Three trends are combining to reshape the banking industry over the next six years, according to industry analysts from Gartner at its first Financial Services Technology Summit: population shifts, surging competition, and the growing imperative for transparency.
These three trends are putting banks under increasing pressure, the company warned, highlighting the fact that chief information officers (CIOs) within the banking industry have realised that the future will be different from the past.
According to 98 bank CIOs who participated in the company's annual Executive Programme (EXP) survey this year, many expect a heightened focus on global competition and business restructuring during the next three years.
Effect on customer relationships
"Banks are facing major changes during the next six years and it is imperative that they begin to adapt now to ensure growth, if not survival, during this transition," explained Susan Landry, managing vice president for the banking industry at Gartner. "The three forces will lead some banks to compete on size and scale, while banks of all sizes will need to focus on selected specialisations. Some banks will emphasise customer relationships while others will focus more on products, and there will be more collaboration within the financial services industry as part of an emerging industry ecosystem."
- Demographic shifts
Around the world people are living longer, and this has a direct impact on their financial needs. In addition, growing migratory patterns span the spectrum of age, income and geography: young adults are pursuing cross-border higher education, employees are relocating for career opportunity and retirees are buying second properties and commuting seasonally. All of these present both opportunities and threats to the banking industry.
"Many people in Northern Europe now aspire to live in the warmer climate of Southern Europe for at least part of the year, and to retire there later in life. Meanwhile young people from all regions of the world seek work, better pay or just safety by moving to northern Europe, and banks must respond to this migratory behaviour," said Graham Taylor, vice president for the banking industry at Gartner.
Banks have started to pursue opportunities that have come about from demographic shifts and have both gained new customers and revenue streams and seen some profit erosion. "It offers banks the prospect to develop their electronic global servicing, attract cross-border fund movements and provide new types of accounts for inward migrants, like HSBC's new "Passport Account" in the UK," Taylor added. "However, it also presents threats to their daily operations."
The carrying-cost of under-utilised or dormant accounts and the risk that competitors will capture customers in their new location are underestimated and will increase, according to Gartner. Inward migrants also pose some challenges such as difficult identity checks and growing local demand for cash at a time when banks are encouraging new electronic alternatives. Bank CIOs must introduce solutions for migrants and for customers who seasonally live outside the banks' area, and innovate in products and services. As an example, Santander now offers a bonus on cash withdrawals at its automated teller machines (ATMs) in Spain for customers of its Abbey subsidiary in the UK.
- Stiffer competition
The overall makeup of the banking industry is in the midst of significant change. The distinction between different types of banking service providers have been converging and consolidation, especially cross border, will continue. This is particularly the case in Europe where the single European payment area (SEPA) creates new opportunities. Cross-border acquisitions have begun with examples such as French bank BNP buying BNL in Italy and Unicredito acquiring HVB in Germany. National consolidation continues in the US with Bank of America going coast-to-coast through acquisition and diversifying by buying MBNA. Card company CapitalOne has bought its first bank Hibernia, while Google has joined PayPal as a global Internet payment provider with its new Checkout service.
"The net result is that the largest banks will invest in scale, diversification and differentiation whilst the smaller banks will need to dramatically rethink their value propositions, focus on more specialised elements of the business and provide superior local service to survive through 2012. There is also too much optimism in the market."
According to Gartner's EXP CIO survey, 46% of bank CIOs believe that their companies are pursuing a 'break-away' strategy. Such companies invest more in technologies that support business effectiveness than their competitors. "There is just not enough market opportunity for 46% of banks to be successful in a break-away strategy. In saturated markets, market share gain enjoyed by one bank reflects a loss for others. And this doesn't include any of the threats from non-traditional competitors," Landry concluded.
The survey also revealed that bank CIOs expect to put greater focus on global competition within the next three years in response to the surging competitive environment.
"Leading banks in Western European must still respond to what their local competitors are doing, but must also be ready to seize opportunities in other continents. In Asia-Pacific, IT teams need scalable architectures and the ability to roll-out new banking services at short notice as their management aims for global expansion," Taylor said.
- Higher transparency
Escalation of regulatory mandates and directives continues to put higher demands on banks to review and report on their policies and practices in greater detail. However, this is not necessarily a bad thing. For some, it is becoming a hallmark for brand differentiation, with companies in many industries aligning with popular beliefs. Bank of America, for example, announced a programme to subsidise employee purchases of hybrid cars, thus aligning with the "green" movement. Many European banks like the Coop Bank in the UK and Triodos in the Netherlands have extensive green policies while others have committed publicly to reducing carbon emissions.
The most significant force comes from the regulatory mandates such as Sarbanes Oxley, which requires transparent accounting practices and European regulations that demand fair treatment of customers and full disclosure of the advice given to buyers of mortgages and long-term investment products. The regulations place an enormous burden on banks to achieve compliance and provide evidence that they comply on every transaction.
Transparency is also being driven by rapid consumer adoption of social networks that join e-community activists as fast conduits for exposing information and spreading news about banking practices. For example, online comparison services for mortgages, loans and cards expose interest rates and fees across competitive lenders and enable customers to quickly find the best deal.
Transparency pressures benefit customers because access to information shifts power from the seller to the buyer, forever changing what clients expect and demand. On the other hand, as IT and business process outsourcing continue to expand, banks will in turn demand transparency from their suppliers to achieve visibility into processes and quality metrics, while achieving assurance of privacy and confidentiality for their customers.
"Transparency must be intertwined with mutual trust in banking. When parties lack confidence or visibility, suspicions arise which could jeopardise the relationship," Landry said. "Technology's role in securely managing information exchange and validation will increase as the ecosystem of industry participants evolves".
Bank CIOs generally expect significant business restructuring and IT transformation over the coming three years. Nearly two in five bank CIOs (38%) said they will give business restructuring greater prominence, up from the 24% currently doing so.
Banks are currently giving increased priority to projects such as channel renewal and Customer Data Integration (CDI) projects. Recent research with leading US banks showed that 20% are now seeing increased sales as a direct result of their investment in CDI and the improved links they have built between their call-centres, web-sites and local bank branches.
"Bank CIOs in all regions will need to speed up the integration of their customer data and delivery channels to stay competitive," warned Taylor. "However, the challenges presented by the shift in population, surging competition and increased transparency will drive different activity in the future and current IT projects will not suffice."