With the financial crisis firmly behind us (at least, we hope) and the U.S. economic picture brightening, the outlook is positive for IT spending in the banking industry. Banks will spend 4.2% more on technology in 2014 than they did in 2013, according to IDC analysts. Overall IT spend in financial services globally will exceed $430 billion in 2014 and surpass $500 billion by 2020, the analysts say.
In Ovum's latest predictions of U.S. retail bank IT spending, based on interviews with bankers and vendors' numbers, the firm sees IT spending rising an average of 3.9% at retail banks in the coming year, according to Jaroslaw Knapik, senior analyst, financial services technology. Overall priorities cited by these surveyed bankers are online and mobile banking, data management and analytics, customer data and analytics, operations and core systems.
Generalities and industry numbers fail to take into account the specific conditions at individual banks. For instance, at Capital Bank in Raleigh, N.C., the IT budget for 2014 is flat in comparison to this year. Chief Operating Officer Zahid Afzal (who was formerly CIO of Huntington National Bank), says the bank will increase its investment on mobile, cybersecurity, regulatory compliance, and more convenient products and services for customers. IT purchases will include sales and service tools, cybersecurity and fraud management software, mobile and payments products and services, storage solutions, and big data and business intelligence related tools, However, the bank's cost of operations is going down through process improvement, better governance and consolidation. Hence the flat budget.
That said, there are several overall IT spending hot spots for banks in 2014.
1. Digital banking and mobile payments. Ovum analysts say banks will spend 6.8% more on digital banking next year than they did in 2013. And in Aite's annual survey of IT executives at large financial institutions, two sweet spots for IT spending are the digital wallet (and the fear of being disintermediated by competitors such as Square) and mobile banking, including tablet apps for consumers and small businesses.
"Mobile is one of those areas where banks are afraid to fall behind," says Jerry Silva, research director at IDC. "In the entire ecosystem around mobile, things haven't settled yet between banks, telcos, and third party providers. A lot of balls are still in the air. Banks are afraid of falling behind and losing by default. That's driving most of the spending around mobile."
Mobile-first initiatives for employee software and customer-facing apps are at the top of James Gordon's list of 2014 IT initiatives.
"We're entering a society where before the phone was an add on, now the computer is becoming an add-on," says Gordon, who is vice president of operations and technology at $1.2 billion-assets Needham Bank in Needham, Mass. "The phone is the first point of electronic communication most people will have. As we redesign and rethink a lot of our platforms, we'll be asking ourselves, how does this operate in a mobile environment, and then, by the way, how does this operate on a computing environment? Three years ago it would have been the reverse."
The bank recently launched Fiserv's Popmoney for person-to-person payments. In 2014 it's going to closely watch the mobile payments and mobile wallet space. "We're engaged in a lot of research, a lot of internal discussion about who will be the top provider for 2016 and beyond for mobile payments and mobile wallet."
2. Marketing analytics, supported by customer data management. In Ovum's research, banks said they plan next year to spend an average of 5.7% more on MIS, defined as data-related technologies including data warehousing, data mining and online analytical processing. And they plan to spend 5.4% more on MI/CIS, defined as systems that give front-office staff access to customer data, next year versus this year.
Customer data management (including data warehousing and data management) and marketing analytics to better understand customers also ranked high in Aite's survey of U.S. bank IT executives. "Banks are in a bit of a pickle with regard to customer insights," says senior analyst David O'Connell. "They have piles of data, some of it in core banking, loan origination and risk management systems. The easy part is analyzing it, the tough part is pulling it together, consolidating it and giving it context so it can be analyzed."
Therefore, banks will be investing next year in data integration capabilities, data quality management, and service oriented architecture to make it easier to apps and data sets to one another. Marketing campaign management is also on banks' minds to get close to consumers, learn more about them and reach them better, O'Connell says.
"Once you get more efficient insights into customer behavior, you can target digital marketing in a much less intrusive way," says Knapik. "It's to drive marketing that's much more relevant. Engagement marketing is not so much ad displays, but trying to create an advisory environment, a conversation that can be automated." Employees are given access to more relevant information and suggestions. The customer theoretically becomes more engaged his needs are being addressed.
The next stage of this is using real-time customer and transaction data to create messages, offers, products and prices tailored to each customers' needs. "As a customer I don't want to be sold a product that the bank wants to sell," says Pierre-yves Glever, senior vice president and global practice head at the financial services global business unit at Capgemini. "I want to be able to get something that fits my needs. Why could a bank not create a package for me?" Banks are starting to invest in configuration tools, pricing engines, real time analytics, and cross-channel architecture to make this possible.
Commonwealth Bank of Australia, PNC and Bank of the West have already traveled far down this path, combining real-time analytics with pricing and value engines to present timely information to customers.
3. The "omnichannel." Omnichannel is an icky buzzword, but it does describe a real goal for many banks: seamless, synchronized interactions across all channels.
"The customer would like to engage with the web, then receive help on the internet, perhaps by co-browsing with someone in the call center," says Glever. "The next step might be to speak with a branch teller and then later, finalize the contract at home through the internet. This is what customers want. It's a huge transformation for banks. They all wonder how they can build this with the people they have. So it's not only about technology, it's about salesforce effectiveness and workforce enablement from tools that will enable their own people to build this new world."
This of course would require integration between channels and customer data that can be shared by all, for a single view of the customer and all of that person's transactions.
The omnichannel concept has been better executed in wealth management organizations than in retail banking, says Knapik. It will eventually include ATMs, he believes. "You want to have the same functionality at the ATM, so if you go to the ATM it looks like the interface for online banking, so you don't have to learn the navigation for different channels separately," he says. "If people use online banking and then go to the ATM, they intuitively know to use it."
4. Core banking technology. Core technology will take up about a third of IT spending for U.S. banks next year, according to IDC estimates, which isn't bad. But this will increase over the next several years because many banks have legacy core systems that will be more expensive to maintain over time. Ovum analysts expect spending on core technology to grow 4.2% next year, compared to 2013.
Silva doesn't expect to see any core conversions in the U.S. this year. (In Asia, however, there are two dozen large core projects happening, he estimates. "They're not as constricted because they already have conservative fiscal policies, and they're not under the gun from a regulatory point of view.")
"The interesting thing with [BBVA Compass and Sovereign] is, will they start to do product innovation based on these new core systems?" Silva says. "And if they do, will that drive other banks in the U.S. to try to compete? That could lead to some core transformations, but we don't think it will happen next year."
"[Zions Bank] is a little more interesting because that's a ground up project it's not another bank coming in to Zions and replacing their system," Silva says. It's a five-year project that will be done in phases, starting with corporate lending.
The downside of doing a core transformation in small chunks a method many vendors at the recent BAI Retail Delivery conference were touting is that if a bank doesn't go all the way through with it, abandons it two years down the road, it's in a worse mess than before it started.
"That to me is more of a canary in a coal mine. Every other bank is watching Zions to see, is it going to succeed? Will it go on a lot longer? Will the CEO be there the entire time? It's always been a risky play for the CEO to be involved in a transformation," Silva notes.
He doesn't expect to see any other major core projects until the three projects above have begun showing results.
There's a lot of reputation risk for CIOs as well as CEOs involved in huge, expensive projects like this. [BBVA Compass is spending more than $360 million on its core project; National Australia Bank is spending $1 billion on its.]
"If I'm a CIO at a regional bank and I'm thinking about a $200 million replacement, do I really want to bet my career on this? It's a real question they're asking themselves," Silva says. One of the attractive aspects of the Zions project is that the bank is taking it piecemeal.
5. Private clouds. At Needham Bank, Gordon recently implemented software for sharing files across all types of mobile devices (it's from Accellion).
"We're protecting trusted data on untrusted or unknown devices," he says.
The software facilitates sharing of documents from a central location, avoiding dreaded version control issues. When an employee leaves the bank, documents and data can be remotely wiped from that person's phone or tablet. Gordon thinks of this as a private cloud, with the software hosted on premise but accessible from anywhere.
The bank is not ready for the public cloud yet. "We have a lot of regulations we have to adhere to, and we can't outsource risk," he says. "To outsource our data is tantamount to outsourcing my job and inviting examiners in for a holiday crucifixion." Auditors regularly scrutinize the bank's credit card records for signs of purchasing from a public cloud provider, which would trigger FFIEC cloud computing rules.
6. Efficiency. Already this year, U.S. banks accelerated their adoption of document management, workflow and business process management software to turn time-consuming, paper-bound processes into simpler, web-based tasks. For instance, Bank of America recently shared how it's streamlining its mortgage processes using software from Pegasystems.
"Banks in the U.S. have been working on small processes like customer onboarding and exception management," Glever says.
7. Security. Security spending will grow a little in 2014, IDC analysts estimate. Cybersecurity is a priority for Zahid Afzal at Capital Bank and others concerned about DDoS attacks and malware.
It's often hard to see a return on investment for security technology, so if it's not considered absolutely necessary it's easily dropped. "That's one of the reasons why EMV hasn't come," Silva says.
8. Compliance and risk management. U.S. bank executives who invested heavily in compliance and risk technology in 2011 and 2012 are now trying to get more business benefit out of those investments, according to Silva.
Zions Bank provided a good example of this when it began making its fraud analytics database available to the marketing department.
"When you're looking at decreasing cost in your institution, particularly in North America and Europe, there's not a lot of fat left to cut," Silva says. "You're down to meat and bone at this point. If you can't cut a lot out in terms of efficiency, you can do is drive more customer value to make existing investments more efficient."
"That's absolutely true," says David O'Connell at Aite Group. "When banks invest in capabilities for stress testing, they're embracing it as an analytical opportunity rather than just a compliance mandate."
One example of this is Opus Bank, where top executives see the stress testing software they use as a helpful loan portfolio management tool.
But O'Connell worries that banks are not investing enough in this overall category, specifically on credit risk, credit decisioning, liquidity risk and capital adequacy and regulatory compliance.
"I'm concerned that banks having gotten overextended and not realized the true nature of their risk in many areas, are now satisfied and making limited increases in IT spending in these areas," he says. "I wish I were seeing a little more focus on winning the last war because it's going to happen again."
"They appear to be satisfied, and here we are only four years after everything blew up in our face," he says.