4 Burning Questions for Bank IT in 2012

Bank IT and business executives have many questions about how to address the critical issues of 2012, including the need for business model transformation, the impact of social media and big data, and dealing with legacy infrastructure while seeking increased technology efficiency. IDC Financial Insights' David Potterton provides some answers about what to expect in the year ahead.

With 2012 well under way, the banking industry continues to be challenged by a number of factors, including regulatory changes, liquidity and debt exposures, revenue replacement and constant cost pressure. In addition to these challenges, IT professionals across financial services are also facing important choices in an ever changing business and technology environment, including the need for transformation in business models and technology, the impact of social media and "big" data, and how to deal with an aging legacy infrastructure while seeking increased technology efficiency.

In order to help guide IT executives with these challenges, IDC Financial Insights would like to share the following four key questions that we have been asked around these issues and our responses. We believe these questions will resonate with banks of all sizes and provide some perspective as business and IT professionals deal with these critical issues in 2012 and beyond.

Q1. Does my bank need to develop a new business model at this point in time?

Financial institutions have seen significant changes in demographics and technology. Formerly reliable sources of revenue are drying up, especially in the U.S. and many European nations. Therefore, financial institutions should be thinking more strategically around how to redefine their business models in this new era, including identifying new sources of revenue and cost containment. This can be done in three major ways:

1. Changing the IT Operating Model -- drive cuts but also work across channels for more effective decision making around IT choices
2. Technology Solutions -- in order to provide a single view of the customer through secure integrated channels and a consistent experience
3. Business Information -- tracking customer sentiment, usage, and profitability through analytics.

Realistically, however, we believe most FIs will spend 2012 implementing relatively minor changes within existing business silos to manage short term profitability expectations. The unfortunate result will be a continued erosion of profitability under existing business models. However, for those FIs that are willing to take risks, this is a particularly good time to do so.

Q2. IT reliability is becoming a major risk factor – why is this happening and what can be done?

Back-end systems will continue to show their age as data processing throughput increases alongside the number of new requirements that need to be reflected in legacy technology environments -- new products, new channels, new risk management reporting mandates, and so on. Incidences/incidents of operational outages and failures have been well publicized in 2011 and will become even more frequent in 2012 as legacy core systems are taken to the point of breaking.

Another key aspect is the aging base of IT professionals who really understand these systems. Many times these systems have been cobbled together over many years across multiple mergers with little or missing documentation on how to support. This leaves the support knowledge in the heads of a small and shrinking group of IT professionals, and this knowledge gap is the real risk -- especially as these systems continue to perform well both on uptime and TCO (total cost of ownership).

The challenge for the industry, then, is how to put programs in place to train the next generation of IT professionals to support these systems into the future. At the same time, it is important to start the migration to newer technology now, as the costs and risks will only go up with time. Nobody wants to risk their career when they can just kick the problem down the road for a few more years, but we are rapidly approaching the time when that strategy will no longer be possible.

Q3. There’s lots of discussion around social media – what models are you beginning to see?

Globalization and tech-savvy millennials are forcing banks to rethink how relevant current and future customers will find their firms. Essentially, banks need to think about what type of company they are trying to be in social media. Most start out by looking at collaboration internally (perhaps using tools such as Yammer), while being tactical or even defensive with the external community by mostly monitoring comments about their companies across social channels. Ultimately however, internal social and collaboration efforts are not enough, especially as younger employees look to share their external social lives with coworkers internally.

Some companies have established a steering committee to determine best practices and risk around social media. Putting forward a consistent message and including representatives from all relevant areas of the bank for the committee also appears to be a best practice. Other best practices include: Understand the types of information your institution wants to share both internally and externally, incorporate social media into your bank's employee policies and also establish social media expertise in your marketing and product groups.

Q4. How do we begin to address the "Big Data"issue?

The advent of alternative data sources through social media, along with the increasing number of access channels and devices, is exploding the amount of unstructured data that banks need for decision making. While the technical and organizational infrastructure aspects of big data are important, the effective use of big data takes true IT and business alignment. Here are the starting points:

• Knowledge Definition -- This starts with understanding the business issues and where decision making needs to be improved or enabled by big data technologies (big data use cases). Despite advances in portals and analytic systems to help users make decisions, the business user will typically need IT to assist in accessing and collecting the right data for the decision maker based on this knowledge definition.

[For more on managing and sharing data across departments and consolidating reporting systems, see related article.]

• Reduce the Noise -- This is not just about the quality of data and its relevance to understanding the issues and being able to make decisions. It also relates to reducing the amount of data to what is necessary based on the bank's definition. With the explosion of both structured and unstructured data, the key is to get to the right data to make the best decision possible.
• History Is Just the Start -- While historical data is important, it is just once piece of the puzzle. Today we have an increasingly integrated world where the luxury of time to make decisions simply does not exist. Banks therefore need to evaluate where they need instantaneous data (and perhaps more importantly – where they don't), the value of supporting this model within the enterprise, and the types of decisions they can make around this data to differentiate themselves in the marketplace.

Ultimately, successful banks understand that although big data is a challenge, big data that's factual, fast and available at the right time is where the value to the enterprise and its customers can be found.

David Potterton is VP of Research for the global banking, insurance, capital markets and risk management practices of IDC Financial Insights. These advisory services cover retail banking, cash and treasury management, payment services, insurance and core corporate banking technologies, as well as capital markets and risk. Follow Potterton on Twiiter @dpotterton.