
system is being used. With word processing, and intelligent copiers going
online, this should not only include data processing but, as well, all
networking devices office automation makes available to the banker.
A most critical area of activity relating to the last reference is the audit
of the recovery and restart capability. Systems fail and catastrophies do
happen. From major catastrophies (for instance, the accidental or
intentional burning down of the computer centre) to minor ones, the
bank must be ready for any eventuality; and a good way to control
preparedness is through drills.
ESTABLISHING STANDARDS FOR AUDITING PURPOSES
The references made in the foregoing section document that the internal
auditing function concerning DP/DB/DC should be kept in the hands of
persons separate from those who perform the various data-processing
and datacommunications activities. The system of internal auditing
must serve as an independent reporting agency, checking upon all the
DP/DB/DC work performed at the bank in such a way as to bring to the
attention of operating executives the kinds of action which should
demand their attention.
Continuous review and reporting of conditions by the internal auditor
is an effective means of making sure that the data-processing and office-
automation executives do not overlook their responsibilities in one
direction because of their preoccupation with some other aspects of their
work. The auditing system should thus serve as an overall check upon
the entire organisation, not in the sense of giving orders or attending to
details of supervision, but in bringing various parts of the picture of the
bank's DP progress and achievement to the attention of proper officers,
so that the persons most interested in correcting undesirable conditions
may take steps to improve results.
It follows that the auditing reports must be comprehensive and
action-oriented. Well-defined standards are necessary to establish the
professional identify of the mission, and it is important to clarify and put
in writing the underlying principles that control and guide the auditing
professionals in the performance of their duties. As a matter of principle,

standards must be universally applicable, descriptive of what is expec-
ted, broad and adaptive to the future. Such standards can be divided into
four categories: organisational, personal, performance-oriented, and
reporting.
Organisational Standards
(1) The bank shall have a DP/DB/DC audit function responsible for
evaluating the adequacy, effectiveness and practicality of its
systems: computers, communications and office automation.
(2) This internal auditing function should be given the responsibility of
control and of quality measurement of ongoing operations.
(3) Management shall maintain an environment within which the
audit function has freedom to act and reach, online or otherwise, all
corners of the DP/DB/DC network.
(4) Management shall allocate sufficient resources to the subject audit
function to enable'it to conform to the principles and standards of
internal auditing.
(5) The bank's systems of control shall include measurement of audit
effectiveness and efficiency.
Personal Standards
(1) Persons accountable for evaluating computer systems - from

software and hardware to quality of operations - shall have
adequate technical training and proficiency to act as the internal
auditing profession requires.
(2) Such auditors shall maintain a sufficiently independent state of
mind to demonstrate clearly objectivity in matters affecting DP/
DB/DC audit conclusions.
(3) They shall use information acquired in the course of performing the
audit function only for audit purposes, reporting the results to
management.
(4) They shall only engage in activities compatible with the interests of
the bank.
(5) They shall adhere to such conduct as enhances the stature of the
internal audit profession, even if audit in the DP/BD/DC field is
new and not fully standardised.
(6) They shall exercise due professional care in the performance of all
duties and responsibilities.
Performance Standards
(1) The internal auditor for data processing, databasing, data com-
munications and office automation, shall have a formal audit plan
which will cover all significant organisational activities over an
appropriate cycle of time.
(2) Audit coverages shall include evaluation of controls within new
systems and significant modifications to existing systems before
such systems become operational.
(3) Audit control should emphasise software from program develop-
ment to operation and maintenance - a particular requirement
being that of preventing computer fraud.
(4) Audit procedures shall provide sufficient competent, well-
documented evidence to support conclusions as to the adequacy,
effectiveness, and practicality of the systems of control and the
quality of operations.
(5) The organisation of the audit function and related administrative
practice shall provide for proper supervision of persons performing
the audit and for proper review of work performed.
Reporting Standards
(I) The internal auditor on DP/DB/DC procedures and operations

shall prepare a formal report as to results of each audit performed.
(2) Each audit report shall contain an opinion as to the adequacy,
effectiveness and practicality of the system of control, or an
explanation of why an opinion cannot be expressed.
(3) When such opinion reflects adversely on the system of control, the
report shall contain a statement as to the condition that might
result, and a proposal for corrective action.
(4) The auditor shall communicate audit findings in a timely manner to
those responsible for management control.
(5) The internal auditor shall request management's formal response
to audit findings and shall institute appropriate follow-up action.
(6) At least once each year, the auditor shall make a summary report of
audit activities to the board of directors.
(7) Reports to the board and to the president of the bank shall include
an opinion as to the overall condition of the organisation's DP/
DB/DC operations and the new measures deemed necessary.
All discrepencies should be noted in a factual and documented

manner, together with the action taken to correct such deviations. A

specific example is loss from improper controls, errors and omissions. In
many banks- American, European and Japanese- the highest ranking
concern is with potential loss resulting from inadequate system design.
IMPROVING CONTROLS ON COMPUTER APPLICATIONS
Rules and standards are needed governing the origination, transmission

and balancing of transactions. Their existence can significantly reduce
errors and omissions relating to source transactions. Improved com-
puter-application system controls can ensure the detection of malfunc-
tions and prevent the subsequent processing of erroneous or altered
data.
Research done to ascertain management's major preoccupation in
this field has come up with the following indication of leading sore
points: potential loss from errors and omissions; improper controls;
inadequate system design; fraud and defalcation; and potential failure to
comply with standards and procedures.
The next major issue concerned computer abuse and fraud. Among
the key subjects of concern were: source data entry; data conversion
procedures (transcription); operations personnel; analysts and
programmers (development); maintenance programmers; processing
procedures. Security relating to physical access rated high, and so did
protection relative to logical issues. Unauthorised data access whether
by the bank's own personnel or that of the clientele has been one of the
most persistent preoccupations.
Time and again research reveals that, for technical reasons, bank
management too often feels itself at the mercy of technicians who have
absolute control over asset and liability records. Management correctly
feels that assurance can be provided by properly inspecting these
records. For instance, the following file-alteration techniques might be
encountered during a computer master file audit:
e transfer of funds from dormant to active accounts;

e nonexistent accounts on file;
e fraudulent withdrawals/deposits;
e misstatement of loan interest or payment terms;
e falsification of collateral;
e illegal address alterations;
e incorrect payment/credit histories;
e erroneous savings-interest calculation method;

e suppression of service charges;
e insertion of illegal general ledger account adjustments;
e modification/deletion from audit trails and trial balances.
It is therefore necessary to institute an internal computer audit

function able to:
(1) Review the contents of computer records, determining what this

information represents and how it compares to the auditor's
understanding of its intended meaning;
(2) Extract data for a careful analysis of their overall contents;
(3) Select for testing, and evaluate the test results;
(4) Test whether the data being reviewed are accurate from a
computational aspect;
(5) Compare information to determine if similar data have been
handled in the same manner, and discover differences between two
groups of records as a method of pinpointing areas for analysis.
Such tasks greatly resemble the functions classically performed by

auditors through manual and accounting-machine methods. But
because our basic files are now stored in computer memory, if auditors
are to perform effective reviews of automated applications they must
utilise computers and make them serve their needs.
This gives the auditors a good method of accessing records and
performing computations to generate evidence that important
procedures and controls have been consistently applied and are in effect.
The result is improved audit efficiency:
e computer printouts on exception items
e trial balances
e data summaries
can be generated, and the scope of the audit tests can be expanded, as the
need arises. If there is a problem with the foreign trade department, for
example, tests can be performed which focus on that problem, and audit
tests can be made more complex if necessary.
Using computers gives auditors and senior management increased
confidence in the test results. Correlations can be established by
computer between different types of accounts, and software can be used
to magnify the reach of the auditor's investigating capability. For
instance, when fraud is intended, alteration may take place in conjunc-
tion with kickback schemes or in order to provide favourable service

terms to the manipulator. Any subject which can lead to the identifi-
cation of kickbacks (for instance, fraudulent supplier payments) can be
flashed out by computer, by programming the proper controls.
DETECTING FRAUDULENT PRACTICES
Computer-based fraudulent practices are often difficult to detect by

using standard control procedures, as with manual methods several
techniques may be used to invalidate the normal control procedures. It is
much more difficult, however, to conceal manipulation when a properly
controlled computer audit program is in effect.
Discrepancies in balances can, for instance, be detected by confirming
the information with an external objective source (the account holder).
Similarly, indirect manipulation can be detected by researching the
proper calculation method with individuals external to the data-process-
ing department, and comparing recalculated results with actual data.
The computer audit aims to determine the existence of material
inaccuracies in computer database contents by issuing balance confirm-
ations or recalculating internally derived totals. Detection will not
occur, however, if basic steps in controlling the audit are omitted. Here
are the safeguards:
(I) Acquisition of a package for computer audit.

