September 17, 2013 5:01 pm

Bank tech expenditure set to rise

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Illustration showing bank tech expenditure set to rise©Oivind Hovland

Banks and other financial institutions are facing up to a new reality. The costs of meeting an expanding roster of regulatory requirements are rising at the same time as an increasingly competitive market is putting pressure on margins. Meanwhile, the need to invest in technologies to respond to changing customer demands, reduce risks and battle cyber crime has never been greater.

Against this backdrop are to be found general IT trends, such as the shift to cloud computing and mobility, the growing influence of social media channels, and the opportunities presented by so-called “big data” analytics. Such topics are expected to dominate discussions among bankers at the Swift International Banking Operations Seminar, SIBOS, in Dubai this week.

“I expect much of the discussion to be focused on the growing cost of meeting regulatory requirements,” says Werner Steinmueller, head of global transaction banking at Deutsche Bank. For some banks, he suggests, these costs could consume up to 40 per cent or more of the annual IT budget and make it harder for them to invest in the innovation they need to keep up with customer demands.

Paul Henninger, a director at Detica NetReveal, a specialist financial software provider, says it is not only the case that banks face more regulations, but that these are more detailed and targeted at more critical parts of their business.

An example of this, he says, is the US Foreign Account Tax Compliance act, designed for foreign banks to report on potentially taxable accounts and transaction activities of US citizens. “The FATCA regulation ... is far more detailed in terms of what is required than previous money laundering regulations ... the initial burden on banks is many times more complex than the initial release of anti-money laundering regulations over a decade ago.”

The implications of this go far beyond tying up bank IT resources. “The focus on regulatory compliance can challenge banks’ capacity to undertake customer-centric innovation,” says Jean Lassignardie of Capgemini Global Financial Services. “For example, partly as a result of the eurozone debt crisis, European banks are complying faster than originally expected with the Basel III objectives [due to be implemented by 2018], but as a result they have less capacity to focus on innovation.”

He says that, for the past few years, most financial services companies have been focused on using technology to cut costs and improve efficiencies. Now they realise that in order to increase revenues they must move to a more customer-centric model and explore the opportunities presented by mobile and online channels.

“They’re doing this while simultaneously responding to the trends shaping the industry, such as ever-changing market conditions, the increasing customer demand for new services and rising compliance costs, not to mention managing the explosion of data at their disposal,” says Mr Lassignardie.

To put this in perspective, Technology Business Research (TBR), the US-based research firm, estimates that large North American financial institutions alone will spend $73.8bn on IT improvements, including software, hardware and professional services, next year as they switch from IT investments designed to “run the bank” to investments focused on “changing the bank”.

“The overall 2014 IT budget growth rate hovers at 2 per cent,” notes TBR’s Banking and Financial Services Source IT report. “Large banking organisations are increasing investment in multi-channel banking and data management to improve system performance [and] ultimately meet customer demand for improved service and an enhanced user experience.”

As part of this trend, banks and other financial services businesses are changing their services delivery models. For example, they are taking services to customers via mobile devices such as smartphones and tablets, rather than forcing them to come into bank branches.

“Business requirements will not be the same as they were three or six months ago so, culturally, technology and businesses have to adapt to new methods,” says Jon Warren of Rule Financial, a London-based consultancy that serves the global investment banking industry. “Those firms most able to implement internal change are the ones most able to survive a post-regulatory world.”

In the meantime, financial services companies must still find ways to streamline their IT operations, cut costs and improve efficiency. However, many banks struggle with this process. “On virtualisation, there is still a fair way to go,” says Lou Rauchenberger, chief administrative officer of JPMorgan’s corporate and investment bank. “My view is that participants in the industry are in a very difficult place ... there is a strong pressure to have much more integrated back-office operations, but many are still several years away.”

While he believes that banks have a breathing space following an intense period of mergers and acquisitions, he says they are still struggling to consolidate applications and reduce the number of servers in their IT operations. Many still rely on bridges between different system architectures rather than achieving real integration.

Cathy Bessant, Bank of America’s chief information officer, agrees. She argues that IT simplification itself is important. “Simpler is always better,” she says. “It always offers more stability and higher performance quality. And simpler is always cheaper, so is a worthy objective unto its own.

“For us, we grew up as a company with hundreds – literally – of acquisitions and so, while we always were seamless in the front office, we rarely took that all the way through the hierarchy of the infrastructure of the firm. Simplification for us has meant collapsing multiple systems that do the same functions into one.”

Ten years ago, she says bankers typically thought of technology as “the back office”, or the infrastructure that kept the institution functioning.

“Today, no good firm thinks of it that way. Technology and the front office are one and the same, and often times we deliver our product – money, capital or payment services – through a technology. The channel and what we are delivering have become one and the same.”

She shares the feeling of many other IT banking professionals that the pace of change that has been experienced over the past decade will continue unabated, but that predicting what the next popular trends remains difficult.

“I can only anticipate that the next 10 years will see that same kind of change as the past 10,” she says.

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