For over a couple decades, IT has been an integral part of a financial institution's competitive advantage. Throughout the 1990s, efficiency and cost-cutting were the primary objectives of IT. Thanks to relatively strong performance during the economic downturn, banks have been able to increasingly apply a strategic approach to their IT decisioning process. Consequently, in the IT ROI equation, revenue enhancement will be gaining equal weight to cost-cutting. Given this trend, Celent Communications expects that the majority of the 4 percent of growth in banks' IT spending in 2004 will be invested in "what can be" rather than "what is."
The Branch Renaissance Continues
More banks are recognizing that the branch is still the cornerstone of retail banking. As banks focus their efforts on growing revenues through sales of more complex higher-margin services and products, they are finding that the branch is the most effective delivery channel. The direct personal interaction provided at the branch creates the best environment for selling these products. Banks' ability to leverage the branch, however, has been impeded by legacy systems and outdated applications that are no longer sufficient to support innovative delivery strategies. Consequently, in order to successfully harness the branch's sales potential, banks will increasingly implement upgrades in branch technology.
Multi-channel Integration Is Moving off the Drawing Board
Multi-channel integration is garnering the attention of a growing number of banks. Although it is far from becoming a mainstream exercise, it is moving away from the early-adopter phase to being a feasible initiative for most banks to undertake. The question is not if but when. Second-wave adopters are moving gradually, due to the complexity and cost of integration. Many of these banks are gaining additional fortitude to move forward by relying on third-party solution providers. Internet banking and call center platforms are proving to be ripe targets for integration.
A Few Intrepid Banks Will Undertake a Core Banking Replacement Project
Faced with the high costs and integration challenges associated with running the antiquated core banking systems, banks are beginning to consider replacing these vital systems. A core system replacement is perhaps the most risky, as well as costly IT project a bank can take on, however, causing many banks to move cautiously. Celent expects that over the next few years, an increasing number of banks around the globe will begin to take on such projects. Many of these will consider for the first time a third-party solution, as opposed to building new proprietary solutions, which are believed to be too costly and risky. Once the world's largest banks successfully complete these projects, setting an example for the industry, other smaller banks are likely to follow.
The Payment Czars Will Gain Authority
By 2004, most of the top 50 US banks will have a senior executive appointed to the role of Payment Czar or head of a payments council. Payment Czars will play an increasing role in shaping banks' strategies in the changing payment space. The vast majority will not be able, however, to supersede business lines, and will still lack P&L responsibility. A few organizations, mostly very large banks, will be strengthening or building up a distinct payment business line across retail and wholesale payments.
Check Imaging's Potential Is Unleashed
With the signing of Check 21 into law, the full potential of check imaging technology can be realized. Check processing in the U.S. is at an historical watershed. Check imaging, which had an ignominious start in the 1990s, has been staging an incredible comeback driven by economic and technological factors. It began generating ripples in the late 1990s with re-pass image capture and is currently propelling a tidal wave, which will sweep in check truncation and image exchange.
Improvements in Internet Banking Will Forge Ahead Banks are increasingly convinced that Internet banking's ROI can extend beyond simple cost-to-serve equations and direct revenue models. Driven by enhancements in Internet banking's user-friendliness, Internet banking's ROI now encompasses generating revenues indirectly by improving customer satisfaction with Internet banking, which in turn, has proven to translate into greater customer retention and higher balances. Banks' demands also include lowering cost-to-serve through self-service features with broad appeal (e.g., check image access and e-statements) and customer support features that not only improve customer service representatives' effectiveness but also their efficiency (e.g., online chat).
Automation of the Loan Process Will Expand
As interest rates inch up, banks are scrambling to develop marketing and IT strategies geared towards maintaining strong growth in originations. Next-generation solutions will provide users with greater work process automation capabilities and better integration with third parties, thereby eliminating many of the manual processes still in place today. A large portion of the typical loan process is still conducted via phones and faxes, creating bottlenecks and unhappy customers, who expect greater speed. New solutions will also be better integrated with the front end, creating greater straight-through processing.
Small Business Need Not Be the Underserved
Until recently, small businesses have been chronically underserved by banks. The classic example is the application of a retail Internet banking solution to serve these businesses, which has been the leading cause of low adoption to date. Banks, however, are increasingly recognizing they could garner a larger share of small businesses' financial services spending if they implement appropriate technology. In an effort to better serve them and attract their business, banks will deploy at an increasing rate Internet banking solutions built specifically for small businesses. Small business online banking adoption is therefore expected to grow beyond its current 12 percent level to reach over 20 percent by 2005.
Cash Management Will Jump on the Browser Bandwagon
While most banks already have large corporate banking solutions in place, a large number of transactions are still being completed on Windows-based solutions. Many banks have announced plans to migrate all of their customers over to browser-based solutions now that full functionality is available through this channel. Consequently, the number of transactions completed online is expected to grow steadily over the next year. Cash management solutions themselves are also evolving, with the greatest advancements being made in FX capabilities, loan originations, and trade finance.
Banks Will Continue To Spend on Compliance Solutions
Much confusion regarding the USA PATRIOT Act and its implied affect on the banks has resonated through the banking industry over the past two years. Today, however, the confusion has subsided as final regulations have been posted for many sections of the Act and speculation is no longer needed. Although a clearly defined roadmap is still missing for financial institutions, we are beginning to see banks revise or implement their compliance procedures. Banks will focus on solutions that will assist them in detecting money laundering both at the account and transaction levels. Much emphasis will also be placed on ID verification procedures to assist them with correctly identifying and authenticating their customers across channels.
Alenka Grealish is the manager of the banking group at Celent Communications, a financial services technology research firm based in Boston. She can be reached at [email protected].