Top Tech Trends in
The top trends:
1. Customer centricity as red thread
2. SOA becomes a way, not a what
3. Core renewal comes of age
4. Internet banking 2.0 takes the stage
5. "Building year" for mobile banking
6. Customer analytics a key differentiator
7. Consolidation of payments platforms plods along
8. Vendor consolidation round 6
9. Risk management and security will dominate
10. Remote capture: learning to compete
11. 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
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
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
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
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
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
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
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
Celent is a global research and consulting firm focused on the application of
information technology in the global financial services industry. Celent publishes
reports identifying trends and best practices in financial services technology, and
conducts consulting engagements for financial institutions looking to use
technology to enhance existing business processes or launch new business
strategies. With a team of internationally experienced analysts, Celent is uniquely
positioned to offer strategic advice and market insights on a global basis. For more
information, please see www.celent.com.