(2) External control of audit software.
(3) Assurance that the software supports the intended auditing tasks
and helps pinpoint erroneous data (or practices) in the investigated
area(s).
(4) The requirement that the computer auditor keeps a sealed version
of the audit program between uses.
(5) Surprise. True surprise is essential. Computer time must not be
reserved in advance of conducting an audit.
(6) Absolute secrecy concerning the account selection method and
intervals to be used.
(7) Use of the established normal audit procedures to the fullest
possible extent, in co-ordination with the computer audit. For
instance, almost all bank systems are structured to provide balance
controls for general ledger accounts prior to the entry of data to the
data-processing organisation. Consequently, matching of account
totals from the general ledger system to the totals found on the
computer master file enables the computer auditor to ensure that

no single balance alteration has occurred during or just prior to the
computer run.
(8) Independent control of results. Any output confirmation data or
recalculation reports must be controlled by the auditor prior to,
during, and after the printing operation. Control prior to printing
is an area which should not be neglected by computer auditors.
It will be appreciated that the first rule is the proper choice of an audit
package. Audit packages are generalised computer programs designed
to assist auditors in independently selecting information for evaluation.
If properly selected, they can change the nature of auditing. Audit
programs enable auditors to extend the scope of their reviews beyond
confirmations without reliance on data-processing personnel. They
facilitate audit review of computerised data and provide management
with more meaningful and effective audit performance.
The auditors decide what information is to be extracted and what
reports are to be printed. But the package should be efficient as to audit
preparation time; and the documentation supplied should measure up to
the bank's standards. With the appropriate programs available, the
computer can be utilised to perform the following functions:
e Extraction: i.e., the selection of records which meet certain
predetermined criteria. An effective extraction routine can select
records on the basis of whether or not data fall within a range of
values.
e Sampling of records based on certain criteria.
e Review of personnel calculations on clients' and bank accounts. The
auditor should use the computer to review the calculations done
during normal computer-processing activities.
e Comparisons: taking item and amount totals of all records meeting
certain criteria, such as determining the number and monetary
amounts of all records falling within a certain financial range.
e Comparison of similar files. If there are any differences, they would
be printed out. This would be a very efficient use of the computer.
e Comparison of dates in records to a given date. This allows
reviewing instalment-loan application and selecting the loans
which are overdue.
e Confirmations: ability to review computer files, select accounts and
print out the accounts selected, as has been done with traditional
audit.
Given the proper software and his own expertise on how to conduct
an investigation and conclude an audit, the computer auditor will need
to perform the following three work phases:
The load phase: inserting his privately kept audit programs for
execution.
The balance comparison. The audit program is used to develop control

balance totals and record totals for all of the accounts on the master file.
The output of this phase is a control report, preferably to be presented
on video (with printing as an option) which should be matched against
account totals extracted from the general ledger system or from another
independent source. This step ensures that no modification of the master
file has occurred which will remain undetected when confirmation or
balance recalculation reports are generated.
The verification. The audit program is used to generate balance

confirmations and/or recalculation statistics for internally developed
balance fields.
In the broadest sense of the word, computer audit and control stresses
the interrelationships which exist between computer-run accounts and
the manual (classical) audit functions. The auditability of computer-
based information systems refers to the features and characteristics
needed to verify the adequacy of controls as well as to ensure the
accuracy and completeness of data-processing results.
As cannot be too often underlined, such a procedure properly reflects
the fact that within every financial institution managers at all levels have
become dependent on data processing for the information they need to
plan, evaluate and control the activities of their organisations. Further-
more, state and local regulations, along with their associated reporting
requirements, have caused an enormous increase in the amount and
kinds of information that banks must collect, process and retain. Also,
changes in data-processing technology have occurred concurrently with
the expansion of management information needs. This sees to it that the
potential for loss associated with the use of data processing is increasing
as procedures once performed manually are automated.
This development has exposed information systems to the possibility
of loss from several sources:
e errors or omissions in inputs;

e improper controls within the system;
e inadequate system design;

e fraud and defalcation and failure to comply with standards or
procedures.
At the same time, internal auditors are faced with the task of
investigating an environment in which most of them have only limited
experience, knowledge and tools.
As part of its overall responsibilities, the top management of any
organisation must be concerned with the internal controls and prov-
isions for auditing computer systems. Since the design of a computer-
based information system is quite complicated, management too often
has tended to leave its development to the experts, without clarifying the
responsibilities to ensure that proper controls and audit capabilities are
built in. Management interest and direction are the keys to overcoming
the inertia that has prevented the development and acceptance of
effective computer audit programs. The direction of top management is
needed to ensure that an appropriate internal audit mandate is
established for all phases of company resources involving such precious
items as data and money.
ENSURING THAT ONLY ETHICS PAYS
Enriched with artificial intelligence constructs and protected through

proper security, online systems and interactive databases are instrumen-
tal in assuring that only ethical practices can be beneficial to those who
undertake them. This is the sense of an automation effort focusing on
management control.
The assistance computers and communications can provide in
policing our fast-increasing volume of transactions and message services
can be best appreciated if we consider that quite often illegal financial
manipulations are so pervasive that nothing can be done about them
through manual methods. Evidence is provided through the example of
insider trading.
Since 1981, in the United States, the Securities and Exchange
Commission (SEC) has brought 125 insider-trading cases, as compared
with 77 during the previous 47 years. This is due principally to two
reasons:
(I) The increase in tender offers;

(2) The improved surveillance and enforcement system.
SEC's ability to expose and prosecute securities frauds has been greatly
enhanced by electronic market-surveillance systems and transaction-
audit trails that permit the quick identification of the sources of
suspicious trading activities.
Electronic surveillance is that much more important as a new
generation of crooks knows how to manipulate computers to their own
advantage. Indeed, a disturbing subject is the recent rash of insider-
trading cases against young men in their twenties and early thirties who
are graduates of leading business and law schools: that is, the cream of
the crop. Ten graduates of Harvard, Stanford, Columbia, Wharton and
other leading business and law schools have been convicted felons. Most
serve prison terms. They may be the tip of the iceberg, symptomatic of
more serious problems in business.
Not only has this problem become pervasive, but also the profile of
the crook has changed. The recent crop of convicted felons included men
who were successful, earning six-figure incomes, with promising careers
at distinguished securities and law firms. Cold figures tend to indicate
that being unethical is a kind of sport. While their salaries were hundreds
of thousands of dollars, their insider-trading profits have typically
ranged from $20,000 to $50,000. Yet they misappropriated material,
non-public information from those who trusted them, or knowingly
traded on such information.
Have the temptations become too great? Is it the challenge or the
excitement of seeing if they could get away with it? If they could beat the
system? Were they driven by rivalries to win a 'game' in which the score
has a money sign in front of it? Or has there been a radical change in
moral attitudes? The answer probably lies in a combination of factors.
The question now is: 'What can be done about it?'
Online auditing will not replace ethics, but it can help police them.
That's the contribution to be made by AI and computers.
e The system must be built around the concept that only ethics pays.
e The risk of uncovering dishonest behaviour should be so high that
the potential felon would have to count the odds of destroying his
career and his life.
Though they survived twenty centuries of practice and malpractice, the
rules of ethical behaviour written in the Bible do need some tech-
nological support. It is not just a matter of making surveillance more
steady to discourage the crook. Rather, the issue is one of policing and
law enforcement in a more intelligent manner.
12 Security in Financial
Networks
Chapter 11 underlined the importance of the audit function in financial
computer systems. The object of the present chapter is to emphasise the
key reasons for firm security rules in financial networks, and the
solutions which are necessary. The bank's assets are held in computers
and communications nodes. No laxity is permitted in network security.
Security must be network-wide. We have defined network processing
as the functions necessary for moving information from source location
to destination. During the transfer, logical actions are executed by
software modules for the purpose of controlling the:
(1) Physical devices of the configuration;

