2006 Bankers As Buyers now available (free)

The full version, with graphs, charts and featured articles can be downloaded at:
www.williammills.com/pdf/bab2006.pdf


About Bankers As Buyers

Years ago, ABA Banking Journal used to publish a great piece of primary research, called "Bankers As Buyers." It was the best "leave behind" any magazine sales representative had ever given me. I missed it and believe there was a void to fill.

I started publishing "Bankers As Buyers," with ABA Banking Journal's permission, about five years ago. My version has evolved over the years, but in short, it is a collection of recent research and commentary about how we believe bankers will spend their IT budgets in 2006.

I would like to give special thanks to Jeanne Capachin, Research Director for Financial Insights; Jimmy Sawyers, Director of Consulting for Reynolds, Bone & Griesbeck PLC; Chris Gill, Senior Manager, Dove Consulting and Art Gillis who provided me with content for this issue.

If you like the issue, please forward the link or PDF to your friends and associates within the industry. If you don't like it or have suggestions for me, please email me at scott@williammills.com




The Abridged Version

Spending Outlook

Bank technology spending will continue at a moderate pace in 2006, growing in the mid-single digits, according to technology analysts.

They expect to see spending concentrated among large financial institutions, investing in compliance (including fraud prevention/security), cost reduction, defending current revenue sources and building new revenue.

“There will be a few major drivers of bank IT spending in 2006,” said Jeanne Capachin, Financial Insights, Needham, Mass., citing infrastructure, cost reduction and organic growth as the major areas where banks will invest their technology dollars. While those investments will center on improving the business, state and federal regulations, including a late 2005 edit from the Federal Financial Institutions Examination Council, will cut into the discretionary IT spending.

Analyst firm Gartner, Inc., Stamford, Conn., agrees. In research published in late 2005, Gartner financial analysts said, beginning in 2006, banks must address operational risk management issues, integrate their retail delivery channels, consider service-oriented architectures to enhance their agility and retain their most-profitable customers via strategic loyalty programs.

The nation’s largest financial institutions grew largely through mergers and acquisitions over the last several years, often involving different hardware and software, often requiring re-keying of data to move information from one system to another. So a large portion of spending will be dedicated to middleware and other technologies that will help disparate systems of these banks communicate more effectively with one another. In a 2005 Financial Insights survey, CEOs cited improved revenues, compliance, and then customer service as the top concerns driving IT spending.

While the mergers and acquisitions mean that larger financial institutions need to boost some IT spending to resolve technology conflicts, it also means fewer total financial institutions, Financial Insights points out. Therefore, the research firm predicts that overall IT spending by financial institutions will shrink from a growth rate of 4.8 percent in 2004 and 4.6 percent in 2005 to only 4 percent in 2006. The numbers of banks, thrifts and credit unions are all shrinking. Only specialty finance firms are expected to grow, but the overall number will remain small.

Spending Breakdown

Entering 2006, banks continue to battle the increasing sophistication of hackers, as well as negative publicity from data breaches of financial institutions and credit information companies. Some of the data compromises were not from actual attacks, but from lost computer tapes. Whether the breaches led to actual compromises or not, they increase the pressure on financial institutions to have more comprehensive monitoring of data access.

Actual spending on fraud prevention is still largely driven by legal compliance, along with the requirements of business – namely, improved profits. So, even in making investments in fraud prevention technology, banks are looking for systems that will provide business benefits in addition to data protection.
Integrated monitoring for risk assessment purposes is part of financial institutions’ attempt to integrate the flow of information across different systems for more efficient processing, better pictures of customers and their accounts and better channel integration, as well as fraud prevention.

According to Financial Insights, technology vendors that help financial institutions reduce the complexity and dependency on the tight integrations of legacy systems will be the ones that succeed.

Fraud Prevention
One of the most important values that banks provide customers is that of a trusted entity, but that value quickly erodes if there is a security breach, even if no fraud was actually committed. Under the terms of California law and other state statutes that mirror it, customers must be notified of a breach, even if no actual theft of data occurs. Such breaches carry not only any financial penalties that regulators may assess, but also generate ongoing negative publicity.

Banks are investing in technology systems that help them monitor electronic and physical access to systems as well as hacker attack trends. The latter helps indicate where financial institutions need extra layers of protection. Some security experts are also calling for encryption of customer and bank data, which theoretically would protect it even if security systems were compromised.

Financial Insights predicts that risk management vendors will grow 15 percent annually for the next few years.

