It's no exaggeration to say that the effects of the Year 2000 change on financial institutions in 1999 were of, well, once-in-a-millennium proportions. As information systems testing and remediation peaked, organizations slowed technology spending slowed and tabled hardware and software deployments.
At the same time, spurred by the globalization of financial services, the electronic commerce craze reached fever pitch, pressuring banks, brokerages and even historically tech-shy insurers to gear up for the brave new world of e-business. "The Internet is controlling a major portion of the spending," says Bill Bradway, research director at Meridien Research Inc. "It's become pervasive."
So pervasive that despite Y2K institutions worldwide ratcheted up IT spending nearly 8%, from $177.6 billion in 1998 to $192.7 billion last year, according to the Newton, MA, research firm (see charts on page TKTK). Of that total, retail bank spending accounted for $115.5 billion and wholesale banking for $77.2 billion. By industry segment, commercial banks spent $91.4 billion on IT, or roughly 47% of total industry expenditures; securities firms spent $38.2 billion (19.8%); insurers spent $42.5 billion (22.1%); and non-bank institutions shelled out $20.6 billion (10.7%).
The leading areas of investment were front-office technology for customer relationship and campaign management; back-office solutions for cross-channel and legacy integration, and decision support; Internet bill payment; data warehousing; data scrubbing; and infrastructure development. This last category, in fact, made up nearly half of all financial IT spending, as enterprises race to lay the hardwiring to compete online. "Big institutions have hundreds of thousands of (computer) seats-they need the network abilities for PCs to access the Internet."
Strategic technology outlays-meaning investment in particular systems adjudged critical to business-grew 18%. Spending on Internet-based delivery systems for corporate customers was approximately $800 billion and is expected to reach $1.4 billion in 2004. The main axis of investment for all these technologies is the 'Net. Randi Purchia, research director of e-retail financial services at Meridien, says that "Banks today are freed up to do what they want to do. Y2K is done, and the changes in Glass-Steagall have expanded the idea of being a financial supermarket, which has been around in financial services for at least 15 or 20 years."
Urge to converge
If 1998 was the coming out party for customer relationship management, 1999 saw it turn into a veritable cottage industry. Fueling banks' ongoing infatuation with CRM is the industry trend toward personalized products and services.
Because banks are still weak at spotting profitable customers, they're upping investment in real-time segmentation, profiling and related applications, as well as in data mining, extraction and other so-called knowledge-factory tools that institutions need to offer customized service. "We still see banks struggling to identify customers, and that's a function of products in the past being siloed," Bradway says. "Banks are trying to become more efficient in extracting customer information from disparate applications.
But for many financial institutions, 1999 was the year cross-channel integration surpassed CRM as their top priority. With the commoditization of financial services has come the understanding that customers are at the center of the banking and brokerage industries. That means supplying them with financial information across a range of "touchpoints": branch, ATM, telephone, point-of-sale, PC, Web, mobile phone.
Yet it's only with the advent of the Internet and its derivative technologies that businesses have developed a capacity to knit these multiple spokes into an electronic whole. In turn, convergence has turned the challenge of financial services firms from the now banal "give the people what they want" to the much more ambitious "give it to them how, when and where they want it." Of greater difficulty is understanding the "why" at the heart of the equation, which requires financial institutions not only to know their customers' individual economic circumstances but to anticipate their future needs.
And that's where CRM and channel integration intersect. "Banks are starting to think about multi-product, multi-channel optimization...and the thrust is around the Internet," Bradway says. "It's a matter of figuring out what the customer needs and optimizing it across (financial products."
Despite this enlightened approach, however, the proverbial "seamless" delivery of products and services is a distant dream. "Because of data warehouse design, the lack of (network) bandwidth and the fact that Web data is in silos, it will be a very long time before all of this is truly integrated," Purchia asserts.
Meridien projects global information technology spending in 2000 to top $209 billion, an 8.6% increase over 1999 figures. Investment proportions by industry sector will remain steady: Commercial banks will shell out $98.2 billion, or roughly 47% of total spending; insurers will spend about $45 billion (21.5%); securities firms, $42 billion (20%); and non-bank concerns, $24.2 billion (11.6%).
"We'll see the e-financial service continue to accelerate," Bradway says...with banks and brokers elbowing it out on the Internet. Insurance continues to lag (on the Web).
Spending on IT consulting, outsourcing and related services will approach $102 billion, a 4% rise from 1999. Hardware and software expenditures will reach $76 billion (3% increase) and $31.4 billion (8.6%), respectively.
Geographically, Europe will see the biggest hike in investment, growing from $72.8 billion last year to $78 billion in 2000, which constitutes more than 37% of worldwide financial IT spending. Institutional spending in North America will hit nearly $68 billion, a marginal 2.1% increase over 1999 levels. Still recovering from economic turbulence, financial companies in Asia/Pacific are expected to lay out $48.1 billion in 2000, or 2.4% above the $43.3 billion they spent last year.
Areas of investment differ considerably around the globe. Apart for a handful of progressive banks in Europe, U.S. institutions continue to lead the way on the Internet, and in electronic bill presentment and payment. By contrast, less hindered by regulatory restrictions, European institutions are ahead in offering aggregated financial services and in their use of wireless services and smart cards.
Investment in mobile financial services is likely to surge, Purchia says, as Web-enabled banks and brokerages adapt their systems to handle emerging wireless protocols (see "Mobile Banking? Hold The Phone," starting on the cover of this month's issue).