(2) Flow of information throughout the network.
The thesis of this chapter is that a third function is vital:
(3) Security assurance and privacy.
In routing information from the source to the destination, text, data,

voice, images pass through one or more relay nodes. These exist for three
reasons: first, as a means of achieving line-cost savings; second, as a
technique for providing alternate access andjor routing capabilities in
networks with high availability requirements; third, for security pur-
poses.
Most security flaws in existing systems are the consequences of design
shortcuts taken to increase the efficiency of the system as an operating
entity. That's a false economy which will cost dearly one day. Basic
control mechanisms used in communication network security are:
e identification;
e authentication.
Identification means the process of determining who or what an entity is
claiming to be. Authentication is the verification of the claiming entity.
Identification and authentication are the initial actions in processing a
request for access to a network resource. Final control over rights of
219
requestors to access various protected objects usually resides within the

objects themselves. Authorisation procedures should be used to provide
a capability profile and the relevant privileges.
Authorisation is a larger problem than authentication since the latter
can be viewed as a strictly yesjno decision at each intermediate
requestor. Authorisation also carries with it legal liabilities which can hit
the electronic funds transfer system.
Not only must the online system be secure in a global sense, but it must
also seem secure to everybody. Intruders will be discouraged from
attacking when they know the system defence is well studied and the risk
that they are electronically traced and identified is great.
LEGAL LIABILITIES WITH ELECTRONIC BANKING
In 1982, in the United States, the Securities and Exchange Commission

(SEC) censured one of the biggest money-market funds for lax
accounting procedures. Such procedures enabled an employee to steal
more than $1 million in an electronic funds transfer system caper. The
SEC publicly reprimanded the money fund's manager for a failure to
maintain adequate controls over internal bookkeeping. In a separate
case, a computer malfunction cost a bank millions of dollars in losses. In
a third case, a federal court held a financial institution liable for
measuring clients' accounts.
What these cases have in common is that with the growing prolifera-
tion and use of EFT, the potential for legal liabilities is also increasing.
Such liabilities are arising out of EFT use and understandably cause
concern to bank management. Financial institutions have every reason
to take notice. Litigation related to electronic financial systems is on the
increase and can prove costly. Hence the interest to identify the potential
legal pitfalls of EFT systems.
Lawsuits related to EFT systems can arise from one or more sources.
An evident one is frauds, thefts and abuses. A financial institution finds
itself liable for failure to take reasonable and necessary measures to
safeguard its EFT system from criminal attack or abuse.
Theft is one concern. The violation of privacy is another. Privacy acts
that reveal essential information to unauthorised parties cause anguish
and distress to customers. As such, they prove the basis of lawsuits.
Theft is not just a matter of missing money. Personal data are just as
important. Abuses involving valuable or personal data, misuse of the
Security in Financial Networks 221
system, financial frauds, anauthorised use, are examples of acts of man

from which the bank must be protected.
Even acts of God can be the cause oflegalliability if an institution fails
to take adequate safeguards against natural phenomena: for instance,
floods, fires, lightning, earthquakes or other similar disasters.
Another example of origins of trouble is hardware and software
malfunctions. So are errors connected to personnel, including
negligence- a failure to act reasonably, so as not to cause damage to
others. The financial institution is also exposed to contract-related
disputes. Typically, in this case, the parties interpret their rights
differently. Warranty-related matters are an example.
Complaints by consumers and regulators may lead to product
liability. Given the ability of EFT systems to collect, record and
disseminate voluminous data, computer technology could prove fertile
ground for product litigation.
The message is simple and easy to explain. The management of a
financial institution should be cognizant with these traps. Any mass
technology which daily transmits, records, manipulates information on
millions of individuals, their transactions and accounts must be the
subject of careful study in terms of:
e legal requirements;
e security rules.
Not only should precautions be taken to secure the system, but also
procedural definitions must be established, for instance, the time and
manner in which notice is given to a customer, as well as the legal duties
and obligations of those who operate and rely on EFT.
Legal liabilities cannot be described in a few pages. There is a
multitude oflaws and regulations that impose numerous obligations on
financial institutions. The stipulation of the law varies between coun-
tries, and sometimes within them.
Nevertheless, a general frame of reference does exist. This requires a
financial institution to devise and implement reasonable safeguards and
procedures to ensure the confidentiality and accuracy of customer-
related financial data. Credit files, for instance, must be not only correct,
but also current and confidential. In the United States:
(1) The Tax Reform Act requires financial institutions to notify their
customers when the Internal Revenue Service (IRS) issues a
summons for their records.
(2) The Right to Financial Privacy Act limits access to customer

records. It requires government investigators to produce a sub-
poena, summons or search warrant for their release.
(3) The Bank Secrecy Act authorises the Secretary of the Treasury to
order financial institutions to record the identity and activities of
specific customers.
(4) The Electronic Funds Transfer Act outlines the liabilities, duties and
obligations of financial institutions in front of their customers.
There is also the Truth in Lending Act which calls for timely and
meaningful disclosure as regards credit costs. The Foreign Corrupt
Practices Act outlines measures for ensuring that banks do not
knowingly engage in foreign pay-offs.
The legal interpretation of official acts is also important. In 1982, in
France, the Appeals Court of Bordeaux decreed that the cheque book is
a very special object. The judge commented:
Abandoning her purse and ID card in her car, in spite of constant
warnings made by banks and the press, the owner of a bank account
committed a serious imprudence, which permitted a thief to use her
cheques. Under these conditions, owner of the account must compen-
sate a shop owner for the loss which he sustained, given that the
cheque bounced back.'
At the same time, given the credit and debit card practice, financial
institutions are carefully phrasing the client contract to hold the
customer liable for each transaction the bank claims has been conducted
with the card. In this case, determined legal action by an aggrieved
customer may lead to a final resolution, but the obstacles to conven-
tional court actions are likely to inhibit most forms of challenge.
Hence, in case of fraud or theft, both parties, the bank and the client,
can suffer important losses of money and time. It is therefore to
everybody's advantage to assure the electronic funds transfer system
and associated computer services are secure, functioning properly,
and present guarantees against abuse and fraud, giving valid assurance
on the dependability of the results.
REGULATORY AND ORGANISATIONA L STANDARDS FOR

