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
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.