How Banking Innovations Trigger IT Spending? Sutherland Banking Insights
February 2014
How Banking Innovations Trigger IT Spending? Overview Banks are extremely conservative when it comes to IT spending. Unless there is a clear cost-saving, business benefit or regulatory requirement, IT investments are unlikely to be signed off. This explains why banks are still running on rigid systems that are 20 to 30 years old. But the picture is changing on account of customer demands for new ways of banking using digital technology, which is making banks see IT in a new light. The declining impact of the financial crisis and improving US economy creates optimistic outlook for IT spending in the banking industry. Globally, the overall IT spending in financial services will exceed USD430 Bn in 2014 and is forecasted to surpass USD500 billion by 2020. At an overall level, banks are planning to increase their spending on innovation, with the mobile and online channels seen as the most important delivery channels to invest in. The banks are all set to offer mobile payment services and tailored tablet banking applications to customers in the next three years.
“Bankers continue to be selective with IT initiatives, focusing on those that can deliver value to their clients and the organization, while also satisfying the mandate of reducing costs and improving efficiency.” “Expect to see projects around risk and compliance, core and infrastructure modernization, customer experience, and security, which are lifting our otherwise tempered forecasts." –Karen Massey, Senior Analyst, Banking, IDC Financial Insights
IT Spending by Global Banks in 2014 According to IDC analysts, banks will spend 4.2% more on technology in 2014 as compared to 2013. Overall IT spending globally in financial services is expected to increase at a CAGR of 2.5% from USD430 Bn in 2014 to USD500 Bn by the end of 2020. Technology investments will be mainly driven by the need to grow revenues and improve customer trust. However, changing regulatory compliance is also seen as an important factor to drive technology investments in future. Online and Mobile banking are expected to be the fastest growing areas in 2014. Other areas such as management information systems, multi-channel integration and customer information systems will also grow at a high rate.
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Bank IT Spending in Key Geographies (USD Bn)
Europe 2.9%
N. America
60.3
62.1
A-PAC
4.5%
56.9
5.8%
59.5
2013
62.9
2014
66.5
Growth in %
Source: Celent
In North America, IT spending by banks is majorly dominated by the US amounting to USD51.2 Bn in 2014, which is expected to further increase to USD55.8 Bn in 2016. On the other hand, IT spending by European banks is finally recovering and is expected to rise by 2.9% to USD62.1 Bn in 2014 and reach USD67.1 Bn by 2016. Economic conditions in Europe are gradually improving – the Eurozone GDP grew modestly in the second and third quarters of 2013, after six consecutive down quarters. Similarly, the UK’s financial services sector will increase its IT spending in 2014, to make its operations more secure and efficient. IT spending by Asia-Pacific banks is expected to grow mainly due to retail banks, while investment banks will face continued global cost pressures. The increase in IT spending in retail banks is mainly due to plenty of upside in the emerging markets. These emerging markets include Indonesia, Thailand, Malaysia, Philippines and a huge potential is also seen in India and China.
IT Spending by US Banks in 2014 Banks in the US are likely to accelerate spending on IT services, based on higher growth in the banking sector and improving economic fundamentals. Mobile and tablet banking are priorities for many banks as they work on enhancing self-service and digital sales capabilities.
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According to Celent estimates, US banks’ IT spending is expected to be 4.5% higher in 2014; the forecasted growth will be consistent during 2014-16 at a CAGR of 4%. Strong growth is expected in retail banking spending with major preferences include monetization of digital channels, enhancements to the user experience, and omnichannel sales and service activities. Spending on wholesale banking will also continue to ascent, as midsize banks are looking at upgrading aging cash and treasury management solutions.
IT Spending by US Banks 2012–16 (USD Bn) $70 $60 $50
$55.2
$62.2
$59.5
$56.9
$8.7
$8.3
$64.8 $9.0
$7.6
$8.0
$47.6
$48.9
$51.2
$53.5
$55.8
2012
2013
2014
2015
2016
$40 $30 $20 $10 $0 USA
Canada
Source: Celent
According to Technology Business Research (TBR,) banks of all sizes are especially focused on investing in technology that can enable business growth through application modernization. At an overall level, close to 60% of a bank’s budget is fixed, which includes spending on technologies that are required to run the bank; while the other 40% is discretionary spending focused on technologies that bring change in the bank such as business intelligence applications and analytics. Apart from large commercial banks, credit unions and regional banks are also investing significantly in IT to remain ahead in the market. The top 20 regional banks in the US, including SunTrust Bank, PNC and Key Bank currently spend USD1-1.5 Bn on information technology every year with focus on deploying emerging technologies, such as analytics, cloud and mobility, onto their existing systems.