TRANSACTIONS
In every country, both the letter of the law and the national bank
establish legal and regulatory steps in order to respond to the concerns of
the financial community. But even these are fraught with their own legal
trappings.
Financial institutions that exchange or disseminate financial informa-
tion should avoid acts that can have anticompetitive consequences. That
is what antitrust law says. But the interpretation can be so broad as to
inhibit EFT banking at the corporate level. Massive movements of
money might in some cases be interpreted as dissemination of informa-
tion regarding an important financial transaction.
Tax laws raise questions about whether system programs are goods or
services. Branching laws have long limited the ability of US banks to
establish A TM, POS systems and other EFT systems.
In another frame of reference, patents, trade secrets and copyrights
have questionable application as regards software. Here the law is weak
and imprecise in providing necessary safeguards. Interestingly enough,
computer software and banking services have this in common: there is no
effective copyright to speak of
Potential enforcement action by legal authorities also raises the
question of system-related compliance regarding electronic funds
transfer. In the United States, of primary concern to the financial
community are the enforcement powers of:
(1) Federal Reserve System It regulates areas dealing with a failure to

provide adequate disclosure and correct data. The bank should
provide valid periodic statements, avoid unfair or deceptive
practices, and allow customers access to credit. Damage caused by
a breach of a legal duty or obligation are actionable. The Federal
Reserve did not exist until 1914.
(2) Securities and Exchange Commission It regulates financial ins-
titutions that fall within the federal securities laws. It can exert
regulatory powers as regards financial disclosures, false and
misleading statements, compliance with Foreign Corrupt Practices
Act, timely filings, insider trading, material omissions, tender
offers, audit practices and the like.
(3) Federal Deposit Insurance Corporation Its action can take the
form of civil or administrative controls for unfair or deceptive
advertising and limiting credit access.
(4) Controller of the Currency The law defines that it can exert
regulatory powers as regards unfair or deceptive practices, mis-
leading advertising, diversion of income and limiting access to
competitors.
(5) Federal Home Loan Bank Board To some extent it overlaps with
the Controller of the Currency. Its concern is with deceptive

advertising regarding services and finances.
(6) National Credit Union Administration It could bring action in
cases involving deceptive advertising and also deceptive represen-
tations. Here again, there are overlaps in terms of responsibility.
European bankers feel bad enough with the national (reserve) bank
doing the controlling activity. What about having six governmental
organisations breathing down your neck?
Though the word security has not been mentioned by most of the
references to regulatory bodies, the breach of security is sanctioned by
them. The challenge to bank management is that new media magnify
some of the security risks even in cases where good faith predominates.
Satellite transmission is an example. Banks use them, but they don't
own them. Protection must be provided by organisational and
procedural means, always with greater security in mind. The Bank of
America prefers to use terrestrial circuits for data communications;
satellites for voice. Bankers Trust uses both satellite and terrestrial links
for data and voice. In management opinion, encryption is the answer.
Sometimes, when public carriers are involved, the lack of standardisa-
tion makes security controls so much more complex. In the United
States, for instance, within ten kilometres from Charlotte there are three
different CATV companies with three different standards. Yet we know
that the delivery system has first to be streamlined before offering secure
banking and shopping financial services. As the media which we are
using multiply and increase in terms of sophistication, controls must do
the same. They should address themselves to human errors, systems
failure, malfunctions, fire, flood and computer fraud. Many reasons
might lead to, say, wrongful deductions from the customer's account
which may not be detected until some time after the event - if at all.
Some years ago, an international study conducted for the American
Institute of Internal Auditors concluded that the following, in order of
frequency, were the potential losses arising from the use of computer
systems:
e errors and omissions;
e improper controls;
e inadequate system design;
e fraud and defalcation;
e failure to comply with standards or procedures.
For every one of them there should be security controls which, when
established, must keep the online financial network as point of reference.

This is the best way of limiting liabilities.
A different way of making this statement is to say that banks must
take organisational and systems measures to safeguard themselves from
the physical, logical and legal trappings of EFT. These can be enhanced
through education and training. An adequate training programme of
bank employees and customers helps to limit EFT system-related errors,
malfunctions and other potential liabilities. It is not enough to take
liability coverage. The best approach is preventive.
Together with proper education comes legal awareness. Personnel
should be sensitized to the legal and regulatory framework within which
EFT operates. Furthermore, personnel security will serve to limit
liabilities connected to EFT system frauds, thefts, abuses and other
unlawful acts.
As the electronic banking revolution is upon us, financial institutions
must take action to avoid costly and time-consuming EFT systems
litigation and associated regulatory enforcement actions. This can be
done through proper preparation. By enacting adequate safeguards in
these areas, we can limit EFT connected liabilities- financial, legal, and
market related. Too remote to stew about? Let's recall that the Bank of
New York computers went down one night in 1985. The Federal Reserve
Bank of New York had to lend the bank no less than 23 billion dollars
until the next day.
BASIC ASPECTS OF PHYSICAL AND LOGICAL SECURITY
Physical security serves to ensure the confidentiality and integrity of

data. Logical security aims to curtail program manipulations, but also
involves procedures to detect and deter electronic interceptions.
Logical security measures are employed to control access to informa-
tion maintained by the nodes of the network. Terminals, users, authors
attempting access, can include those authorised for admission to the
information transport and/or data-processing facility and those denied
access. Even entities authorised to access must be classified. They may be
allowed to reach:
e none of the information at a given time or from a given post;
e portions of the information, again dependent on temporal,
topological or other criteria;
e all of the information- though they may have only reading rights.
Entities authorised to enter the facility, or initiate access from a remote

terminal device, may be forbidden from writing on files. Those
permitted to write may not get the authorisation to insert or delete
inf01mation elements.
Several levels of logical security should be applied to prevent
unauthorised access to information once physical access to the network
has been accomplished. Therefore the financial institution must
carefully study the access mechanisms it is logically supporting. A whole
access classification study is called for.
Logical and physical means should be studied to this end. Password
sequences can grant or deny access to the network following the initial
connection, establishing whether the user is valid and authorised to
connect to the network- and at which level of security. Depending on
the user entity and its authorisation level, a higher-up layer can be
applied to grant access to a specified dimension of the network. Still
further clearance may be required for controlling access to certain
databases maintained by the information processors of the network.
Not only must the security locks be in place in the network supported
by the bank, but their flexibility is a function of the ability to reset the
locks. This is done by defining new values for authentication and
authorisation. In terms of resetting authentication/authorisation pat-
terns and passwords, the access control system should incorporate a
concept of ownership. A user may dispense and revoke privileges for
objects he owns. The administrator can do the same for any and all of the
users.
Access control mechanisms must be part of the run-time environment,
with hardware support for performing access checks. These mechanisms
are typically based on object-dependent controls. Object-dependent
controls are also needed to protect against faulty transaction programs,
equipment malfunctions, and intruders.
A key prerequisite to the security is that the network must be basically
reliable. Physical unreliability inhibits, even cancels logical controls.
Physical reliability requires use of:
e quality hardware;
e proven software;
e redundancy of equipment;
e alternate routes between critical points;
e error-detection techniques;
e metrics for uptime and reliability.
In Chapter 11 we said that reliability is not an ability. It is the
probability a given system (or part) will operate over specified period of
time, under given environmental conditions, without failure. Intruders
can capitalise on a system's unreliability just as they can exploit its
errors. Security measures have their own goals, as this chapter
exemplifies. They are not supposed to make up for hardware and
software failures in an availability sense.
Error-detection modules used for data transmission must be such as
to reduce the probability of an undetected error to about one bit in I 00
billion (10- 11 ) or better. This, together with redundant routing informa-
tion, can almost eliminate the possibility ofmisrouting messages due to
an error introduced into the address portion of messages during
transmission.
Data being handled by the network can be made less vulnerable by
minimising the time a message is present in the network. Consequently
exposure can be minimised by restricting journalling and clearing
buffers immediately after use.
Recovery and restart procedures should include checks on routing
tables and, if there is a possibility that memory contents have been
modified, a complete reload of all programs associated with security
should be performed. Unattended remote programmable devices such
as network processors should be loaded downline only from a secure
host processor.
Remote diagnostics should be an integral part of a financial network.
Expert systems may be used in an able manner to promote diagnosis of
both software and hardware failure. They should also be employed to
foretell impending problems so that the network is better controlled and
repaired on time. Without a diagnostic capability, it is not possible to
manage a device in a distributed sense. The user must be able to do
diagnostics and effective maintenance on his equipment. According to
IBM, through online diagnostics global-cost figures can be brought
down by 30 per cent, eliminating the need for immediate vendor
intervention.
A communications manager must know number oflines, device types,
and other system characteristics. A software communications man-
agement layer can be put at every attached device, or even better,
enriched with expert systems functionality. Mock alarms must also be
performed at the network administrator's choice. For the specialists
manning the financial network, proper training includes drills developed
by the executive responsible for security together with the vendor. They
should be conducted at least twice a year but preferably quarterly.
As the financial institution depends more and more for its operations
on automated systems, additional security procedures become man-

