Four Themes for Canadian Financial Services Firms to Consider in 2009

The global outlook for financial services has changed considerably since last September. While the Canadian industry has been the most stable and resilient in the developed world, it is not immune to the effects of the global economic slowdown, and the collapse in the price of oil to the $35-$40 range coupled with the solvency issues affecting North American auto industry are having an impact in Central and Western Canada.

In examining 2009, Financial Insights sees four major themes that will dominate global IT spending in financial services and have a direct affect on Canadian organizations:

The drive to reduce IT costs

Canada is a relative bright spot for spending this year as our institutions have generally not had the need for bailouts and restructuring. However, the large Canadian banks have been watching IT spending very closely since the beginning of 2008, and the rest of the sector has been doing so since September. We see a small, overall contraction in IT spending in Canadian financial services in 2009. However, IT budgets may change as the probable depth and length of this current recessionary cycle becomes more apparent.

Financial Insights sees net new IT spending in 2009 being more focused on smaller projects that provide very short-term returns on investments. Projects that fit this profile include those that raise the efficiency of business processes and workflows. Unified communication, which lowers travel costs and increases the efficiency of worker collaboration is a great example. On the hardware side, virtualization initiatives will continue to extend through the enterprise right down to the desktop level.

Reviewing potential merger and acquisition activity

In Canada, 2009 is not likely to see major mergers and acquisitions in the banking sector. Merger and acquisition activities will be strongest in 2009 in the Canadian insurance sector and capital markets sectors. Already we have seen two major moves in the insurance sector with the BMO purchase of the Canadian operations of AIG Life Insurance, and the announced divestiture of ING Insurance by the Dutch corporate parent. We expect these announcements within the Canadian space to continue as the insurance industry in particular consolidates. Systems integration activity in Canada should be strong in 2009 as firms move quickly to realize the cost savings from M&A activities.

Financial Insights expects that 2009 will be a year of accelerated M&A activities among the vendors in FinTech 100, with fewer players expected to be around to welcome in 2010. Perceived vendor quality will be an increasingly important criterion for financial services IT decisions in 2009, and large vendors that are able to provide self-financing options for IT investments to clients will be in a particularly strong position.

Enhancing IT risk management

One of the causal factors in the current financial crisis was in the failure of risk management systems first to correctly assess the risk attached to new financial products being sold; and secondly to identify, understand and control risk across the enterprise and within national banking, insurance and capital markets systems. In Canada, the conservative regulatory regime has spared us so far of most of the pain seen in other markets. However, new regulatory frameworks are being considered in Canada and are likely to be announced and enacted in 2009. One of the probable ramifications for financial services firms is the need to provide real-time information to regulators.

Financial Insights expects that in 2009 we will continue to see investments in enterprise wide data management and content management systems to gather the data, and in business intelligence software to provide the analytical frameworks for risk management systems. Executed correctly, investments in these areas also have payoffs in improving the customer experience.

Improving the customer experience

Often one of the first casualties of cost-cutting in recessionary times is the customer experience. In the US we have already observed this with the ACSI reporting significantly lower scores for financial services customer satisfaction in 2009 from 2008. Financial Insights feels that the winners and losers in this current environment will be separated by how well they innovate in customer acquisition and retention.

IT projects in customer experience that will provide wins include projects that make transaction workflows shorter, easier and cheaper for both customers and employees. Improved account openings are a primary example of this type of project. Multi-channel integration projects that provide a common look, feel and experience for the brand across all delivery channels is another example of a project to improve the customer experience, and can provide immediate benefits by moving customers from higher cost to lower cost channels.

Conclusion

These four key themes will set the tone for Financial Services IT spending in Canada in 2009. While the Canadian Financial Services industry will probably continue to be in better shape than in most other countries in 2009, it will not be immune to the economic shocks that will continue to be felt through the year. Financial Insights sees winning financial services firms taking advantage of the disruptions being created to improve their market position through smart investments in technology.

About the Author

Rob Burbach is Senior Analyst for Financial Insights' Canadian Financial Advisory Service, which covers the banking, brokerage, investments and insurance industry and its underlying technology solutions in Canada.

About Financial Insights

Financial Insights, an IDC Company, was formed in November, 2002. Its focus is to provide strategic business technology and application advice for the financial services industry. IDC is the premier global provider of market intelligence, advisory services, and events for the information technology and telecommunications industries. IDC helps IT professionals, business executives, and the investment community make fact-based decisions on technology purchases and business strategy.