The war in Ukraine, a major nearshoring hub for IT, could create challenges for financial institutions and core providers already struggling to find IT workers.

“My experience from nearshoring to Eastern Europe is it can take months to find new resources and get them online and productive,” Rob Norris, senior analyst at advisory firm Celent, said last week during the panel War in Ukraine: Implications for Technology in Financial Services at the Celent Innovations & Insights Week conference. “Meanwhile, IT departments of financial institutions are already struggling to find workers back at home and they’re facing long backlogs of IT projects. So the timing really couldn’t be worse in attempts to reassure those workforces back to safer geographies.”

There are core providers, software firms and document management systems vendors that service financial institutions with Eastern Europe-based operations, Norris said.

“These vendors may in the short term struggle to deliver on customer commitments or make progress on product roadmaps,” he said.

Long-term disruptions

Entanglements in the ownership of intellectual property are a possibility as companies attempt to distance themselves from Eastern Europe, Norris said. In addition, potential hardware issues related to the supply chain — such as disruption to the trade of rare earth metals, shipping routes changes and chaos in the energy markets — may soon affect the industry, he added.

Meanwhile, Western European nations are likely to increase their defense spending, which will create a demand for more technology products, Norris said. There are likely to be continued disruptions in the availability of tech products, including semiconductors and their parts, which could cause delays and higher costs for the financial services industry, he added.

“My advice would be certainly planning number one for the counterparty risk,” Norris said. “Also the budgetary pressures that financial institutions themselves will be under in this highly inflationary environment.”

The conference panel also included partners from consulting firm Oliver Wyman, which recently released a paper on 10 watchpoints for financial services on the war in Ukraine.

Technology touchpoints on the list include:

• Heightened cyber threats requiring elevated defenses;
• Risks from managing a fast-moving and complex sanctions environment; and
• Development pathway of crypto, stablecoin, and central bank digital currencies (CBDCs).

Another issue larger banks may have to contend with is the so-called SWIFT sanctions, which Gareth Lodge, a senior analyst at Celent, explained was a misleading idea.

“Money never crosses a border,” Lodge said. “What happens in reality is correspondent banking, so major banks will hold an account with their money in another bank.”

Banks that are dealing with a sanctioned bank are “left out of the legal obligations,” he said. Many banks around the world “have money frozen on the other side of the equation,” he added.

It becomes a cash flow problem, Lodge said.

“There’s going to be certainly revenue impacts, because they’re not making payments through major bereavement, trading partners, through FX and through cash management,” he said. “Then there’s going to be exposure of what money’s tied up, what obligations are getting paid, etc.

“There’re two banks in Europe who have already said they believe there’s going to be at least 10 billion Euros at risk,” Lodge said, adding, “pretty much every major bank globally is going to have some kind of similar issues because of the trading party.”

Planning for the near term

A key lesson for banks: Planning needs to evolve to be more dynamic, with a “more frequent cadence of checkpoints” as multiyear plans may be a fantasy for now, Norris said.

“We’ve got two back-to-back ‘black swan’ events — the pandemic and Ukraine is another one — around the corner, Taiwan, global recession,” he said. “It’s critical that we engage in more of strategic planning to explore different sets of assumptions, political, economic, social, and so on that could quickly and fundamentally alter strategic direction.”