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Game-Changing Trends
Transforming the Banking Industry
Fallout from the ...
7 Game-Changing Trends Transforming the Banking Industry

better capital and liquidity management, re-evaluation of their
7 Game-Changing Trends Transforming the Banking Industry

devices (smart phones and tablets) constantly to text, browse
7 Game-Changing Trends Transforming the Banking Industry

disrupt the traditional triumvirate of card issuers, payment net...
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SAP+Industry Week - 7 Game-Changing Trends Transforming the Banking Industry - Opportunity 2013


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SAP+Industry Week - 7 Game-Changing Trends Transforming the Banking Industry - Opportunity 2013

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SAP+Industry Week - 7 Game-Changing Trends Transforming the Banking Industry - Opportunity 2013

  1. 1. This Report Brought to you by: OPPORTUNITY 2013 Game-Changing Trends Transforming the Banking Industry Fallout from the 2008-2009 recession continues. Not only do consumers and investors remain distrustful of the banking industry, years of top-down management edicts and waves of job cuts mean that employees are distrustful of bank leaders as well. For banks to move decisively into growth areas, they will have to start paying attention to culture and motivate their talent base. With macroeconomic pressures and regulatory changes continuing to squeeze bank profitability from both sides, the outlook isn’t entirely bleak. New technology is making it possible for banks to reduce risks and costs, mitigate the impact of new regulations and cultivate new customers. Here are seven major trends that are transforming the banking industry in 2013 and beyond. T he outlook for the banking industry typically mirrors the outlook for the economy as a whole. With unemployment falling and housing starts creeping up, the United States is showing signs of continued recovery. However, historically low interest rates mean historically low margins for bank products and services. Increased capital requirements and other rule changes in the United States and Europe are other drags on profitability for the financial industry. In contrast, although China’s rapid growth has decelerated (pushing down commodity and fuel prices), the economic growth outlook for parts of Asia, South America and other emerging markets is much more promising. With the near- and long-term success of austerity measures in Europe uncertain, though, it all adds up to challenging growth prospects for the banking industry in 2013. 1 1. Post-Recession Regulations: New Rules Become More Clear In 2013, banks will continue to overcome the inertia following regulatory changes imposed in the wake of the 2008-2009 recession. Now that the new rules and implementation procedures are better understood, financial institutions can work on compliance and try to minimize the impact of the additional work on margins already narrowed by the macroeconomic environment. Changes at the global level include the Basel III regulatory accord—already in effect in many G20 countries—which increased capital requirements and introduced new rules for bank liquidity and leverage. “There are different ways banks globally are responding to the new Basel III requirements,” observes consultancy Capgemini. “Common responses include Brought to you in association with:
  2. 2. 7 Game-Changing Trends Transforming the Banking Industry better capital and liquidity management, re-evaluation of their product mix, restructuring of balance sheets and realignment of business models.” In the United States, the Dodd-Frank Act has restricted speculative proprietary trading by banks. Financial institutions with assets greater than $50 billion must now create “living wills” that identify critical operations and known risks, and outline their plans in the event of bankruptcy. They began submitting those plans to regulators last summer. Bank leaders don’t yet know entirely what to expect—but fear the worst—from the Consumer Financial Protection Bureau (CFPB). Another creation of Dodd-Frank, the CFPB operates from a somewhat protected position within the Federal Reserve. Last year, it levied $425 million in penalties against Capital One, American Express and Discover, for deceptive credit card marketing practices. Banks are next in the consumer-protection agency’s crosshairs. Citigroup has already set aside $500 million to cover potential legal and regulatory issues. In January, CFPB released new rules for high-cost mortgages that will disrupt some home lending practices and potentially reduce overall mortgage volume in a sector that’s finally showing signs of recovery. 2. Restructuring: Time to Move from Cost Cutting to Growth With more clarity on the regulatory front, bank leaders can turn their focus toward executing growth plans. These moves will follow—and hopefully be funded by—the rounds of staff reductions and other cost-cutting measures that most banks have been forced to make in recent years. “We believe industry profits and return on assets (ROA) will hardly budge in the next three to five years, growing just 1% to 2% annually,” says Booz & Company. “In this environment, every dollar spent—whether investing in a new product launch, purchasing accounting software or paying to keep the lights on—is precious. Banks must have the right cost structure in place to maximize the benefits of each dollar, position themselves for growth and grind out profits.” Specific changes on the agenda include restructuring branch service