Top Tech Trends in
Banking: 2008
The top trends:
-
Customer centricity
as red thread
-
SOA becomes a way,
not a what
-
Core renewal comes of
age
-
Internet banking 2.0
takes the stage
-
"Building
year" for mobile banking
-
Customer analytics a
key differentiator
-
Consolidation of
payments platforms plods along
-
Vendor consolidation
round 6
-
Risk management and
security will dominate
-
Remote capture:
learning to compete
-
The new face of the
branch
Preface
2008 bank IT spending growth will experience a slowdown for the first
time in several years. IT spending will climb by a modest 3.6% in 2008, a
significant 0.5 percentage point drop from the 4.1% growth experienced in
2007. The credit crunch and looming economic uncertainty have banks
tightening their belts. Banks of all sizes are slashing budgets and
placing significant emphasis on keeping costs under control. This
contraction will push numerous IT projects out of the picture and will
make internal competition for IT resources that much greater. IT dollars
will be hard to come by after compliance/regulatory spending and
maintenance expenditures. This is a difficult position for banks to be in,
particularly since the market is still extremely hyper-competitive. Banks
will be forced to be creative with their funds in order to make
investments go as far as possible.
Customer Centricity as Red Thread
Financial institutions are facing numerous challenges: acquisition and
diversification strategies are yielding disappointing results, while
organic growth through de novo branches and cross-selling is proving less
fruitful. Moreover, market share no longer translates into market power or
profitability. Faced with these challenges, financial institutions are
finding that they need to shift gears from "grow, grow, grow" to
grow profitability. Growing profitability requires them to focus on
customers more than products and grow balances and fees while lowering
cost to serve.
The drive for customer centricity will
manifest itself in numerous types of implementations: customer
profitability analytics, relationship pricing, and dynamic pricing
(pricing based on specific market and/or customer factors). In addition,
Celent expects to see an increase in integrated customer information
management and account opening (across products and channels). This
implies restructuring of data warehouses/marts, greater adoption of
content management, and business process management technologies to
automate information management and decision-making processes.
SOA Becomes a Way, Not a What
Banks have been struggling for years to achieve a single view of the
customer. Recently a few have been gradually dismantling their IT
infrastructure built around products to one built around services (IT) and
customers (line of business). A service-oriented architecture (SOA) is
enabling them to undertake this Herculean effort. Early success stories
will fuel SOA projects across the midsize to large bank segments.
Banks will increasingly build SOA-based
middle layers to reduce application redundancy, assure data integrity,
facilitate data sharing, and lower overall maintenance costs. Some banks
are striving to move away from proprietary applications to open systems as
well, especially in Asia and Europe. SOA will become the method for Tier 1
and Tier 2 banks (over US$20 billion in assets) to incrementally modernize
core systems. Few banks of this size -- and among larger banks, even fewer
-- are willing to do a rip and replace. The name of the game will be
owning the middle tier of technology.
Core Renewal Comes of Age
Banks have been nursing along their legacy core systems for three
decades or more, spurring predictions of a landslide of core replacements.
What will happen instead is core renewal, where selected parts of the core
system will be upgraded, service-enabled, or perhaps migrated to a modern
platform, while other parts of the core system remain untouched. Why now
and not before? SOA has now come to a level of maturity where such renewal
is technically achievable. Leading edge banks are beginning to implement
such renewal with technical success and business results that justify the
investment.
In 2008, Celent expects a growing number of
banks to undertake the first steps of core renewal, which is simply
service-enabling the core in order to reduce the cost of maintaining front
end applications that need to access information in the back end systems.
Internet banking and call center typically lead the charge here. The next
level of core banking is creating products that rely on multiple core
systems. Relationship pricing is a common application driving such a
renewal.
As a result of core renewal efforts, Celent
anticipates new types of products that combine features of loans and
deposit products or loans and securities to be launched. Offset mortgages,
for example, may drive the need for coupling a mortgage system with a DDA
system. Once banks have moved to a SOA, they will be able to mix and match
granular services to create new types of products and out-innovate their
competitors to offer superior returns.
Internet Banking 2.0 Takes the Stage
Web 2.0 has taken on too many faces, being used to describe anything
from new programming capabilities to online social networking. Absent the
buzz, Web 2.0 defines the essence of the Web's second generation,
leveraging the Web's openness, network effect, and many-to-many
capabilities.
In 2008, Web 2.0 will meet the online
banking market in several ways:
- Social networking concepts will see
integrations into two forms. Financial institutions (FIs) will create
integrations into social networking sites such as Facebook as well as
bring more social networking aspects into the bank's online banking
channel.
- Google, having remained silent on
activities related to online finance (excluding its finance site and
merchant servicing capabilities), will begin to show its face.
- Online banking vendors will embrace Web
2.0 and release products with enhanced user experiences, focused on
ease of use.
- FIs and vendors will learn from
(independent) innovators such as Wesabe, Geezeo, and Prosper.
- As the year progresses, more
revolutionary talk will set the stage for creating an entirely new
online banking experience - beyond releases slated for 2008.
