Technology is a key for banking in 2009

I found a whole range of technology predictions for 2009.  One of the best general forecasts comes from Gartner, who say that the top ten technology areas to focus upon during an economic crisis are:

1. Reduce headcount or freeze hiring
2. Renegotiate with technology and service providers
3. Curtail data center expansion, virtualize assets and lease them back
4. Consolidate systems
5. Outsource commodity
6. Offshore outsource
7. Investment shutdown
8. Prioritize projects
9. Mothball businesses and projects
10. Change leadership and restructure IT teams

I agree with this list.

In banking, it goes further. 

In banking, technology is a critical part of the solution for the crisis, and technology also provides a way to avoid the crisis occurring again. 

That is why I titled this as technology providing 'a key for banking in 2009'.

Technology is the key. 

It is a method of solving the market issues long-term - if deployed correctly - and banks, governments and corporations will realise this in 2009.

Five banking technology forecasts for 2009

As mentioned yesterday: this will “be a year for introspection and circumspection rather than innovation and action.”

This means that the majority of banks will focus upon highly conservative cost saving projects with short-term returns on investment. The long-term and strategic will be dropped by many, as will the regulatory. That’s why some key milestones will be missed, particularly for the Payments Services Directive in Europe, which I'll discuss later in the week. After all, what is the point of implementing regulatory change in a year when all regulations are likely to change?

Banks will avoid anything discretionary, anything uncertain, anything unnecessary and anything intangible, so here are the top five things that all banks will focus upon as a result:

# 1 Systems Rationalisation

Server consolidation, virtualisation and grid technologies will also be a critical aspect of improving services and streamlining costs. Banks will see the reduction of distributed servers and data centres, to consolidation into a few centres as being a key focal point. This is demonstrated best by the case study I discussed the other day relating to HSBC.

In 2003, the bank had 130 data centres in over 80 countries. By 2008, they had rationalised these centres down to just 20, and aim to reduce this to six by 2010. Why? Because the bank is run on the network and large data centres provide global platforms for reducing costs, focusing skills in a few centres of excellence, improving resilience and capabilities through economies of scale, and allowing any new regional or local business to be established rapidly and easily by just layering them upon the network.

These are critical aspects for all banks to focus upon in 2009.

# 2 Outsourcing

We have seen a move to offshoring and outsourcing for many banks over the past few years, but 2009 will see a major increase in the focus of moving non-strategic services out of the organisation in an effort to reduce costs. The typical areas will include core applications maintenance, ATM network management, server management, co-location and proximity services. Equally, as more mergers and acquisitions occur, expect to see the acquired operations being moved out of the bank to outsourcing partners.

# 3 Networking

As Ken Harvey stated in the HSBC story, the “network is the bank”. Banks that are not running on hi-speed bandwidth will be challenged as speed is a critical differentiator. Low latency in the investment markets for speed of trade execution through to leveraging web technologies for better customer service in the retail markets will be seen as a critical and core competence. Therefore, all banks will see this as priority.

#4 Interoperability and Standards

But it’s more than speed, it’s connectivity.

Connectivity between banks, between banks and corporations, between banks and consumers and, most importantly, between banks and regulators will mean that interoperability and standards will come to the fore. Although interoperability has been discussed for years, the fact that it is still non-existent in many areas of the markets is now a known weakness.

As Donald Rumsfeld would say, it is a “known known”.

Therefore, regulatory authorities will rapidly move towards a fully connected marketplace globally where all monetary movements and financial instruments are connected and visible, rather than opaque or transparent. This will be seen as a critical G20 change programme, and will rise to top the agenda by end of year. Banks that are not on global standards and networks will be seen as non-compliant.

#5 Risk Management

The last two points build to the final point: the connectivity of bank systems through real-time networks will be seen as a key driver and motivator in order to provide effective industry risk management. I mentioned this in the end of 2008 discussion about long-term solutions to the banking crisis. This is one where Colin Henderson mentioned that he was not so sure what a global risk exchange would mean, so let’s get into this.

I actually blogged about this back in September 2007, where I discussed the issues Lloyd’s of London faced when ineffective risk management hit the market. The issue then was that risk was leaving Lloyd’s through reinsurers who then reinsured back into Lloyd’s. Result: the majority of risk lay with a few key players in the market who collapsed when catastrophic risks occurred.

In banking, this is exactly what has happened in the 2000’s, even though it is lending rather than risk. The issue is that leveraged lending allowed banks to create liquidity that did not exist. Result: the majority of leverage lay with a few key players in the market who collapsed when liquidity disappeared.

What did Lloyd’s do?

They created a run-off company, Equitas, that took all the toxic risk from the market and managed it in a long-tail trade-off firm, whilst creating a centralised risk system where all firms logged their underwriting. The latter allowed the supervisory administration of Lloyd’s to see the total risk portfolio across the market and the exposures of each firm. Any firm that over-leveraged their risks were curtailed, such that the catastrophic risk exposures that hit the market in the 1980’s would never happen again.