Hot Technologies Banks will Focus in 2014 Online and Mobile Banking Online and Mobile banking will be the most preferred areas for IT investments in the banking industry. According to Ovum analysts, banks will spend 6.8% more on digital banking in 2014 compared to 2013. Banks are dedicating more and more resources to front-end innovation that touches the customer.
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Online banking has taken another big step forward with the advent of mobile banking. Mobile will be the most important channel of customer relationship in the next five years. According to The Financial Brand, 51% of US adults bank online, while 32% transact on mobile phones. Most banks today have developed a comprehensive suite of mobile apps that enable customers to check account balances, pay bills, transfer money between accounts, receive information about new products and services, and receive notifications about fraudulent activities. Currently, banks are moving to next generation of transactional mobile banking services such as person-to-person (P2P) payments, remote deposit capture (RDC) of checks, and contactless payments at the point of sale. Apart from the retail mobile banking, banks in the US will be investing in corporate mobile banking technologies in response to a significant rise in demand from their customer base. Few banks in the US are already offering corporate mobile services; the focus is on enhancing the breadth and depth of their capabilities beyond cash management and payment. Banks are in the process of adding capabilities such as checking the status of a letter of credit or viewing commercial loan balances or liquidity information from a mobile device. Customer Data Management and Analytics Banks and financial institutions have amassed critical data related to their customers including data related to account portfolio, transactions, channel interactions (branch/ATM/Internet), customer service exchanges, household relationships, etc. This data is scattered around in various systems such as core banking, loan origination and risk management systems. Analyzing these data points is a tedious job and requires pulling together scattered data, consolidating it and giving it context so it can be further analyzed. In 2014, banks will be investing in data integration capabilities, data quality management, and serviceoriented architecture to make it easier to analyze the data. Analytics will harness these data to give banks a clear picture of individual customer attributes such as demographics, sentiment, transaction history, life cycle needs, risk tolerance, channel preference, utilization, and much more. After getting insights on customer behavior banks can target their customers and market the products customers actually require. The banks will utilize real-time customer and transaction data to create customized messages, and offer products and prices tailored to each customer’s needs. Bank employees can analyze the transaction history and suggest "next best product" for a cross-sell; and may also recommend the "next best action", if customer sentiment does not require a cross-sell at that moment. It can help the service agent to know his customers better and convert the calls/leads into sales.
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Core Banking Platform Core banking platform is the center of any bank system. It is the base of the bank that processes all deposits, payments, loans, most bank transactions and customer data. Some banks in the US still use aged core banking software purchased 30 or more years ago. Also, on top of it banks have deployed additional products such as online banking and mobile banking software. This has created a complex IT environment, which is very difficult to manage and upgrade to launch new products and comply with emerging regulations. The time has arrived for banks/financial institutions to transform their old rigid legacy systems to new agile core banking platforms. Need for customer-centric core banking platform calls for humongous investment in information and technology. Complete implementation of core banking platform may cost banks in millions with payback period of 18 to 24 months. Integrated banking software, which is customer-centric, fast, agile, user-friendly and cost-effective, will prove as a major game changer in years to come. According to IDC estimates, in 2014, the core banking technology will take up about a third of IT spending for US banks. However, in the near future demand is expected to increase because many banks have legacy core systems that will be more expensive to maintain over a period of time. Ovum analysts expect spending on core technology to grow 4.2% in 2014, compared to 2013. Payment Space In 2014, banks will be making substantial investments in technology for payments and other ecommerce services. There will be a rise in solutions that power seamless corporate-to-bank connectivity and enhance treasury services. To drive market share, banks will also be looking to develop innovative offerings that set them apart not only from other banks but also their non-bank competitors. The peer-to-peer (P2P) payment market, in which money transfers are made directly between consumers, is vast in Africa and other parts of the developing world, where fewer people have bank accounts. But such payments have been slow to catch on in the developed world where the bank typically processes transactions on behalf of consumer. In US, a P2P payment is majorly dominated by PayPal, Google Wallet and Squares. According to a Fiserv survey conducted in 2013, 79% of US consumers are open to using a digital P2P service through their financial institution. Consumers trust banks and credit unions to manage their money and keep their personal information secure. In the US, large banks such as Bank of America, JPMorgan Chase, Wells Fargo, Capital One have launched P2P payment service and many banks and regional banks are in the process of launching their P2P.
