If you listen to bank tech execs, analysts and technologists talk about new strategy for the coming year, you can almost hear a page turning. Gone is the moribund posture of retrenchment and compliance focus that's dominated IT work for the past five years, replaced by an outlook that's more focused on true innovation than at any time since before the real estate bubble burst.
Sure, spending's not growing by leaps and bounds and the evergreen line items like compliance, credit risk, disaster recovery and security aren't exactly going away soon. Basell III, Dodd-Frank, rising sea levels and hackers will ensure that.
But the primary pressure on banks is now coming from nimble startups developing exciting new tools that change the way people make payments, deposit funds, and engage their finances; as well as from consumers who expect and demand a robust, layered, educational, and even fun experience when managing their money. While it may not be 1999, the air is filled with creativity.
"2013 is the first year of 'beyond the financial crisis.' From 2008 to 2012, the banking industry was consumed with the crisis, with consumer credit, regulatory impact, introspection and cutbacks. But when we talk to senior level executives now, they are carving out a strategy to go forward," says Jim Eckenrode, the executive director of the Deloitte Center for Financial Services.
Even though economic weakness lingers, particularly in Europe, most banks feel as though they can no longer wait on new tech projects. "Banks have been talking about growth despite the climate of uncertainty. It's time for the rubber to meet the road in terms of innovation and growth," says Lisa Kart, a research director at Gartner.
The projections suggest steady growth in overall bank technology spending. Gartner says that in the banking sector, technology spending is expected to reach $460 billion in 2013, up 3.5 % from $445 billion in 2012, with lending, payments, trading and risk management receiving an uplift in funds. Across all industries, global IT spending is forecast to total $2,679 trillion in 2013, a 2.5% increase from 2012's projected $2,603 trillion.
"North America is looking better than Eastern Europe [which faces a fiscal crisis]," says Kart, who adds that while Citigroup's recent announcement of cost-cutting may impact the forecast slightly, the overall climate in North America is relatively healthy. "Most banks expect IT budgets will increase, and only about 7% say they are decreasing IT budgets, so that's a very positive sign."
In the most recent numbers available, Celent has projected 2012 bank IT spending in North America, Europe and Asia to total $173 billion (the dollar size of different analysts' predictions can differ widely because definitions of bank IT spending differ), or 2.8% higher than 2011. 2013 is projected to come in at about 3% higher, or about $180 billion, with 2014 expanding by about 3.4%.
Celent says the fastest growing region is Asia-Pacific, with 2012 spending approaching $60 billion, with 2013 expected to surpass $62 billion. North American bank spending is expected to grow 2.4% in 2012, closing in on $55 billion, and passing $56 billion in 2013, or about 3 percent higher. Growth in Europe is expected to be flat, or hovering around the $60 billion mark.
Broken down into categories of spending, Gartner says top priorities will be the improvements in systems that enable IT modernization, such as virtualization, cloud, analytics and business intelligence.
"A lot of the investments are being driven by application modernization and the fact that legacy applications more and more need to be replaced, such as core banking systems, risk management and online banking," Kart says.
A pointed focus will be on software to deliver improved CRM, business intelligence and analytics, she says. Such applications can be used to develop sophisticated marketing and sales campaigns to promote mobile financial services, particularly personalized marketing and merchant offers delivered at the point of sale. The technology can also help leverage social media and other unstructured customer information that's part of the "big data" revolution. Social networking has proven to be a source of information on consumer tastes and affiliations that can prove useful in marketing, sales, credit risk and security.
Many major new tech projects in the coming year are expected to involve data management and business intelligence engines. The use of social networks as a venue to deliver content and gather data should mature in 2013, becoming a substantial component of financial services marketing. "Social is generating a tremendous amount of interest right now. Some banks are still taking a wait and see approach, but others are getting headlong into it. The investments in social are not huge when compared to other investments, but they're certainly important right now," Eckenrode says.
Big data's also a big job producer as companies hire specialists, sales people and other staff with skills in advanced information analysis and its varied uses. Gartner is projecting 4.4 million new jobs will be generated in 2013 across all industries and disciplines directly and indirectly connected to big data, with more than 1 million of those jobs coming in financial services.
Kart adds that while banks are still predominately licensing and hosting software, cloud structures are gaining favor. After years of choosing internal or private clouds out of concerns over access and safety, banks are starting to become more comfortable with public clouds, which are less expensive.
"Most banks are using private cloud services, but about 20% are using public cloud services," Kart says.
FOCUS ON THE CUSTOMER EXPERIENCE
If 2012 was the year that banks embraced innovations such as big data, the cloud, mobility and crowdsourcing, 2013 will be the year they intersect to make the user experience more robust, cut costs and change the way in which financial tech professionals are recruited and trained.
"How can we leverage the new technologies that seem to exist in every layer?" says Suresh Kumar, chief information officer for BNY Mellon, who says the bank's focuses this year will include improvements in customer experience and operational efficiencies.
To harness innovations ranging from big data and mobility to virtualization, BNY Mellon just launched a new development platform called BNY Mellon Xtreme Platform (BXP). In 2013, the bank will migrate as many applications as possible to that platform, which will streamline how new technologies are built and delivered across the enterprise. The bank will also increasingly rely on innovation initiatives, including a contest in which bank employees will provide input on how client experience can be improved, costs lowered and service levels elevated.
"We have about 50,000 employees and a firm-wide focus around innovation...we want to be able to leverage our employees' ideas," he says.
Kumar, who spoke with BTN in early December about the bank's plans for 2013, was in the midst of a talent management trip to Pittsburgh to scope out and recruit new talent from area universities such as Carnegie Mellon and the University of Pittsburgh. The emerging tech environment for banks not only includes new programming languages and architectures, but also the shorter development cycles that come with mobility. That places a premium in technologists with skills in new agile project management and development theory.