What will the banking system do?

Give the governments all their toxic financial instruments whilst creating a centralised real-time risk system to ensure this never happens again. The real-time exchange will log financial instruments being traded by whom with whom. The real-time system will also log the total capital of the institutions involved against their portfolio of risk, borrowing and trading, to see their total leverage position. Firms will be provided with leverage and capital limits as an enhancement to Basel, which will be managed in real-time.

Effectively, governments, banks and corporations will all be connected to a massive data warehouse which runs a global real-time risk exchange. And I would propose that the DTCC, now that they have LCH.Clearnet and EuroCPP in their camp, are well positioned to provide this.

Either way, the capability to focus upon networks, interoperability and standards in 2009, combined with regulatory changes that enforce the centralisation of risk management in a real-time system, will provide one cornerstone towards the long-term solution for this crisis.

Meantime, these five areas of technology operations will be the focal points for all banks in 2009.

What about the few banks who have some discretionary spend?

Yes, there are a few.

A very small few, but there are a few.

What will they be doing?

Banks who have discretionary spend will be able to invest in disruptive technologies, such as social networks, video over broadband, branch 2.0 or even 3.0, mobile financial services, wealth management online advisory services and more.

These areas have been a theme for the last few years, but banks will get the message in 2009 and, for those who can afford to leverage, they will be even more in vogue in 2009. To take just one example that covers all of the above, deploying new network-enabled financial services across multiple devices will be a major point of differentiation.

This has been illustrated recently by BBVA in Spain, who launched a service in summer 2008 called tu cuentas (“you count”).

Tu cuentas offers an ability to use personalisation with total customisation for all of the bank’s services. The service offers a mix of rich financial management tools and personalization features, integrated with personal recommendation technology. There are basic payments and banking services, as well as budgeting applications, alerts, aggregation services, recommendation engines, comparison tools, financial widgets, and all of this is device neutral for both internet and mobile access.

If you have not seen the service, then I recommend you view this video:

Although in Spanish, it illustrates the system pretty well.

There’s much more to discretionary technology spend than just device-neutral semantic social networking however. For example, Gartner state that the Top 10 disruptive technologies for 2009 are:

1. Multicore and hybrid systems
2. Virtualization and fabric computing
3. Social networking
4. Cloud computing
5. Web mashups
6. User interface
7. Ubiquitous computing
8. Semantics
9. Augmented reality
10. Contextual computing

There are also other forecasts that are relevant here.

For example, from a solution providers’ perspective, there will be more service offerings delivering what the market wants in terms of functionality; better domain positioning of technology players targeting financial services; more focus upon the contribution of firms as deliverers of infrastructure; more inclusion of vendors in industry initiatives, as per the global risk warehouse; more focus upon making technology more effective in terms of speed, cost,
power consumption and so on and so forth.

But the bottom-line is that this is a year of consideration, and the top things the banking industry will be considering are:

• Systems Rationalisation
• Outsourcing
• Networking
• Interoperability and Standards
• Risk Management

And working out a way for governments, banks and corporations to all be connected to a massive data warehouse which runs a global real-time risk exchange.

Comments

[Rob Walker, VP Strategy & Innovation, Chordiant software]

While risk management will certainly be the focus for the banking industry in 2009, it will not only resonate across the trading floors but also other areas of banking such as retail banking. Already we are seeing banks taking strong action to lower their risk profiles and protect their shareholders. However, there is a very real danger that this swing from aggressive selling towards a more conservative mindset could result in lost opportunities, as potentially high-value customers are ruled out by too stringent risk guidelines.

The key lies in finding the right balance between managing risk and promoting growth. While prudence may find more favour than growth in the current climate, risk decisions can still be, and should be, made with a clear view of what is best for the organisation’s bottom line but also with a full understanding of the long-term value of a customer. In addition to market conditions and corporate rules, a bank’s risk management strategy should also take into account the value a bank has received from a particular customer over time and employ predictive decisioning to determine the potential value of that customer. In other words, banks need the ability to infuse customer marketing and retention strategies with risk assessments. Such an approach using customer experience technology can enable a bank to automatically guide every decision and customer interaction across every channel, delivering a consistent and appropriate customer experience that minimises risk.

[Jim Mancuso, General Manager, Financial Services]

Your five banking technology forecasts should strike a chord with most banks, especially your points on risk assessment. In a recent survey of IT executives working at tier one banks we found investment in technologies such as high performance computing is becoming increasingly popular and driven by a need to reduce costs and improve risk management processes. It’s no surprise given the current economic climate that we also found virtualization to be an IT infrastructure priority for banks looking to improve utilization of existing their resources. The FS sector has long been an advocate of such technology and the benefits it offers. We expect the current financial crisis to act as a catalyst for greater adoption in 2009.