datory. To postpone or avoid implementation of proper security is to
court disaster.
AN EXERCISE ON RISK ANALYSIS
A good deal of computer crime takes place in environments in which

there is a centralised timesharing computer system with a large number
of terminals connected to it. Online computers are vulnerable to a broad
range of threats. Hierarchical centralised computers are more vulnera-
ble than others. As our dependency on computers and communications
increases with time, proper protection must be provided in a system
sense.
Protection of computer-based assets should be achieved through a
security program for developing and implementing cost-effective
measures to cope with computer-related threats, vulnerabilities and
risks. Such a program should start with risk analysis, with the aim to
develop and present valid solutions to management.
A vital step in the risk-analysis process is to gather all information
necessary to determine the expected amount ofloss for each threat/asset
combination. The net expected loss must be expressed in quantitative
terms. One way to deal with all expected losses is to calculate on the basis
of one year's threat exposure, the same time-frame which forms the basis
for all other accounting.
Once this is successfully done, it should be extended on a life-cycle
basis. A financial network is built with 'X' years of service in mind, 'X'
being usually a one- or two-digit number. Typically, penetration and
falsification risk is greater when the network is in its first year or two of
operation and has teething troubles. Also when the network starts
ageing, its defences become known, its software and hardware start
being obsolete and security measures become lax. These are ideal
situations for intruders. Management auditing must account for them.
Furthermore, auditing of the communications environment must
involve not only the data communications system as such but also the
applications and database. We should establish review techniques for
developmental, post-implementation, operational and maintenance
purposes - all with risk analysis in mind.
A financial institution will also be well advised to make its security
measures global and standardised. Said the senior executive of a money

centre bank: 'To a large extent, data security had been a regional
responsibility before we decided to standardize. With a number of
different security systems in use, we experienced many inefficiencies.'
For example, resources protected at one location could not be protected
at another. Security auditors had a difficult time determining the extent
of protection, or lack of it, on a particular system. They could not take a
global sense, given the lack of uniform standards.
The many systems also created problems for the bank when
employees were transferred from one data centre to another. Employees
had to learn a new security system each time they were transferred.lt was
expensive, confusing, and potentially dangerous to have different
security standards, incompatible systems, and sometimes contradictory
security procedures.
After a thorough review of security systems, management standar-
dised on one of them. 'We needed a single set of security rules for all our
operating environments,' the executive noted. 'Since its installation, we
have evolved our security procedures based on one standard. We apply
this standard uniformly across the bank's global operations.'
There were also other policy changes. In the beginning, when
evaluating security systems, the bank considered only systems with
capabilities for controlling online resources. This was subsequently
extended to all communications and computers operations, as man-
agement wanted to have the changes made to take effect immediately,
applying to all resources.
Among the criteria considered for evaluation of global security
measures were ease oflearning, comprehensiveness, extensive audit, risk
analysis and maintenance functions. 'A good information systems
defense is fundamentally dependent upon the security system's ability to
react to change,' management commented. This brings another dimen-
sion into perspective: the temporal and system changes.
EFT security exposure can be studied at different levels through risk
analysis.
(1) Operational reliability, including terminals, other peripherals,

nodes/switches, nodes/hosts, and transmission of data.
(2) Vulnerability to deliberate fraud In this case, exposed EFT
components are: personal identification numbers (PIN), terminals
(POS, ATM), switches, hosts, software at all computer devices, and
communication lines.
(3) Users of the facilities They range from the bank's own personnel
(at all levels) to client-base references.
The best way to defend against computer crime, specialists say, is for
managers to know their employees well enough that unusual behaviour
or serious personal problems stand out. Risk analysis can be applied to
the human component as to all other factors involved in the system.
The global approach is advisable for another reason. An EFT security
concept includes organisational, physical, and logical measures. The
physical we can acquire; the logical we can build. But the most difficult
to develop are the organisational.
The security system should help the bank's security administrators
keep on top of changes in personnel, hardware, and operating policies. It
should demonstrate comprehensiveness in protecting all the bank's
computer resources- from workstations to central databases- without
inhibiting flexible file access. The emphasis on the global perspective is
important. By being a service business, the bank depends greatly on
office work. But the office is a network of people and workstations
working together for a common goal. It is not scattered resources
working independently from one another. Hence both the network we
develop and its security measures should serve the interconnect
requirements of different jobs. They should maintain:
(I) Flexibility in the range of applications which are accepted.

(2) Integration capabilities, for attached devices.
(3) Horizontal approach to communications, that is, peer-to-peer.
While the system architecture we develop should answer these

requirements, attainable functionality must not be inhibited by security
measures. A balance must be obtained and risk analysis helps in
reaching such a balance.
THE DATA ENCRYPTION CHALLENGE
It is not the object of this text to treat data encryption in any detailed
sense. But neither should this subject escape attention. Cryptographic
techniques range from a very elementary letter-substitution cipher to
highly mathematical public-key encryption systems. Security levels
which these different approaches provide also vary very dramatically.
The existence oftrade-offs between security level, simplicity, and ease of
management require careful analysis in the light of particular require-

ments: from simple privacy systems to the most secure military and
financial solutions. To understand the varying levels of protection, it is
necessary to appreciate exactly what a cipher system is and how
cryptanalysis of a system may be achieved.
The proper study involves an analysis of the threat to financial
networks. The concepts of theoretical and practical security must also be
evaluated. Can a theoretically secure system be broken in practice? Can
a theoretically insecure system be secure in practice? There are no
unbreakable systems and all have limitations.
Precisely because data encryption is perceived as a challenge to be
met, the financial industry welcomed the Data Encryption Standard
(DES) as a non-classified encryption algorithm by the National Bureau
of Standards (NBS). Yet using the DES safely is not easy and requires
care in the design of the system, as well as managing the cipher's keys. In
a network, cryptography should be fitted -into the system architecture.
This is a process which is just starting to be studied in the ISO/OSI
reference model. In this sense, public-key ciphers from a second branch
of technology aimed at reducing security risk. Ciphers also allow the
generation of digital signatures for a document, a more powerful
protection against illegal changes than conventional authentication.
The problem with DES, however, is that its country of origin has now
abandoned it. In June 1986 it was announced that the US Government
does not intend to re-certify the Data Encryption Standard, even if it is
by now widely used not only by government agencies but also by
financial institutions and private companies to protect sensitive com-
puter data. This decision becomes effective when DES is due to be
reviewed in January 1988- though the latest information indicates that
due to time and other constraints the change-over has been delayed to a
yet unspecified date. The National Security Agency (NSA), said that the
use of the DES algorithm has spread to sensitive applications, making it
an increasingly attractive target for US adversaries. Hence, NSA intends
to introduce new cryptographic algorithms which will be available only
in the United States.
This new generation of security locks will be designed for voicejtextj
data terminals, their usage being required by:
e banks doing business with the Federal Reserve;
e the Pentagon's defence contractors.
The problem for the banking industry is compounded by other
regulatory inconsistencies. Encryption is not allowed in many countries,
particularly countries with dictatorships of the left or of the right. There,

what you transmit has to be in clear text. As a way out, some financial
institutions use an encryption bypass. This is typically done by means of
statistical multiplexers. Their specialists can do encryption through
ingenious use of built-in error correction techniques.
Other solutions have also been tried, for instance, importing termin-
als, exporting them, modifying them (repeated experience) and re-
importing them. They can then give the required copy of the schematics
to the local government. They would not be readable anyway.
Quite independently of the difficulties governmental regulations may
create, and in some cases because of them, financial institutions are very
keen to protect their networks through encryption. The National
Bureau of Standard& suggests the following criteria for building a secure
node:
(I) Confidentiality This is the basic, minimum level.