- Banks will have a response to the P2P
lending phenomena (especially to Zopa's US entry).
"Building Year" for Mobile
Banking
In the US, 2008 will be a "build" year for mobile banking
services. Following the lead of most top-10 banks, most top 50 banks will
launch some form of mobile banking service in 2008. Multiple technologies
(i.e., SMS, downloadable application, mobile browser) will be used within
a single bank to enable mobile banking for diverse demographics. Celent
expects that many individual end users will use two of the three and hence
agrees with banks that are supporting all three. The more aggressive banks
will expand mobile banking services out from basic functionalities (e.g.,
balance inquiries) to more advanced functionalities (e.g., bill pay or
intrabank transfers). Adoption of mobile banking services in the US will
be consistent with Celent's earlier prediction of 10% of online banking
households.
Although mobile proximity (near field
communication-based) payment critical mass is still years away, mobile
devices will gradually play larger payment-related roles in 2008. Celent
expects to see more use of the phone to receive e-coupons/discounts from
merchants or to participate in merchant promotions. Mobile phones will
increasingly be used abroad as a vehicle for P2P and utility payments.
Perhaps the most exciting development will be the use of mobile wallets to
hold overseas remittances. More people communicate via handsets than
browsers. Do they want to bank that way? Outside of the US the answer is
yes.
Customer Analytics a Key Differentiator
Celent believes that the ability to develop customer profitability
analytics and execute strategies and tactics based on the results will
differentiate financial institutions over the next decade. Financial
institutions that differentiate service levels, develop segment-specific
products, and implement relationship pricing based on customer
profitability will excel. Currently few financial have the gears to shift
to growing customer profitability. The few that have built the gears state
that it has been the "biggest thing they've ever done to improve
profitability" and "the only way to become a truly
customer-centric organization."
At its core a customer-centric strategy
requires an understanding of customer profitability at the account level.
Hence, the journey to customer profitability analytics will be long, and
the road paved with numerous challenges, the primary one being the need to
undertake either an activity-based or behavior-based cost accounting
exercise. The end result, however, will be a sustainable competitive
advantage. During 2008, an increasing number of banks will recognize the
potential and begin the journey or continue the one they already embarked
on. IT spending will be focused on building data marts and calculation
engines and business intelligence systems to push the results to the front
line.
Consolidation of Payment Platforms Plods
Along
Whether from the vantage point of a business or a bank, the idea of
looking at the payments operation from an enterprise perspective isn't
new. The coming year will experience less philosophical banter and more
decisiveness and action. Until recently, enterprise payment management was
simply a concept, but in 2008, a growing number of US banks will
contemplate recent payment system advancements around the globe,
especially those in the EU, against the US payment market and the bank's
offering.
More bank executives will take an informed
position on the vision and approach for their payments franchises; fewer
banks will dismiss the enterprise payment approach as a fad. Consequently,
there will be a marked increase in enterprise payment initiatives as the
year progresses - whether at the level of execution planning,
organizational changes, business process, technical investment, or
otherwise.
Heightened interest in electronifying business-to-business payments will
occur, with new beta projects coming on line. Banks not yet taking a
leadership role will risk being left behind as businesses move from the
check to ACH.
Vendor Consolidation Round 6
The banking technology vendor landscape has been consolidating for
over five years, and the pace is likely not to abate in 2008. Active areas
will be middleware, online banking and electronic bill payment (EBP), and
mobile banking.
The broad application of SOA in banking
will trigger large technology companies without a significant middleware/SOA
offering to acquire one of the leading independent providers and compete
head-to-head with IBM WebSphere and SAP NetWeaver.
Consolidation has dramatically reshaped the
market for online banking and EBP providers and processors. This trend
will continue in 2008 as there remain a handful of providers; providers
that have great capabilities but don't have the capital to keep up with
the giants or have capabilities not sufficiently differentiated from a
large provider's lineup. If you have been keeping score, there is only a
small number of material (but not giant) online banking and EBP players
(e.g., S1, ORCC, and iPay) that have not been acquired in the
consolidation land grab. Interesting to note too that there hasn't been
much activity in the alternative money movement or online account opening
areas, two areas that can drive revenues into the online channel. Will
Fidelity, Metavante, or Fiserv double-down? Will a competitor of these
behemoths step up its investments in these areas (to expand its offering
or simply to defend against a competitor acquiring it)? Will a couple of
smaller players combine forces?
On the mobile banking/payments front,
Celent expects consolidation as bank adoption picks up. A harbinger is
Qualcomm's purchase of Firethorn. Smaller, privately held players in the
mobile space with relatively well-known names (e.g., ClairMail, mFoundry,
Obopay) will likely be considered as acquisition targets by banks, bank IT
vendors, or even mobile IT vendors.
The weak US dollar could lure foreign IT
competitors to enter the US market via an acquisition or two.
