European retail banks, in common with those across the world, are reviewing their planned investments in the light of the economic downturn. Now, more than ever, they have to invest intelligently in the areas that can hopefully create sustainable competitive advantage and have proven return on investment. So what will European banks be prepared to spend on over the next few years? According to Datamonitor, two areas that will see growing investment are customer relationship management and outsourcing of IT operations.
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In the report "CRM Technology In Retail Banking," Datamonitor predicts that spend on CRM by European retail banks will grow from $2.4 billion in 2001 to $3 billion in 2004. Over this period there will be a new phase of CRM implementation, shifting from operational towards analytical CRM. Operational CRM includes sales, marketing and services automation, front-end applications for traditional channels, campaign management and eCRM, such as e-marketing and e-service. It also encompasses contact centers, Web enablement technologies and e-mail management. Analytical CRM takes the concept further. It covers data warehousing, data mining tools such as profitability analysis, customer segmentation and churn analysis. This shift has been driven by the realization that the main purpose behind CRM is to make the customer pay. "Too many customer relationships only break even or are in fact loss making," the report says.
For an effective solution, retail banks should aim at the integration of operational and analytical CRM.
Integrated CRM solutions theoretically put banks in a position to design their customer relationships on an individual basis to balance customer profitability with customer loyalty. The idea is that banks can provide value added services for more profitable customers and more basic products and services for customers the banks believe are lifetime loss-makers. Examples of personalization are rate variations, channel availability and surcharges. "CRM in retail banking will move into a new phase focusing on delivering long- term competitive advantage, cutting structural costs through channel integration and establishing a single, operational customer database and delivery application platform," the report says.
Anders Maehre, Datamonitor's financial services technology analyst says, "The downturn is clearly putting IT budgets under pressure, but provided an ROI can be demonstrated, it is clear that growth in CRM spend will be strong in the next years, albeit after year on year decline in spend in 2002."
Across Europe, banks are at different stages in CRM development and adoption. The leaders, according to Datamonitor, are found in the Nordics, Benelux and the United Kingdom, where analytical CRM is forecast to attract the majority share of investment by 2004. Retail banks in Germany, Italy and Switzerland will still spend more on operational CRM. And French and Spanish retail banks will lag after other European markets in terms of CRM advancement. Infrastructural and operational CRM will continue to take up the greatest proportion of CRM spending in these countries.
"There is increasing cost pressure on banks' IT budgets, but CRM will still grow significantly over the next four years," says Maehre. "But there are major 'ifs.' Vendors need to be able to demonstrate clear ROI and spend time building a business case for banks to invest. It is also key for successful CRM that organizational issues will make or break it. A Web-based branch system will amount to nothing if the bank staff is not trained, or not enthusiastic. This has caused some of the CRM failures in the past. It is rare for CRM to fail because of the system."
But CRM is not the only area of bank IT spending to buck the downward trend. Spend on outsourcing IT services by European retail banks is one of the few areas that will hold up firmly. Datamonitor predicts that it will increase by a compound annual growth rate of 8%, well above the market average of just 2.8% between 2000 and 2005. It presents lucrative opportunities for IT vendors to secure significant revenues, especially when growth in overall IT expenditures is seriously slowing down.
Slowing loan growth, deterioration of credit quality and weakening of fund flows mean diminishing revenue growth for European retail banks. It follows that the most important short-term priority is to control costs and gain rapid return on investment, and cost control is now a key driver for IT outsourcing in the retail banking sector. Outsourcing is attractive for other reasons including the focus on core competencies, organizational changes, quality of service and rapid access to technical and key IT skills.
"There will be investment in areas where a clear ROI can be demonstrated," says Annette Bozorgan, eFinancial services analyst at Datamonitor. "Banks need to focus on core competencies and outsourcing appears as a consideration for retail banks trying to keep IT costs down. Vendors say that a savings of between 10% and 30% can be achieved by outsourcing."
Spend by European retail banks on outsourcing will increase from $2.6 billion to $3.8 billion in 2005, when almost 11% of IT budgets will go towards outsourcing.
"The counter-cyclical nature of outsourcing makes it the growth segment in the European retail banking technology market to 2005," says Bozorgan. "The growing acceptance of outsourcing among retail banks is creating prime opportunities for IT vendors, which need to be seized now.
"Traditional areas of outsourcing are IT infrastructure systems, data centers, application and hardware maintenance," she says. "These are non- core and non-threatening to outsource. Desk top and network management are also becoming commoditized. Beyond traditional areas of outsourcing, the fastest growth will be in transaction processing and business process management."
Datamonitor estimates that European retail banks' investment in the BPO sector will increase from $270 million in 2000 to $560 million in 2005, a CAGR of almost 16%. Spend on transaction processing will rise from $440 million to $770 million over the same period, a CAGR of 12%.
But not only must IT vendors be able to demonstrate rapid ROI, they'll also have to build trust and goodwill.
Once banks take the outsourcing plunge, they need to keep going, even if the economy picks up again. "Moving to outsourcing is a step change for banks and they won't move back once new practices are in place," says Bozorgan.