(2) Integrity Not only confidentiality, but value added to assure
node line and network integrity.
(3) Availability The network will be characterised by multiple
processor states, protection of layers of memory, content
assurance, privileged handling of instructions.
Design features for node security should include: multiple communica-

tions options; high speed cryptographic processors; system indepen-
dence (in a software and hardware sense); secure device and system
drivers; user set keys; key management procedures; as well as cryptogra-
phic and key utilities.
All this facility, NBS suggests, must be integrated into the network. A
large number of keys can be helpful. Encryption must reach all the way
to the database, including (disk encryption). Though a necessary
component of the encryption process, the use of algorithms is not itself a
guarantee of security. Algorithms can be deciphered and there are so
many ways that insecurity can be introduced by poor methods of
operation. Hence a methodology for security assurance is most impor-
tant.
The basic message is that in a.financial network requirements for secure
communications are increasing at a dramatic rate. Bank management
must study available products and explore major development areas in
which security is required. Trends must be analysed together with the
technologies that are enabling them. In addition, possibilities for
advancement must be carefully examined and security decisions made.
Glossary
ABBREVIATIONS AND ACRONYMS
ACE AT & T's cable maintenance expert system

ACS All-chigin Card Systen
ADN database management system by Hitachi
AI artificial intelligence
AIN database management system by Fujitsu
ANSER Japanese automatic answer network system for electrical request
APPC advanced program-to-program communications
ARPA Advanced Research Projects Agency (US Department of Defense)
ATM automated teller machine
BANCS Japanese city banks' ATM network
BASE Bank America Systems Engineering
BER bit error rate
B-ISDN Broadband Integrated Services Digital Network
BO branch office
BOM bill of materials
BPS bits per second
BRAIN Sumitomo Bank's Bank Report and Information Network
BSC bisynchronous communications
CAD computer-aided design
CAF Japanese centralised applications facility
CAFIS credit and finance information switching system
CAl computer-aided instruction
C&C computers and communications
Captain Japanese Videotex system
CATV cable television; Community Antenna Television
CCITT Consultative Committee oflnternational Telephone and Telegraph
ccs Mitsubishi Computer Complex System
CD cash dispenser
CEPT Comite Europeen des Pastes et Telecommunication
CHAPS Clearing House Automatic Payments System (London)
CHIPS Automated Clearing House for International Payments System
(New York)
CIF customer information file
CINDY computer-integrated network documentation system
CM-HB Cash Management-Home Office Banking
CMS communications management configuration system of IBM/Bank
of America
CMS centre for mainframe and PC implementation
CNF centralised network facility
COAM company operated and maintained networks
COMRES Online investment analysis system by Sanyo Securities
CTO chief technology officer
233
234 Glossary
DAF distributed applications facility

DB database
DB2 relational database management system by IBM
DBC database computers (fifth generation)
DBMS database management system
DC data communications
DCA document content architecture
DDI direct dialling-in
DDX digital data exchange
DEC Digital Equipment Corporation
DES Data Encryption Standard
DIA document interchange architecture
DIS distributed information system
DISOSS Distributed Office Support System
DNA digital network architecture
DNF distributed network facility
DP data processing
DSS decision support system
EAM electrical accounting machine
EFT electronic funds transfer
Email electronic mail
Esystems expert systems
ET electronic teller
FAX facsimile transmission and machines
FDIX facsimile data conversion and interface control equipment
FEP front-end processor
FIFO first in/first out
FINE A Japanese enterprise-oriented banking network, connecting
banks and companies
Gil Group II of CCITT for facsimile transmission
Gill Group III of CCITT for facsimile transmission
GBPS gigabits per second
GBytes gigabytes
GOLS generation of online system
GPS generation of product strategy
HB Home Office Banking, Home Banking
IBM International Business Machines
IC cards integrated circuit cards; chip-in cards; smart cards
ICOT Japanese Institute for New Generation Computer Technology
ICS in-house communications system at UBS
IDN integrated digital network
IDNX integrated digital network exchange by IBM
IMS hierarchical database management system by IBM
INS Japanese integrated network system
IS information system
ISDN integrated services digital network
ISO/OSI International Standards Organization/Open System Interconnec-
tion
JAIS Japan Information System
Glossary 235
JCL Job Control Language

KBPS kilobits per second (kilostream)
KBytes kilobytes
KLIPS kilo-logical instructions per second
LAN local area networks
LIFO last in/first out
LISP list processing - a programming language
LU6 Logical Unit 6 of SNA
MAN metropolitan area network
MAP manufacturing automation protocol
MBPS megabits per second (megastream)
MHTC Manufacturers Hanover Trust Company
MICR magnetic ink character recognition
MIPS million instructions per second
MIRI Mitsubishi Research Institute
MLIPS millins of logical instructions per second
MMI man-machine interface
MOSS management and office support system at UBS
MTBG mean time between failures
MTTR mean time to repair
NAPLPS North American Presentation Level Protocol System
NBS National Bureau of Standards (US)
NCC network control centre
NCS Nippon Cash Service
NEC Nippon Electric Corporation
NIM network interface message processor
NSA National Security Agency (US)
NTC DEC's troubleshooting consultant expert system
NTT Nippon Telegraph and Telephone
OA office automation
OCR optical character recognition
ODA Office Document Architecture
OSI open system interconnection
PAD packet assembler/disassembler
PBX private branch exchange
PC personal computer
PIN personal identification number
POS point of sale
PSI personal sequential inference engine
PTT Post, Telephone and Telegraph, the public communications utility
run by the State
S&F store and forward
scs Sogo Bank Cash Service (Japan)
SEC Securities and Exchange Commission (US)
SIMPOS Sequential Inference Machine Processor Operating System
SIRNIS Sanyo Investment Research New Information System
SNA systems network architecture
sfs start/stop
SW/HW software/hardware
236 Glossary
TCP/IP Transport Communications Protocol/Internet Protocol

