Banking on the future
By Patricia Howell, senior analyst, Financial Insights, IDC Canada
Banking may be driven by relationships, but it is through technology that the goods are delivered. To put this in perspective, consider that Canadian organizations will spend in excess of $39 billion (all amounts in Canadian dollars) on information technology (IT) goods and services in 2006. Financial Services represents 18 percent, or $6.9 billion, of that spend, making it the single largest vertical market for IT goods and services. Canadian banks dominate the domestic financial services patch, representing $4.3 billion, or 62 percent, of the vertical's IT product and services spending in 2006 (44 percent of that can be attributed to the big five banks: CIBC, BMO, TDCT, RBC, and Scotiabank).
Canadian banks have always been and will continue to be shaped by advances and investment in technology. But what form will the bank of the future take? This is a question that bank executives have grappled with for years, and the vision varies depending on the strategic objectives of each institution.
Banks are perpetually looking to increase productivity and drive cost efficiency. With the exception of emerging markets, the banking industry is mature, and its players must continue to grow or become marginalized. This is especially important to banks in Canada and worldwide in a rising interest rate environment where the costs of funds rise more rapidly than asset yields. While this is not new, the realities of operating in a mature market are starting to hit home as "the low hanging fruit" associated with expense reduction is quickly being consumed. This leaves banks in the often-uncomfortable position of having to spend more to save more. The challenge is how to optimize operational efficiencies given legacy investments and demands for improved capabilities. Banks will seek to address this challenge on many fronts, including fundamental changes in their foundations and using emerging technologies to support their needs for continued organic growth.
Changes to the foundations
The "industrialization of banking" is an idea that has been borrowed from the manufacturing industry. By transforming or industrializing their business operations, banks are extending the integration of business process management beyond individual departments or lines of business across the enterprise to improve service quality and increase productivity. Applying a framework for workflow and underlying business rules can help to improve, normalize, and unify internal processes (e.g., exception management). This will fuel the integration of bank workflow processes with customers, partners, and counter-parties.
Dynamic IT, or Service-Oriented Architecture (SOA), focuses on transforming the management of IT and rebuilding IT infrastructure to support business processes. Spanning back, middle, and front offices, the development of SOA, to support real-time requirements as well as centralized transaction warehouses, will connect previously autonomous check, electronic funds transfer (EFT), and product processing systems with customer information. Information normalization and messaging technologies will dynamically serve up content to staff and customers through front- and middle-office systems.
Aging core banking systems are proving to be the "Achilles heel" of many banks, driving up costs and severely impacting their agility and flexibility. While a wholesale rush to core banking replacement is not anticipated, the idea has started to resonate in Canadian banking circles. Whether considering a major "heart and lung transplant" or a much less invasive surgery, the complexity of these initiatives will likely keep them on an institution's agenda for many years to come.
Investing for organic growth
Deprived of the ability, at least for now, to grow through mergers and acquisitions, and realizing that they can’t cut their way to profitable growth, Canadian banks are also looking to technology to enable new sources of revenue. One of the manifestations of this focus on organic growth is investment in channel technology, particularly branches and the Internet. Although banks have been investing heavily in their Internet channels since the late 1990s, they were not leveraging a coordinated or integrated channel strategy. At the time, branches were less important, but now branch renewal initiatives that take advantage of face-to-face customer contact are more important than ever. Banks are expanding their branch networks to gain greater market penetration and expand their share of customer wallet.
As they search for new sources of fee-based revenues, new product and service development will be critical. On the corporate side of the business, banks are looking for ways to provide straight-through processing of payments and information-based services. This has been triggered by supply chain events with corporate customers, and banks are using this as a means to deepen relationships and generate new revenue streams.
The Canadian banking sector is striving for increased efficiencies and organic growth while struggling to defend their turf against new market entrants and manage the ever-increasing complexity of the financial services industry. Technology has long been a key enabler within the industry, and going forward, from near-term operational tactics to long-term transformational initiatives, Canadian banks will continue to invest in IT in order to achieve their goals.