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Cloud Computing In 2014, banks will be increasing its spending on cloud computing technology due to lower cost, standardization and consistency. Banks are adopting cloud services as they make them more agile and receptive to changing market conditions and customer needs. Few banks will go with a private cloud and build it out themselves, while others will replace aging legacy applications with cloud alternatives, run either in a secure private cloud or a public cloud, depending on the criticality of the information in the system. As the demand for cloud grows, investments in legacy systems will reduce. Banks will be focused on reducing the costs associated with hardware, infrastructure, and other legacy technologies that consume resources but do not drive innovation.
Cloud Spending by Financial Services Globally, 2010–15 $ Bn $30
$26.4
$25 $20 $14.0
$15
e$10.0 (38%)
$10 $5
e$4.0
e$5.2 (37%)
e$1.2 (30%)
$0 2010
2012 Overall Cloud Spend
2015
Private Cloud Spend (% of total)
Source: The Tower Group
Financial services firms have been more cautious than other industries about adopting cloud services, owing to data security and regulatory concerns. Currently, cloud-based services account for only a small portion of bank IT spending, but banks are projected to increase their annual cloud spending to USD26 Bn by 2015. Banks are also spending on private cloud services mainly due to data security. Private clouds provide hybrid model ability to add discrete services and also provide better management control to both business and IT executives compared to public cloud. For instance, recently a large IT company helped a Scandinavian bank to use cloud services to swiftly integrate a newly-acquired bank. Using a cloud environment, the bank was able to test and simulate their new systems before going live, and its pay-as-you-go pricing model, which only charges for resources deployed and consumed allowed the bank to release processing power it no longer needed. Since the merger, the newly-acquired bank has captured more than 10% of the country’s market share.
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BBVA Compass – Implemented Core Banking Platform BBVA Compass, the US subsidiary of Spanish banking group BBVA, operates over 700 branches in Alabama, Arizona, California, Colorado, Florida, New Mexico, and Texas states of the US. The bank ranks among the top 25 largest US commercial banks based on the deposit market share. In 2012, BBVA Compass Bank implemented a new core banking platform, which is the largest bank transformation in the US in at least 10 years. The The Core banking transformation transformation earned accolades for the bank such as “Model Bank of the Year for 2013". BBVA Compass generated cost savings of 13.2% in bank shifted to core banking platform of Accenture 2012 and is expected to increase to called ‘Alnova’ and became the first US bank to 22.8% by 2015 completely modernize its banking platform. Compass is the fusion of 7 to 8 banks acquired over the years, all of them having different banking platforms. Shifting to Accenture’s Alnova is to modernize and integrate the fragmented independent banking platforms and to implement a customer-centric real-time core banking platform, which will be cost-effective. The project cost grossed over USD360 Mn and will serve the bank’s 716 retail branches, commercial and wealth management branches on real-time basis. This is first successful transformation in the last 10 years by a major US bank. The bank conducted a year-long extensive study of core banking platforms and its vendors around the world and ultimately zeroed down to Accenture’s Alnova. To monitor the implementation, the bank had set up an internal Project Management Office (PMO), which was run by the bank’s employees. PMO, consultants, and testing team worked as a unit and successfully implemented the same. A pilot project was executed at a branch at Colorado for six weeks and then expanded to all the branches of the bank in the US. Now, customers can see their executed transactions updated in realtime and can also open an account online without stepping a foot inside the branch. Key Benefits of the Transformation • • •
Real-time updates to deposit accounts that support a consistent view of the customer across all channels Consistent corporate data across the enterprise; no more reconciliation of reports The new system cuts down new account setup times from 40 minutes to 5 minutes and reduces the time to market new products by 75%, largely because of time saved on coding across multiple platforms.
“We didn’t just change the technology and continue to do things that way we had before; …” “We made big changes in process improvement.” –
Jorge Ortiz, EVP and Director of IT Platform Development at BBVA Compass
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Conclusion The banking industry witnessed a strong improvement after the worst of the financial meltdown and is moving from cost-centric approach to revenue generation. Banks are investing in innovation, to cope up with the changing customer behavior and evolving regulation. The banks are making significant investments in technologies such as online and mobile banking, risk and compliance, customer data analytics, and clouds. Banks are in the process of upgrading its age-old rigid legacy system to the core banking software. To compete in this dynamic industry, banks whether big or small should lead the revolution and embrace the future of banking.
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