models (look for more self-service technology and a greater emphasis on sales) and re-focusing on core business lines (which means divesting anything that no longer fits). Capabilities will need to be aligned with each bank’s strategic direction, Booz & Company adds. This means investing in 2 people, processes and technology without overemphasizing any one area (such as technology) or trying to be best-in-class in every dimension, which inevitably fails. Many financial institutions are targeting their best customers, the affluent and high-net-worth market segments. Retirees, for example, have significant assets, want simpler products and tend to be more loyal. Yet, with many banks creating new offerings for such customers, the competition will drive down margins. Building and implementing new operating models in an industry not known for innovation will require considerable vision, and will sometimes require new leadership to set the tone and direction. The danger, if changes are not made now despite low interest rates, thin margins and scarce resources, is that medium- and longer-term opportunities will be met by new, more technology-centric competitors. 3. Information Technology: Invest to Reduce Costs, Boost Revenues IT spending by the global banking and securities sector will rise 3.5% to $460 billion in 2013, Gartner estimates. Key investment areas include core systems, online portals, fraud management, mobile banking and more robust social media efforts. With new regulations weighing down margins, strategically managed IT investments can reduce operating costs and boost revenues at the retail banking level. Banks that can eliminate the need to support redundant applications and legacy systems (many left over from incomplete mergers and acquisitions) can redirect resources into enterprise-wide systems that streamline workflows and enhance analytic capabilities. More and more customers expect to access their account information and easily reach the right service providers across functions and product lines. These channels include mobile and online—which are growing in every demographic, not just the younger generations—as well as more traditional customer service call centers, ATMs and physical branches. Maximizing efficiency across channels requires more integrated IT systems that can offer enhanced functionality and service across multiple platforms. “Twenty million new customers are expected to be entering the system over the next three to four years, looking to establish banking relationships,” observes Max Bercum, a principal at Deloitte Consulting LLP. “These customers use their mobile Brought to you in association with:
  3. 3. 7 Game-Changing Trends Transforming the Banking Industry devices (smart phones and tablets) constantly to text, browse and navigate their worlds.” Creating the bank of the future with the budget of the present won’t be easy. Rather than try to be all things to all people, bank CIOs need to determine which technology platforms are strategically important, and consider outsourcing non-core functions to third parties, possibly cloud-based options. In 2013, they will have to continue to work on integrating systems across the enterprise in order to support the advanced analytic capabilities needed to achieve the promise of big data. 4. Big Data: Creating a DataDriven Business Model Regulatory demands for greater transparency, the search for growth opportunities and the challenge of creating a better customer experience all come together under the auspices and hullabaloo of big data. “The top challenge facing the bank technology community in 2013 will be leveraging big data in a way that benefits banks’ bottom lines,” says Dr. Stuart C. Wells of FICO, a provider of decision-support services, as reported by Bank Systems and Technology. “Despite the hype surrounding big data, few organizations have figured out how to operationalize it and make it pay off for the business.” Banks have been gathering and using market data for decades, of course. New processing and analytical capabilities make it possible to extract meaningful information about customer behavior from massive, unstructured sets of transactional data currently buried in multiple, disconnected databases. One of the under-acknowledged challenges of such efforts is the competition for skilled data analysts. In the talent market, banks are competing with similar data-intensive initiatives in practically every other industry. In the banking industry, high-powered data mining and predictive analytics promises to: • implify regulatory disclosure requirements S • mprove transparency and reduce financial risks I • upport more timely decision-making S • uide the development of new, highly targeted products and G sales offers • reate a holistic view of customer profitability C • ailor marketing messages to highly targeted customer sets T • upport new sales channels, such as Facebook. S Such analytical capabilities will also support banks’ mandate 3 to own customer relationships beyond one-to-one interactions at the branch level in an increasingly fragmented and mobile world. 