"The time to market is going to be critical, that's why I mention the importance of talent management," Kumar says. He says the "consumerization" of IT is changing project management and software development, requiring new skills in agile, lean and other emerging techniques that will increase in importance in coming years.
"The competencies that we need right now and what we need in the future are different than what we needed in the past. ..it's very important at the end of the day to have the right talent," Kumar says.
BRANCHES AND CHIPS
Innovation will also be leveraged this year to inject life into older channels, a particular challenge for credit unions that rely on shared branch networks and are tasked to manage branch and digital usage patterns that are rapidly changing.
"One of the areas that we're looking at in the next year is branch transformation and automation. Branch volume is going down and cost per transaction is going up," says Kathy Herziger-Snyder, vice president of development for CO-OP Financial Services, which shares tech and physical resources among a national network of credit unions.
Herziger says CO-OP is testing ATMs that link to video tellers, a technology that an increasing number of banks have been utilizing to re-imagine branches, either by using video to help manage staff expense at branches, or by creating a new branch model in which some branches can be larger than others that rely on video to save costs. Through a partnership with Diebold, CO-OP plans to enable two-way chat with remote tellers.
And like most card-issuing banks, CO-OP is waiting for the eventual EMV (Europay, MasterCard and Visa payment standard) migration. EMV, or the use of cards with embedded chips, is thought of as more secure than traditional magnetic stripes. After years of delays, a move toward EMV is expected to begin in the U.S.
The card networks have threatened merchants with increased liability if they fail to adopt EMV technology by certain dates, but thus far there has not been a lot of movement, leading to speculation that overall migration may get pushed back even further. "The big elephant in the room is EMV, and how institutions and credit unions are going to address EMV," Herziger-Snyder says.
She says CO-OP is advising its credit union members to educate themselves on how EMV works and the varied time lines. COOP actually offers a service through which members can ask questions about chip and PIN cards and migration. "Credit unions should have a strategy to move into EMV. We're not sure how it will shake out in terms of the whole ecosystem and what merchants will have to do with terminals. It's going to be a multi-year effort to get everyone. But for 2013, credit unions need to become informed and work with [card and ATM] vendors on a plan. That's going to be a big budgetary consideration. If they don't have a budget for EMV in 2013, they probably will for 2014."
DESIGNING A RESPONSE
The growth in electronic commerce will come with challenges, namely in ensuring consistency between devices while managing the different form factors. Banks have spoken for years about the need for customers to hear and see the same thing regardless of point of contact, but that's never been harder than it will be going forward.
"Two or three years ago, you had an iPhone and that was it. Today there are so many platforms to scale to. We need a model that allows us to be nimble and responsive and confident," says Hari Gopalkrishnan, a managing director at Bank of America with a responsibility in the electronic and mobile technology space, including architecture strategy for its retail and wealth management customers.
To deal with what Gopalkrishnan refers to as "sprawl" with a multi-channel approach to serve customers, Bank of America plans to use responsive design to ensure content and presentation are optimized for tablets, phones and PC screens without glitches in user experience or heavy lifting on the bank's part.
Responsive design determines what kind of device has been used to access a company's site, and responds accordingly with size, font, color and other design elements that are designed to fit the screen of a PC, a particular smartphone or tablet. So a graph may change color, size or shape accordingly. "The idea would be to do the common work once and then do special work at minimal layers to move faster and more aggressively to add new products," Gopalkrishnan says.
That nimble design should aid an aggressive tech year for Bank of America, which is planning to let customers make their own address changes and expand the features of remote deposits and bill payment.
The bank is also planning to expand the use of data and analytic driven platforms to enrich special offers, building on new products such as BankAmeriDeals, a customer rewards program. "We want to be able to know that if you are a customer that does a certain level of business with us, we will reward you with additional services," Gopalkrishnan says.
TRANSFORMATIONS TO CONTINUE
Are you using the same television that you were 30 years ago? Or driving the same car? For many banks, the rails that drive the IT department are much the same as they were when Ronald Reagan was president.
That's necessitating broad renovations of the application landscape at many banks - which can include a combination of core processing upgrade projects, sweeping data projects and other initiatives that renovate a bank's application landscape to accommodate fast changing customer demands, manage time-to-market pressure, respond to changing risk and security mandates, and nimbly adhere to new and changing regulations. "Banks are highly interested in these transformations," says Jost Hopperman, an analyst at Forrester Research.
Hopperman in early November completed research on transformations. He says 79% of North American survey participants are either working on a transformation initiative or will start to do so by 2016 at the latest. The top business reasons given include compliance, improvements in customer service, agility, increasing operational efficiency, coping with changing markets and managing costs.
Regarding the three to five initial focal points of the transformation, Hopperman found that:
-48% of the respondents listed analytics and business intelligence.
-More than 30% listed building the architecture and application infrastructure to support the transformation.
-Between 20% and 30% listed multi-channel enablement, centralized customer and third party data management, CRM, core banking, regulatory compliance, internet banking, mobile banking and risk management. Hopperman also asked how the institutions will use services oriented architecture and business services over the next 18 to 24 months. Forty-two percent said they would be used in more than a third but less than half; 20% said in a majority of applications, 18% said less than a third, and only 2% said nowhere.
What also may need transforming is an understanding of third-party relationships. "We also found that there is still confusion between SaaS and more traditional hosted offerings. Because some companies that say they are using capabilities out of the cloud are using capabilities that are not yet available in the cloud," Hopperman says.
Innovation-oriented echnology spending looks to begin picking up, spurred on by mobility and payments.