Cost Reduction Leads IT Priorities

Banks will face an assortment of IT issues and challenges during 2003, according to a report, IT Issues for Banks, by Giga Collaboration. With Y2K now a distant memory, and CRM and other enterprise initiatives underway, the priorities for IT spending will fall into three primary categories: reducing costs, improving customer service and managing risk.

Cost reduction, achieved through service providers, outsourcing and new technologies and processes, will be the top priority. Cost reduction is the rationale behind the large outsourcing contracts signed recently by JP Morgan Chase, Bank of America, Deutsche Bank and ABN AMRO with IBM and EDS.

Banks are expected to plow a portion of their profits back into IT investments designed to assure future growth, the report states. Among these are building a standards-based, layered IT architecture containing a middle tier of core business components. By mixing and matching these components, banks will be able to more easily bring out new products and services, as well as support their CRM initiatives. "The fastest way to bring new electronic banking offerings to market is through good integration of this middle tier with legacy mainframe systems," wrote Penny Gillespie, lead analyst for the report.

Business process outsourcing, involving such functions as check imaging, document management, loan processing and others, has been and will continue to be a way for banks to cut costs. Under pressure to invest in technology and business processes in order to remain competitive, many banks are choosing BPO as a way to reduce back-office expenses.

Business-to-employee applications, such as employee self-service portals and e-learning, provide yet another cost-saving opportunity for banks. E-learning, for example, delivers one of the highest ROIs among business technologies by reducing travel, HR, regulatory compliance and customer support costs, as well as increasing employee performance.

Under the category of improving customer service, banks will continue to invest in CRM processes, organizations and techniques that enable them to identify high-potential customer segments. Deciding which processes should be centralized and which should be located at points of customer contact will be a matter of importance for banks. The emphasis must be on using, not merely collecting, customer information. "It's the people and the use of the technology that will separate leaders from laggards," wrote Gillespie.

Multichannel contact centers will continue to receive hefty infusions of IT spending, as banks seek to streamline customer-facing processes and build a single platform for customer communications. The ultimate goal for banks is to gain a unified view of customers and insight into their preferences. Banks that fail to integrate customer data to deliver personalized services risk falling behind, the report said. "One-to-one directed selling and intelligent response based on customer profiles is a key differentiating factor."

Under the category of risk management fall IT investments associated with complying with new regulations on disaster recovery, operational risk and information security.

Disaster recover guidelines promulgated by the Federal Reserve, the Office of the Comptroller of the Currency and the Securities and Exchange Commission require that settlement and clearing functions be restored within four hours and that recovery sites and other resources be located "out of region." These requirements present a formidable challenge, especially if "out of region" means more than 30 miles. "The technology can't perform at this distance, and a four-hour maximum precludes use of commercial hot-site services," wrote Gillespie.

By requiring banks to maintain at least two years' worth of historical data on operational risk, Basel II will challenge their information gathering capabilities.

Regulations surrounding protection of customer information and systems will be the third driver of IT spending under risk management, the report said. "Security architecture should be closely ties with security/privacy regulations."