U.S. Banking Industry Trends and IT Impacts

In the current business environment, banks will take steps to improve their profitability and competitive capabilities, including product enhancement and redesign, cost restructuring, relationship focus, precision pricing, select customer acquisition, and mergers and acquisitions, according to consultancy Novantas.

U.S. banks' financial performance remains under pressure. While losses continue to decline and profits slowly improve, the revenue drought continues. Looking ahead, the outlook is not promising, with many revenue headwinds on the horizon.

U.S. banks are reacting to these new conditions with a variety of strategies to improve their profitability and competitive capabilities in the marketplace. Each of these strategies requires IT to focus on delivering different capabilities, but all require improved ability to use internal and external data, and improved capabilities in self-service and assisted channels.

An analysis of 2010 Q4 bank-submitted regulatory and investor data by our parent firm, Novantas LLC, paints a challenging picture. While credit is improving, revenue overall remains flat for the third quarter. Loans remain essentially flat with some uptick in residential. Deposits balances are growing only ~2 percent across seasonality.

Net interest margin is continuing to drift downward, while deposit charges continue to decline from Reg E; trading and other fee revenue is also down.

Long-term returns have clearly declined from their peak, and probably from even normal. Recent increases in profitability have been driven by credit improvements. But there are a series of headwinds, including regulatory pressures and excess capacity, which will counter these improvements.

On the plus side, expenses also declined. This is noteworthy for fourth quarter, which typically shows slightly higher expenses than third quarter.

But excess capacity will continue to heighten competition for remaining value. Low economic growth and pressures on profitability, combined with excess branch capacity, will increase the competition for quality.

Given this extremely challenging environment, Novantas research anticipates that banks will take a variety of steps to improve their profitability and competitive capabilities in the marketplace. Among these are: product enhancement and redesign; cost restructuring; relationship focus; precision pricing; select customer acquisition; and M&A. Each of these strategies has an impact on banks' IT priorities.

Product Enhancement and Redesign means enhanced product management capabilities in core systems, as well as new capabilities such as person-to-person payments, or more options for online and mobile payments. Recent initiatives by some banks to implement payment hub technologies that act as a central point of coordination between the point of payment initiation and execution are examples of strategic moves in this area.

Cost Restructuring means improving distribution systems to focus on sales and guided selling rather than transaction processing, including a shift away from transaction processing systems and towards sales platforms, including mobile and online channels, as well as enhancements in videoconferencing, tablet, and other display technologies to support the more flexible deployment of staff, thus maximizing the reach of high-value sales employees.

Relationship Focus and Precision Pricing mean even greater demands on data mining, analytics and CRM capabilities. These insights will need to be operationalized through improvements in campaign management systems and point-of-sale systems.

Select Customer Acquisition means strengthening CRM capabilities as well as incorporating third-party consumer and business data in order to improve customer segment knowledge and drive more effective targeting of prospects.

M&A is a huge potential resource drain, since gaining the efficiencies of operating at scale mean expensive and time-consuming conversions. Bank CIOs should prepare themselves as best they can by understanding their business leadership's M&A strategy and being aware of how much operational consolidation is planned for.

While the economy may be turning the corner, banks face serious challenges to their recent revenue strategies and need to adapt to the brave new world they find themselves in. Strong information technology capabilities will be key both to providing the foundation and the tools for execution.

Bank CIOs should ensure that they understand their institutions' strategic responses to current market conditions and that they can efficiently provide the right capabilities in distribution technology, financial data analytics, and customer data integration to allow them to execute those strategies.

Matthew Josefowicz ([email protected]) and Madhavi (Madi) Mantha ([email protected]) are managing director and head of banking research at Novarica, a technology strategy research and advisory division of Novantas LLC. This article is based on their recent quarterly executive brief "US Banking Industry Trends and IT Strategy Impacts," available online at https://www.novarica.com/banking_trends_and_impacts. BS&T Readers may request a free copy at that link.