TDB text and database
TDP text and data processing
TP teleprocessing
TPR teleprocessing routines
TS timesharing
TWX Western Union teleprinter exchange service
UBINET integrated network of Union Bank of Switzerland
UBS Union Bank of Switzerland
UNIX (trademark) Bell Laboratories operating system
VAN value-added network
VAX/MVS (trademark) operating system by DEC for VAX series
VDR voice digitisation rate
VF vector facility
VLSI very large-scale integration
VRE videotex relay equipment
VSA T very small aperture terminal
VTX videotex
WAN wide area network
WP word processing
WS workstation
Index
AI, 74, 75, 84 BASE (Bank of America Systems
Abacus, 70, 74, 75 Engineering), 4, 168, 173
Access control mechanism, 226 Bank Secrecy Act, 222
Account co-ordination, 10 Bank of New York, 225
Advanced program-to-program Bank Report and Information
communications (APPC), 63 Network (BRAIN), 122
Advanced Research Projects Agency Bankwire, 3
(ARPA), 195 Banque Internationale de Placements,
American Express, 33 4
American Institute of Internal Batch processing, 3
Auditors, 224 Bolt, Beranek and Newman (BBN),
American Telephone and Telegraph 82, 199
(AT&T), 61, 195 BBN Communication, 195, 196,
ANSER (answer network system for 198
electrical request), 106, 114-18, Branch offices, 30
120, 130, 156, 157 Brass Project, 182
Applications layer, 57 British Telecom, 93
Appraisal procedures, 43 Broker's Edge, 182
Artificial intelligence (AI), 6, 59, 134,
165, 185 Cash-based systems, 21
AI constructs, 121, 191, 195,206, Cashier, 3
217 Centel, 183
Audit packages, 215 Centre for Mainframe and PC
Auditing procedures, 207 Implementation (CMS), 133
Auditing reports, 209 Central information file (CIF), 70
Audit of computers, Chase Manhattan, 17
communications, and databasing Chemical Bank, 166
facilities, 208 Chemlink, 166
Audit of programs, 208 Centralised applications facility
Authentication, 219 (CAF), 171
Authorisation, 220 Chess, 3
Automated teller machines (A TM), CHAPS, 156
29,49,50, 101,114,223 Chief technology officer (CTO), 13,
ATM networks, 30 14, 173
ATM transactions, 131 CHIPS, 3, 156
Circuit optimisation, 92
Backbone subsystem, 94 Circuit switching, 16,88
Banca Provinciale Lombarda, 155 Citibank, 5, 30, 31, 184
BANCS, 106, 149, 156 Communicating databases, 42, 51
BANCS/NCS, 144 Communication management
Banking, universal, 73 configuration (CMC), 172
Banking products, 99 Communications, 11
Bank of America, 4, 32, 34, 167-70, Communications architectures, 77
172, 173, 183 Communications engine, 51
237
238 Index
Contd. Dai-lchi Kangyo Bank, 30, 31, 121,

Communications, higher-level, peer- 128, 129
to-peer, 88 Daiwa Securities, 122
Communications managers, 227 Database architecture, 175
Communications networks, 64, 77 Database management, 84
Company's own operated and DBMS, 128
maintained network (COAM), Data communications, 78
54, 148 Data Encryption Standard (DES),
Computer-aided design (CAD), 86, 231
88, 198 Data-link layer, 56
Computer-aided instruction (CAl), Data-link protocol, 53
164, 189 Data processing, 3
Computer auditor, 216 DP/WP, 3, 192
Computer-based fraudulent practices, Data transmission capabilities, 49
214 Decision support systems, 75, 192
Computer-based message and DESIGNet, 199-201
transaction systems, 99 Deposit account
Computer Complex System (CCS), integrated, 100
161 ordinary, 100
Computer crime, 228, 230 Digital Equipment Corporation
Computer fraud, 202 (DEC), 88, 194
Computer-integrated network Digital lines, 153
documentation system Digital network architecture (DNA),
(CINDY), 86 64
Computer literacy, 42 Digital utility network, objective of,
Computer masterfile audit, 202 171
Computer system architecture, 79 Direct dialling-in (DDI), 96
Computers and communications, 19, Distributed applications facility
71,202 (DAF), 171
Computers and communications, Distributed data processing, 40
manufacturers of, 83 Distributed information systems, 43
Computers and communications Distributed network facility (DNF),
technology, able employment of, 171
166 Distributed office support system
Controller of the Currency, 223, 224 (DISOSS), 84
Consultative Committee for Document interchange architecture
International Telephone and (DIA/DCA), 57
Telegraph (CCITT), 55 Dow Jones, 177
Cost-effectiveness, 1
Cost reduction, 147 Electronic bank, 195
Credit and finance information Electronic banking, 124, 202, 225
switching system (CAFIS), 144, Electronic Banking Committee, 100
156 Electronic banking transactions, 131
Credito Commerciale, 155 Electronic-based systems, 21
Critchfield, John T., 167, 173 Electronic funds transfer (EFT), 3,
Crocker Bank, 32 19,27,29,220,221,223,225
Cross-product selling, 179, 180 Electronic Funds Transfer Act, 222
Cryptanalysis, 231 EFT security exposure, 229
Cryptographic techniques, 230 EFT/POS,32, 110-12,114
Index 239
Contd. (GOLS), 2
Electronic mail, 78 Geonet, 166
Electronic media, 49 Global database, 189
Electronic money, 19 Global network policies, 90
Electronic office, 97 Grossberg, Kenneth A., 31
Electronic surveillance, 218
Encryption, 231, 232 Hitachi, 139
End-user interface, 57 Housekeeping procedure, 112
Ericsson, 94 Huschke, Hubert, Dr, 71, 88
Error-detection modules, 227 Hyperchannel software, 90
Ethernet, 89
Eureka, 78 Identification, 219
Executive committee, 47, 48 Image handling, 42
Expert systems, 185,189,191,207, Inference engine, 188-90
227 Information, request for, 83
Information management, 14
Facsimile interconnection, 42 Information providers, 25
Federal Deposit Insurance Corp., 223 Information systems projects, 44
Federal Home Loan Bank Board, 223 Inhouse Communications System
Federal Reserve Bank of New York, (ICS), 89
225 Inhouse solution, mission of, 94
Federal Reserve System, 223 Institute for New Generation
Fedwire, 3 Computer Technology (I COT),
Fifth-generation computers, 59 144, 165
Fifth-generation computer (5GC) Integrated digital network (IDN), 88
projects, 143, 191 INS, 100, 150, 153, 154
Financial information documents, 18 Intelligent business system, 16
Financial networks, 19, 143 Interbank Card Association (Ibanco ),
First-generation online systems 34
(IGOLS), 2, 3, 38, 54, 102 Intercomputer communications, 148
First-generation product strategy Interfaces, user-friendly, 67
(IGPS), 2, 3 Interlink Network, 32
First-Interstate Bank of California, 32 Internal audit functions, 204
First National Bank of Boston, 31 Internal auditing, 203, 204, 209
First Nationwide Bank, 31, 32 Internal auditor, 203, 205, 206, 207,
Flurhof, 90 213, 217
Flurpark, 90 Internal Revenue Service, 221
Flur Sued, 90 International Business Ministries
Ford Motor Company, 31 (IBM), 27, 61, 82, 83, 88, 171, 183
4GOLS, 6, 107, 109, 134, 155 International Marketnet (Imnet), 183,
4GPS, 6, 8 184
Fourth-generation programming International Standards Organization
tools, 84 (ISO/OSI), 55, 74, 82, 163, 186
Front-end processor (FEP), 38 Internetworking, 55
Fuji Bank, 121, 131, 133, 134 Intruders, 220
Istituto Bancario Italiano, 155
Gateways, 16,94
General Electric, 38 JAIS (Japan Information System),
Generations of online systems 123, 124
240 Index
Contd. National Life Insurance, 180, 181

K mart, 31, 32 Natural language processing, 190
Knight-Rider, 183 Net expected loss, 228
Knowledge-communication network Network concept, 3, 181
systems, 194 Network configuration, 196
Knowledge engineering, 185 Network control center (NCC), 24,
Knowledge-engineering projects, 148 38,96,97
Knowledge management, 186, 188 Network dependability, 20
Network design, 197
Legal liabilities, 221 Network digitisation, 147
Local and wide area networks, 41 Network interface processor (NIM),
Local area networks, 40, 56 54
virtual, 89, 90 Network management, 54, 97
Logical Unit 6.2, 57 Network objects, 201
Networking, 56
McSweeny, William, 61 Networking environment, 43
Management and Office Support Networks, 1, 2, 29, 51
System (MOSS), 70, 71, 74, 75, financial, 24
79,82,83 intelligent, 6
Management co-involvement, 43,47 interactive, 65
Management information systems, parallel, 16
grand design of, 45 Nippon Electric Co. (NEC), 82, 150,
Managerial accountability, 46 192
Manufacturers Hanover Trust NTT, 100, 109, 115, 118, 120, 144,
Company, 166,173-80 147-9, 153, 192, 193
Manufacturing Automation Protocol Nomura, 121, 139, 141
(MAP), 161 Nomura Computer Systems (former
Mercury, 93 NCC), 139-41
Merill Lynch, 180-3 Northern Telecom, 82,94
Metropolitan area network (MAN),
92,93 OASIS, 78
Microcomputers, 41 Office Document Architecture, 61
Million instructions per second Office System, 98
(MIPS), 66 Online auditing, 207
MITI, 161 Online systems, co-operative, 3
Mitsubishi Bank, 111,121,125-8, Open vendor policy, 58
158 Operating system (OS), 38
Mitsubishi Electric, 161, 163
Mitsubishi Research Institute Packet switching, 16, 88, 196
(MIRI), 125, 143, 161, 163-5 Passport expert system, 138, 139
Mitsui Bank, 139 Personal computers, 16, 41
Money, 18, 19 Personal-computer procedure control
Money One, 31 unit, 118
Morgan Stanley, 166 Personal sequential inference (PSI)
engine, 143, 165, 192
National Bureau of Standards, 232 Philips, 82
National Credit Union Phillips & Drew, 93
Administration, 224 Physical layer, 56
Index 241
Contd. Session layer, 56

