The More Things Change...

During the past two years, the revenue at the top five U.S. commercial banks has been heavily weighted toward retail banking, which has accounted for between 55 and 75 percent of the total revenue. Below are highlights of the challenges the retail banking segment will face in 2004.

Acquisition and Retention

To avoid losing customers to the rebounding equity market, it will be essential for banks to make better use of customer data, customer channels and product offerings. In the short term, banks should be looking for point solutions to help with management in closing the sale.

Although customer-relationship management (CRM) is a widely discredited buzzword today, that doesn't mean bankers have given up pursuing better use of customer data. In fact, the need for effective marketing, opportunity identification and knowledge delivery has never been higher.

Operational Improvements

Ten years ago, an efficiency ratio of 58 percent was the industry best practice in the United States. Today, that's the industry average, and now best practice is represented by a figure closer to 45 percent. Nevertheless, we forecast, banks will not undertake replacement of core systems, at least not now. Rather, short-term investments will be made in point solutions associated with efficiency gains: enhanced workflow and process automation. Similarly, we anticipate that streamlined front- and back-end lending systems will be brought together to eliminate manual interfaces.

Outsourcing will continue to move up the asset scale for both IT outsourcing and, increasingly, business- process outsourcing (BPO).

Regulatory Compliance

Dealing with a host of new regulations will also play a major role in technology investments by the banking industry in 2004. Check 21, the USA PATRIOT ACT and Sarbanes-Oxley head the list of legislative actions that will have an impact on financial institutions in the coming year.

In particular, Check 21 will be driving a great deal of investment. This not only includes image archival and production of image replacement documents, or IRDs, but also investing in a redesign of the check-clearing process, from the front office of the accepting bank to the paying bank. These issues will gradually build to a move to upgrade core systems.

Likewise, the USA PATRIOT ACT is ratcheting up the need for fraud detection.

Risk Management

Banks have long occupied a position of trust in the minds of U.S. consumers. But recent increases in fraudulent activity across the spectrum-the Internet, ATM networks, credit cards-will undermine this reputation if banks have not dealt with it in an expeditious and effective manner. Not that fraud is new to the banking industry, but what is new are both the types of fraud and the regulations established to combat it.

For example, at TowerGroup we are observing that many large banks are again spending on the ATM channel. These investments include not only machine upgrades, but also critical security enhancements.

Meanwhile, card issuers are going to have to respond to the growth in online-fraud schemes involving identity theft and transaction fraud.

Finally, we anticipate that managing credit risk will involve an increased use of customer data by banks for both credit granting and collections.