Risk Management and Security Will
Dominate
There will be increased pressures to start thinking more holistically
about risk. Although change will not happen overnight, we expect 2008 to
be the genesis of breaking the siloed mentality toward a more converged
view of risk. In reaction to subprime losses and the collapse of
structured credit markets, there will be renewed calls for a higher level
of transparency, structural integrity, and operational controls that, at
the moment, leave a lot to be desired. Financial firms will come under
pressure to reexamine underwriting practices and align the various parts
of the credit management value chain as well as address potential
conflicts of interest, financial valuation, and interconnected risk
management challenges associated with the velocity of market movements.
Regulatory and stakeholder scrutiny will increase, and linkages between
origination, credit portfolio management, credit control, and
administration need to be actively managed.
In reaction to subprime losses, banks will
undertake projects to ensure they have screens for all types of new risks,
including secondary analysis of FICO scores to determine any credit
improvement or enhancement that may need to trigger a secondary scoring,
and prevent "shotgun" fraud by borrowers making same day
coordinated applications to avoid multiple closings by separate lenders
against the same property. The lending and securities industries will also
come together more - either on their own or as a result of pressure by
federal regulators - to promote better lending practices. New technology
may be used to improve already strong predictive tools. Election 2008 will
generate further pressure on lenders to revamp.
From an operational risk viewpoint, there
will be continued emphasis on "defensive" security-related
initiatives that include internal fraud, online multifactor
authentication, mobile banking security, and business continuity planning.
However, institutions will adopt a more proactive and strategic stance to
institutionalize operational risk frameworks and practices driven top-down
as well as bottom-up. Banks have to stay on their toes as new technologies
(e.g., behavior monitoring solutions) surface. Additionally, the flurry of
banks diving into mobile banking is introducing security challenges -
banks are looking to offer secure solutions that use one or more of the
mobile browser, text messaging, and downloadable applications.
Finally, firms that have undertaken
"first round" regulatory mandates to develop infrastructural
building blocks and achieve rudimentary compliance will now look to make
preliminary investments pay off. They will examine how risk management
practices and technologies can add value to their firm and what it means
from a competitive perspective. Basel II, whether directly or otherwise,
will drive spending, especially in top tier banks and ambitious mid-tiers
looking to advance onwards to develop sophisticated risk management
practices.
Remote Capture: Learning to Compete
Remote deposit capture (RDC) will continue to change the
deposit-gathering landscape. Most financial institutions that have not
already adopted RDC will do so in 2008. Joining the deployer fray will be
multiple third party aggregators delivering solutions through independent
sales organizations (ISOs) taking RDC to smaller businesses en masse.
Client deployments will exceed a half million in the process. Historic
"first mover advantage" will disappear in most markets, creating
an environment of escalating competition for RDC clients among deployers.
The inevitable result will be price compression, leading to accelerating
adoption.
Midsize and large banks will uniformly
launch RDC initiatives targeted specifically to small and midsized
businesses in 2007 and 2008. Virtually all these solutions will be Web
client products offering enhancements designed to streamline entitlements,
provisioning and training of bank's burgeoning client base. Most cash
management banks will integrate RDC into wholesale and retail lockbox
platforms to better serve the receivables and cash application needs of
larger clients. Some smaller lockbox users will leave in favor of RDC's
comparatively good value proposition. Most remaining lockbox clients will
still use RDC for expedited processing of stranded items.
Continued check image exchange adoption
will result in straight-through image processing of remotely captured
checks in most banks by 2008. This will compel banks to further
deconstruct any vestige of paper check processing infrastructure, leading
to favorable RDC pricing versus traditional paper deposits. Currently,
many banks incur a processing premium on RDC items.
The biggest leap in RDC will be its
emergence as a viable niche consumer application in 2008. Led by community
banks and retail brokerages, "consumer capture" will be offered
as a component of online banking using existing scanning devices to reduce
cost.
The New Face of the Branch
Banks are facing a fundamental question: Do they want to become an
excellent retailer? For some banks, the answer is no. Perhaps they are
already excelling as a low-cost bank, a business bank, or a mortgage bank
and do not need to change strategic course. For other banks the answer
should be yes. Yes, if they want to build their market share in an
increasingly consolidated and competitive environment. Yes, if they want
to generate deposit growth commensurate to loan demand. Those responding
yes must be willing to undertake a major long-term commitment to invest in
the people, training, and systems required to transform themselves into
world-class retailers. Celent expects more banks to gradually make the
commitment in 2008 and follow in the footsteps of retail stars such as
Umpqua Bank.
Transforming the branch into the retail
mold will involve a myriad of investments from refurbishing branch
interiors and restaffing with sales-driven individuals to implementing new
interactive technologies. Technologies that will transform the branch and
invite customers to browse and learn include panel touch screens which
offer access to a variety of product information, desktops which enable a
customer to videoconference with a product expert, and laptops which allow
a customer to simply surf the Internet. Behind the scenes more robust
teller and platform systems will support the branch's customer service
representatives and enable them to readily identify profitable customers,
expedite account applications, and offer relationship pricing, including
fee waivers. Early results from next-generation branches are auspicious:
deposit goals reached in 60% of the target time.
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