If you haven't noticed yet, wholesale bankers will be wading upstream again to do more of their fishing in 2004. This time they've studied the water and the hatch more carefully and have employed technology to design new flies better suited to their objectives. They're after the fabled "revenue fish," a tasty but elusive species that doesn't compete well against the more abundant "cost reduction fish" found in the lower pools.
According to a survey conducted recently by TowerGroup and the American Bankers Association, there will be a significant increase in investments by wholesale banking units in technology aimed at deriving new revenue streams by enabling banks to create new products or services, as opposed to the customary focus on boosting productivity.
This is not to say that technology spending on cost efficiency will decrease, for it surely will not. Wholesale banks will continue to place a high priority on eliminating operating costs, where opportunities are still abundant. Our survey finding does, however, indicate that banks will deploy technology in a more aggressive two-pronged attack to try to reverse the continuing decline in net interest margins, which has plagued wholesale banks for more than a decade. This shift is an overdue need from a strategic planning perspective, but one to which banks are only now committing on a broad scale.
Wholesale Banking Emerging at Last from a Slump?
From recession to terrorism to war to corporate scandals, the wholesale banking industry has been battered and bruised since the beginning of the 21st century. While the banking industry at large has prospered thanks to its continuing strong retail performance, wholesale business lines have remained uniformly mired in weak loan demand, deteriorating credit quality, large loan write-offs, and an unusually sluggish economic recovery. The earnings stream from wholesale banking has become increasingly volatile, as demand for commercial loans has dropped 15% in the past three years, charge-offs of bad loans rose to alarming levels and neutralized efficiency improvements, and once loyal corporate customers now shop around for the best financing deal while demanding better service and Internet-based technology.
For the past few years banks have held wholesale technology spending relatively flat, but now with signs of economic recovery finally appearing, they are indicating a readiness to increase technology investment in 2004. Where are the most promising opportunities?
"Tastes Great...Less Filling!"
Ironically but importantly, most technology implemented by banks has been directed toward reducing operating costs and not toward the production of revenue. For the past two decades and more, the overriding focus for new systems has been on eliminating manual labor, improving productivity, and streamlining work processes, all of which serve to reduce costs. Revenue-generating technology has fared poorly at the investment decision tables, primarily because its benefits are more difficult to quantify and verify than those derived from cost reduction. That bias, however, is now starting to crack, and wholesale banks are beginning to shift their technology priorities toward the pursuit of revenue opportunities. Many are looking particularly at customer relationship management (CRM), as their top investment priority.
CRM may still be a four-letter word at some banks, based on earlier experiences, but it is nevertheless a four-star strategy, and will be a top technology spending priority at many wholesale banks. It comprehends multiple aspects, from the straightforward quality of service provided to customers when they interact with a bank, to the capability to provide tellers and call center agents with real-time information about customer relationships, to analytical software that can provide cross-sell opportunities by modeling and predicting customer financial needs, to sales force automation technology to improve the tracking and follow-through of customer leads, and complex accounting applications to measure customer profitability. Perhaps because it has so many possible facets, and perhaps because banks are wiser now about how to reap its benefits, CRM software will be very much in demand in 2004. But perhaps the simple answer for its renewed popularity is that a critical mass of banks realize that their best hope for long-term profitability lies in adopting and living up to a customer-centric strategy. In that context CRM is arguably a cost of doing business instead of an investment that must be recouped.
Cost containment is the perennial 800-pound gorilla that is always a technology priority, but wholesale banks in 2004 will be looking especially for those cost reduction initiatives that will not have the detrimental effect of weakening other strategic objectives such as customer service or risk management. Wholesale banking is rife with opportunities to streamline operating processes and eliminate large blocks of expense; three conspicuous ones are straight-through processing in commercial lending, customer online self-service, and outsourcing. The larger opportunities for cost reduction in outsourcing come from transferring entire business processes, and many wholesale banks will seriously investigate doing so for commercial loan operations, trade services, and cash management support.
Risk management has become perhaps the most potent and most compelling force affecting wholesale banking today, due primarily to the intense focus brought about by the USA PATRIOT Act, Sarbanes-Oxley, and Basel II. Risk management can be, if banks choose, the overall theme that both triggers and justifies initiatives related to operational efficiency, straight-through processing, real-time processing, customer relationship management, channel integration, and outsourcing, all on the basis of increasing risk management effectiveness and thereby optimizing capital allocation.
One of the most critical challenges facing wholesale banks in the next decade is the imperative to create new value for their customers in order to generate new revenue streams. Technology applied to that objective will become more and more in demand as banks move beyond their traditional criteria for ROI results and recognize the need to apply powerful productivity tools in pursuit of the top line as well as the bottom line.
Overall, of course, the transition has to be planned and implemented through a comprehensive approach involving people, process, and technology. Wholesale banking divisions at many banks still have a lot of organizational and cultural baggage that needs to be confronted and either modified or discarded as a critical element of a strategic business transformation. But the generic technology initiatives identified here are those that will best advance and facilitate the strategic imperatives wholesale banks face today. If banks focus on developing the capabilities and value enhancement that these types of initiatives represent, they will invest their technology budgets wisely in 2004.
Mr. Lee Kidder is the director of the Wholesale Banking practice at TowerGroup, a leading research and consulting firm focused exclusively on the global financial services industry. He can be reached at [email protected].