5. Mobile Banking and Mobile Money: A Bank Teller in Every Pocket In 2012, global smartphone shipments grew 45% to more than 717 million units, according to market research firm IDC. The company predicts that smartphone sales will climb 28% in 2013, and exceed 1 billion units per year by 2014. In one way or another, most of those users will use their phones to manage their money. It’s a no brainer then that every new bank product, new service or marketing push should include a mobile element, if not be mobile at its core. Bank customers will expect the next generation of online tools and mobile banking applications rolling out this year to be fully integrated and offer a seamless customer experience. More bank customers will start using newer features such as remote deposit capture and mobile alerts, and will be receptive to new tools that help them make better decisions and save money. The problem with both websites and mobile apps is that they’re geared almost entirely toward serving current customers, observes Peter Wannemacher, an analyst for Forrester Research, as reported by American Banker. Banks need to increase their use of mobile technology as a sales channel by offering people who don’t have existing accounts access to information and features. On the mobile money front, banks will need to form partnerships with network operators, technology firms and emerging service providers, if only for defensive purposes. As Deloitte Consulting observes, “Mobile payments have the potential to Brought to you in association with:
  4. 4. 7 Game-Changing Trends Transforming the Banking Industry disrupt the traditional triumvirate of card issuers, payment networks and merchant acquirers that has long been dominated by the banks.” While mobile wallet applications haven’t coalesced around a standard yet because of technology fragmentation, security concerns and other factors, merchants aren’t standing still. Howard Schultz, president/CEO of Starbucks, recently Starbucks sees mobile transactions as a way to deepen customer relationships and pursue new revenue streams. Banks should have a similar perspective. reported that the company processes more than 2 million mobile payment transactions per week. He sees it as a tool to deepen his company’s relationships with customers and pursue new revenue streams, such as music and digital publishing. There’s no reason bank leaders shouldn’t have a similar perspective. 6. Cyber Security: User Education and Cooperation Turn Back Hacker Attacks Just as mobile banking and mobile payments open new business channels, they also open the door to new threats. With the dramatic rise in usage, malware attacks on largely unprotected smartphones will rise in 2013. Bank IT departments will do what they can to ensure that mobile devices are not the weak link in their efforts to protect systems and customer information from hackers. However, mobile device users themselves must also become more vigilant. “Deputizing consumers through education on mobile security threats and encouraging use of anti-malware, firewall protection and other security solutions will have far-reaching benefits,” says Al Pascual, industry analyst of security, risk and fraud at Javelin Strategy and Research. This year could also bring more distributed denial of service (DDoS) attacks such as those that slowed down and disrupted the websites of Wells Fargo, Bank of America, Citigroup, U.S. Bancorp, PNC, HSBC and many other major financial institutions this past fall. U.S. security organizations attributed these sophisticated banking-system attacks to Iran, possibly in retaliation for economic sanctions and cyber attacks on its systems. 4 Large banks aren’t the only financial institutions and businesses being harassed by hackers. Two out of three organizations experienced DDoS attacks in the past 12 months according to a survey of more than 700 senior IT professionals conducted by Ponemon Institute and Radware, an application delivery and security provider. The average downtime for each attack was 54 minutes, costing as much as $100,000 per minute. Respondents cited the lack of a budget as one of the major impediments to shoring up cyber security. “Cyber threats are outpacing security professionals, leaving most organizations vulnerable and unprepared,” says Avi Chesla, chief technology officer, Radware. “From hacktivists to cyber criminals, companies live under the constant threat of assaults that contribute to lost revenue and serious reputational damage.” Currently, banks and their telecommunication providers are catching only 15% of security breaches, American Banker reports. Potential solutions include more robust authentication measures—which don’t overburden customers—such as biometrics, device finger printing and location verification. 7. Risk Management: Balancing Models and Judgment Regulatory reform has prompted banks to reform their definitions and management of financial risk, pushing visibility up to the board level. The challenge in 2013 is to leverage those dayto-day efforts to embed strong risk management beyond the risk management function and into the everyday culture of the organization. “This revolution in risk management has been embraced at the board level and the function now commands much more respect and authority throughout the organization,” notes Ernst & Young. “The challenge will be to achieve a balanced approach. Over-reliance on models and systems not only has the potential to constrain innovation but may also restrict the organizational agility required to respond to emerging risks, as well as dealing with those in today’s marketplace.” In addition, regulatory requirements, fraud and computer system security threats require regular risk analysis and assessment. As the economic recovery unfolds—or sputters out (especially in Europe)—banks will need to re-examine the potential for default in their loan portfolios. New analytical tools can help on this front by pulling data from multiple sources and ensuring that risk calculations are performed in a timely and consistent manner across the business. Brought to you in association with: