Banking

Banking Segment Scope Sheet

Draft – 5 January 2005

See also Banking_Research_Segment Combined_research_segments_and_topic_teams

Research Area: Banking

The banking industry is composed of a variety of entities whose primary business focus is offering, producing or servicing products that fall into four broad categories:

• Borrowing: consumer and commercial loans, mortgage, credit card, etc.
• Investing: savings, money market, funds, sweeps, etc.
• Conducting commerce: making and collecting payments
• Mitigating risk: trade finance, insurance

While the banking industry is predominantly represented by organizations, usually corporations, that are chartered by a state or national government., there are also many other kinds of firms that engage in banking business lines.

Banks

• Commercial/Retail Banks: Institutions that cater to the financial needs of private individuals and small businesses (Also includes Thrifts, Savings & Loans, Building Societies, Credit Unions)
• Wholesale/Corporate Banks: Institutions that cater to the financial needs of companies
• Private Banks: Any bank (or trust department in a bank) that provides products and services to high net worth individuals (including tax & investment advice, portfolio mgt.). 90% of US commercial banks offer this kind of service - outside the US private banks are often separate institutions
• Central Banks: Institutions responsible for the creation and contraction of the supply of money and its cost.
• Investment/Merchant Banks: Institutions that acquire assets for the purpose of capital market transactions, corporate finance, mergers and acquisitions, leveraged buyouts. Investment banks take principal risk in the positions they create and manage
• Universal banks: European institution that provides products and services to every financial services segment (e.g., insurance, investments, banking)

Other companies involved in ban-like activities:

• Mono-line financial service providers: credit card (e.g., MBNA, American Express), mortgage (e.g., Countrywide)
• Financial arms of companies in other industries: automotive firms (e.g., GMAC), manufacturers (e.g., GE Capital)
• Technology companies serving the Banking Segment
• Also: Payment clearers, associations, and standards bodies

Key market drivers/disrupters/inhibitors

Market Forces Driving Business in the Banking Industry (rank ordered):

1. Regulation and enforcement: New regulation and increased enforcement are driving needs for improved corporate governance, financial and customer data standards and enhanced security. The increased compliance requirements and scrutiny are also exposing gaps and problems with existing technology (Driver, Disrupter, Inhibitor)
2. Commoditization: With a few exceptions, banking products and services have become commoditized. With less ability to differentiate on product features, banks are now more focused on differentiating based upon quality, service level, and price. Agility and responsiveness are new objectives, but rigid organizational structures and technology architectures impede progress. (Driver, Disrupter)
3. Margin erosion: Readily available alternative sources of capital and pricing pressures contribute to erosion of revenue banks earn from interest income. This is driving a heightened focus on products and services that earn fee-based revenue such as payment disbursement and collection services. Fee-based revenue produces steadier earnings flow and is less influenced by economic cycles. (Disrupter, Driver)
4. Productivity and cost: Investor interest in short- and long-term financial performance is sustaining a focus on operational effectiveness, efficiency and productivity. Some regions have been at this longer (e.g., U.S. and U.K. banks), so it’s harder to achieve incremental improvements. There’s a quandary here for IT: technology investments are necessary to drive cost reduction in the overall business, but IT itself is under pressure to reduce its own cost. (Driver, Disrupter, Inhibitor)
5. Industry consolidation and globalization: Banks mergers have evolved to a more strategic level, from purely an economy-of-scale play (1990’s) to deals structured to acquire complementary components either by expanding into new markets, or by acquiring new capabilities. Cross-border acquisitions are on the rise. (Driver, Disrupter)
6. New competitive threats: Threats from non-traditional sources are nothing new in banking, however in recent years the market impact has been minimal thus the threat is viewed as a distant concern (e.g., lackluster performance of internet-only direct banks, alternative payments). Now, new competitive threats are more viable. This is particularly true in the payments arena. (Driver, Disrupter).

Top 10 business issues (rank ordered)

1. How can banks sustain organic growth in saturated, developed markets? There is excess capacity in many developed markets (e.g., availability of capital for commercial finance), and many options for buyers (e.g., national brands, regional and local players, credit unions, direct banks). Banks need strategies to improve retention and growth of existing customer relationships, while attracting new business.
2. What are best practices and benchmarks for operational efficiency? Operational efficiency and productivity improvements are essential to drive down costs, to enable banks to better compete on price (which has been shown to be the leading criteria customers use to select firms).
3. What can banks do to create value by better managing risk? The essence of banking is to make money by managing risk. Thus, the better you are at managing risk, the more money you will make. Beyond measures required by new regulations, leading banks are pursuing sophisticated approaches to managing risk at the enterprise level, across various categories (e.g., credit, market, operational, etc.).
4. How can banks acquire a better understanding of customers and prospects, and to predict and optimize outcome? Banks and lenders are seeking ways to improve lending decisions, avoid fraud, and avoid doing business with inappropriate people and organizations.
5. How can banks protect and grow revenue from existing fee-based products, and where are new revenue-producing opportunitites? Banks recognize that siginificant revenue is at-risk (e.g., due to declining check volume, corporations doing in-house banking, etc.). Thus, banks are seeking ways to protect what they have while developing new capabilities
6. Improvements to security and business continuity are essential. What are best practices and when do you reach diminishing returns?
7. What are world-class corporate governance and business management practices?
8. In emerging and growing markets, how can local banks evolve and how should foreign banks enter?. There are unique challenges for banks seeking to do business in developed economies experiencing rapid growth (eg: Ireland, Korea), and in countries with earlier-stage development (e.g., China, India, Western Europe). In developed countries (e.g., U.S., western Europe), there is also an emerging market made up of vast numbers of people (many immigrants) that are “unbanked�?.
9. What strategies should banks adopt in a declining rate environment, and what steps should they take to insulate themselves from future volatility? Credit criteria and portfolio performance are significant near-term issues.
10. What emerging trends, technologies and competitive initiatives will impact the banking industry?

Top 10 technology issues (rank ordered)

1. How should banks deal with new and changing regulations, and what technologies and tools should they use to support compliance efforts?
2. How can banks spend less time and energy just “keeping the doors open�?? The effort and expense of maintaining existing systems and applications has risen in direct correlation with point-to-point integration (e.g., CRM integrated with systems-of-record), and because many applications use older architecture that is less flexible.
3. What are the right tools and techniques necessary to protect the enterprise?Data and access protection, security.
4. How can IT do more with less, sooner? Few IT resources are available to focus on discretionary strategic initiatives (because most are needed for compliance, and to merely maintain existing system capabilities). A critical technology challenge is to find ways to deliver more of these initiatives in less time and with less effort.
5. How can IT deliver more consistent, quality technology infrastructure support while lowering TCO? (desktops, telecommunications, storage,…); avoiding obsolescence, supporting at lowest possible cost, fulfilling demand in rapidly changing environments.
6. How can banks establish a solid and agile architecture?: To ensure longevity of components, an enterprise architecture is essential. This is hard to do while simultaneously delivering near-term results. This requires new skills and governance, shared funding, compromises with regards to priorities, etc.
7. How can banks attract and retain talent, and reskill existing staff?
8. With technology decisions and capability shifting to the business, how should IT ensure mission-critical control while supporting business agility? Governance with respect to BPM and rules engines, purchasing decisions, architectural standards compliance..
9. With data proliferation, how should bank IT manage data quality and integrity, and assure adquate data storage and access capability?
10. What emerging trends, technologies and competitive initiatives will impact the banking industry?

Critical investments that are necessary through 2006 (rank ordered)

1. Multichannel integration: Specific channels require substantial refresh, however banks are (or should) approach this with a single, multi-channel architecture (SOA) to enable lower TCO, greater agility, consistent and pervasive interactions across channels. Specific investments on this architecture include branch (converged telecommunications, branch equipment and application upgrade, assisted service and other innovations); online (capacity, usability, feature-function), ATM, Call Center, Voice Response systems, and mobile access (e.g., SMS).
2. Identity management, security: With risks and vulnerability more urgent now, banks it is imperative that banks invest in stronger identity management solutions, particularly to control exposed access points (e.g., internet access). Banks have resisted this to-date to avoid cost, customer disruption, and the threat of driving transactions from self-service channels (eg., online and ATM) back into manned channels.
3. Customer intelligence and relationship : Real-time analytics embedded in operational systems such as CRM and channels, single view of customer, predictive analytics, segmentation). Relationship pricing and loyalty capabilities are new opportunity areas.
4. Content and Business Process Management: Financial services is by far the most aggressive adopter of content and BPM, particularly to automate and manage labor-intensive high-volume operations. Investment in these areas will continue (to support cost reduction and productivity), however more strategic investments will begin to expose content and BPM more broadly (e.g, to give Call Centers visibility into a mortgage application status). Lower-volume but higher-value LOBs (e.g., commercial lending) will begin to invest here in order to drive operational excellence, collaboration and as an element of regulatory compliance.
5. Core banking (legacy) replacement: The “systems of record�? that manage customer accounts, transactions, statements, payments and settlement systems are, for most banks, using old technology (e.g., monolithic COBOL applications, for some even Assembler) that is fragile, expensive to maintain, and inhibits agility. Replacement options have been limited until recently. New applications have emerged (some from Indian software companies), making the up-side of such projects more attractive today. Furthermore, drivers are converging to make this an imperative for some banks (growth exceeds capacity of old systems).
6. Business Process Outsourcing: In recognition of commoditization, business processes that are essential, but non-differentiating, are candidates to be outsourced to third-parties. Smaller banks have traditionally done this out of necessity, however larger banks are more aggressively outsourcing now. Active areas include payment operations, statement production, loan and mortgage operations, and call center functions.
7. Corporate performance and financial management: Prompted by a variety of drivers (regulatory compliance, risk management, opportunity detection), banks are considering or are already investing in real-time solutions for financial and management information and dashboards, which are tightly integrated with underlying systes of record and external information sources.
8. Specific compliance investments (Basel II, KYC regs, etc.)
9. Payment infrastructure and innovation (EMV, consolidated global payments platforms,