Plessey, 94 Siemens, 82
Policies and standards, 175 Simultaneous code coversion and
POS, 50, 195,223 interpretation, 149
Presentation layer, 56 Software support, 10
Private branch exchanges (PBX), II, Sokoneken expert system, 136
78,90 Sony, 122
PBX, digital, 94 Sperry, 83
PBX-WS connectivity, 94 Standards
Products and services, 99 organisational, 210
Protocols, 52 performance, 211
personal, 210
Qutron, 184 reporting, 211
Strategic aspects, 5
Radar chart, 137 Strategic Information Resource
Recovery and restart procedures, 227 Committee, 169
Reliability, 197 Strategy, global, 35
Remote diagnostics, 227 Sumitomo Bank, 105, 111, 121-5,
Research, 212 158
Research and development, 144 Supermicros, 16
Reuters, 177 Swift, 3
Right to Financial Privacy Act, 222 System Applications Architecture
Rimensberger, Ulrich, 82,86 (SAA), 63, 64
Rockefeller, David, Dr, 17 System architecture, 41, 58, 59, 72, 76,
Roebuck, 31 93,175,230
Rolm, 94 System integration, 59, 60
Rothschild, Guy de, 18 System operator, 25
System restructuring, 177
Sales promotion, 147 Systems network architecture (SNA),
Sanyo, 121 61-3,82,84,88
Sanyo Extended Data Systems, 135 SNA software, 63
Sanyo Investment Institute, 137
Sanyo Investment Research New Tax Reform Act, 221
Information System (SIRNIS), Technical research, 175
135-7,139 Technology assimilation, 21
Sanyo Securities, 135-9 Technology planning, 175
Satellite transmission, 224 Telebanking, 195
Sawa Bank, 160 Telecommunications, II, 77
Sears, 31 Telecommunications, building
Second-generation online system distribution systems for, 93
(2GOLS), 2, 3, 8, 39, 40, 42, 102, Telecommunications network, 54, 60,
103, 126 66
Securities and Exchange Commission Telenet, 82, 166
(SEC), 217,218,223 Teleprocessing routines, 38
Security, 20, 219 Telerate, 177
logical, 225, 226 Text and database, 65, 66
physical, 225 Text and database processing, 66
Security Pacific Bank, 32 Text and data transport, 66
242 Index
Contd. Univac, 140

Threat exposure, 228
3GOLS, 4, 5, 8, 40, 42, 103, 104, 107, Value differentiation, 72
121, 126, 134, 155, 160 Videotex relay equipment (VRE), 118
Times-Mirror, 183 Voice communications, 77
Transactions, online, 37 Voice mail, 65
Transport layer, 56
Transport protocol, 53 Wang,83
Wells Fargo Bank, 32
Union Bank of Switzerland, 70, 73, What You See is What You Get
78-80, 84-6,90,97 (WYSIWYG), 86
UBINET, 71,74-76,80,85 , 86,90 Word processing, 3
UBINET-Interna tional, 89 Workstations (WS), 16,84
UBINET-Switzerland, 88 WS, intelligent, multifunctional,
UBS Board of Management, 78, 29,41
79,84
UBS, policy of, 97 X.400,57
UBS Telecommunications
Department, 94 Zengin, 106, 156
Unisys DCA network, 88 ZEUS, 125, 163, 164

Dimitris N. Chorafas, Heinrich Steinmann - Implementing Networks in Banking and Financial Services-Palgrave Macmillan UK (1988)

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Dimitris N. Chorafas, Heinrich Steinmann - Implementing Networks in Banking and Financial Services-Palgrave Macmillan UK (1988)

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IMPLEMENTING NETWORKS IN BANKING AND

Also by Dimitris N. Chorafas

*Also published by Macmillan

All rights reserved. No reproduction, copy or transmission

First published 1988

Filmsetting by Vantage Photosetting Co. Ltd

British Library Cataloguing in Publication Data

1 High Technology in Banking: A Strategic Perspective 1

2 The Role of Money: From Coins to Electronics 18

3 Generations of Online Systems 36

4 Rethinking the Telecommunications Network 54

5 UBINET, the Worldwide Network of the Union Bank

Developing the Concept of a Communications

6 Four Generations of Payment Systems in Japan 99

7 Top Performers of Japanese Banking Industry 121

8 National Payment Systems, Research on Artificial

9 Advanced Networking Solutions by American Banks 166

A High Technology Architecture 178

10 Artificial Intelligence and Expert Network Systems 185

11 Using Computers for Online Auditing 202

12 Security in Financial Networks 219

international, national and in-house network of the Union Bank of

GENERATIONS OF BANKING PRODUCTS

Technologically advanced information systems and networks provide

(I) Computers and communications (C&C) merged into one entity,

Basically technical in their nature, these developments evidently had an

Characteristically, they are both network based. They also had a

At the same time US bankers are the most product-oriented with a

EVALUATION OF BUSINESS OPPORTUNITY

one. In a few years, products of distinction will not feature just

(1) The banking industry clearly depends on computers and communi-

- SPECIFIC BANK GROUP - INTERBANK NETWORKS

Figure 1.1 Advances in banking systems

The new framework in terms of profitability in banking services, and the

THE NETWORK IS THE MEDIUM

Selecting and planning innovative projects requires new skills, including

PRODUCT PROFITABILITY AND INFORMATION SYSTEM

NON-REGULATED ENVIRONMENT: IF WE ARE FIRST IN MARKET

NON-REGULATED ENVIRONMENT: IF COMPETITION IS FIRST

+ 4 GPS 3 GPS 2 GPS

Figure 1.2 Product profitability and information system

no logical information. Knowhow has become a powerful weapon in the

Two viewpoints both contradict and complement each other in this

(1) The product defines the market.

(1) Account co-ordination Consulting with the client, providing a

New banking products are developed through computers, but largely

person-to-person exchanges to the use of electronic devices. Emphasis

Switching, transmission and terminal equipment define the physical

A NETWORK TO MEET MARKETING REQUIREMENTS

(1) Best response to market needs;

This means a focus on customer requirements. These are generally

The background is well known: create department objectives; tie each

(1) Integrating text and digital communications;

Every one ofthese goals is results-oriented. The bank's chief technology

reached a pivotal point in banking history. Today's technologies are but

INFORMATION MANAGEMENT IN FINANCIAL INSTITU-

Information management plays a significant role in banking strategy. It

(I) Understanding environmental factors at work in the market-place;

(4) Developing an essential framework for successful implementation;

In a client-driven market, the product is not simply software and

e It provided a more reliable service at lower cost.

One of the significant contributions of new switching technologies has

Parallel networks for financial institutions get increasingly fast,

e distilling information for management decisions;