Regulatory/Compliance Spending
With financial institutions, one of the top targets of phishers, spammers and other hackers, compliance and fraud prevention are becoming intertwined in terms of technology spending. Much of the regulatory spending includes some component of fraud prevention or consumer protection.

The influence of regulatory compliance is expected to increase and is predicted to cut into discretionary IT budgets for all types of businesses through 2008, according to Gartner. Compliance spending is currently growing twice as fast as discretionary IT budgets.

Increasingly complex federal and state regulatory and compliance rules are forcing banks to rely on technology to automate as many of the processes as possible. This trend will undoubtedly grow in 2006 as privacy laws continue to evolve. Despite the push from bankers and businesses alike for comprehensive privacy legislation to help consolidate all of the different state laws, no such law had passed by the end of 2005.

Financial Insights predicts that compliance vendors will enjoy a 13 percent compounded annual growth rate for the next few years.

The number one compliance concern of community banks and credit unions that responded to a survey conducted by Bankers Systems, a part of Wolters Kluwer Financial Services, is meeting the requirements of the Bank Secrecy Act (BSA).

Many of the other significant compliance issues identified were related to BSA requirements:

· Anti-money laundering requirements (62 percent)
· Data security (50 percent)
· Compliance examinations (50 percent)
· PATRIOT Act compliance (43 percent)
· Customer Identification Program requirements (42 percent)

Community Bank Perspective
In a recently released survey of its membership, Independent Community Bankers of America (ICBA) found that those with more than $100 million in assets were facing these following long-term technology decisions:

Systems security 64%
Keeping technology affordable 62%
Data security 61%
Staying updated on existing technology upgrades 58%
Imaging-related technologies 54%
Regulatory compliance solutions 53%

One of the ways these institutions are trying to keep technology affordable is to outsource it, with nearly half (46 percent) of institutions with more than $100 million in assets using third-party resources, and nearly the same (45 percent) with less than $100 million in assets also going the outsourcing route. Even so, 53 percent said they would spend more on technology than in the previous year.

Customer Service
Though the number of banks is shrinking and financial institutions are trying to encourage customers to use low-cost electronic delivery channels, the number of branches continues to rise. Additionally, as mergers and acquisitions continue, de novo institutions with smaller branch networks will add locations to serve former customers of the larger combined institutions.

New branches are installing new technologies to improve their efficiency, says Chris Gill, senior manager for Dove Consulting, Boston, Mass., a division of Hitachi Consulting. Gill foresees increasing investment in technologies to enable branches to efficiently serve customers, including cash dispensing machines for tellers and branch image capture devices.

Payment Systems
As the number of checks decline, the cost of processing continues to rise; therefore spending in the payment system arena is expected to focus around electronic bill payment, imaging and other electronic resources.

Forrester Research, Cambridge, Mass., predicts that online bill payment will grow 75 percent by 2010. While non-bank financial institutions had taken much of that market earlier in the decade, banks were recapturing it in 2005. By the end of the decade, 52 percent of households with Internet access will pay their bills online. Forrester reiterated that annual Electronic Bill Payment & Presentment (EBPP) growth rates are eroding and will continue to decline through 2010.

Forrester sees the growth of electronic bill payment will be concentrated among Generation Y customers, representing a 219 percent growth rate. Growth among Baby Boomers will be only 32 percent.

Integration
Providing better integration among systems is the best way to provide quicker customer service and more complete straight through processing, even if complete end-to-end processing isn’t achievable yet. Efficient integration helps control costs, an important factor as banks face thin margins and fierce competition.

“Workflow is in the air. Workflow and imaging systems will be the rage as banks finally get serious about process improvement and squeezing more cost out of the operations,” says Steve Williams, analyst with Cornerstone Advisors, Scottsdale, Ariz. “Expect big capital expenditures on these initiatives over the next 12 months, especially in loan and deposit back offices.”

A survey of bank executives by Financial Insights points to service-oriented architecture (SOA) with real time connectivity, Internet Protocol (IP) connections, alerts, batch processing and message-based processing as the most important factors in providing a flexible framework for better integration.

Other Technology Spending
Banks are quickly adding remote capture devices for both large and small corporate clients. This enables banks to take advantage of many of the efficiencies afforded by Check 21 legislation, which went into effect at the end of October of 2004. The law permits the use of check images rather than of physical checks in the clearing process. The images are less costly to handle and transmit than paper checks, and also require much less storage space.

In terms of controlling expenses, expect to see many banks moving more of their communications to Voice over Internet Protocol and away from traditional telephone service. De novo banks are opting for this technology from the outset, while large, established banks are replacing legacy phone systems entirely or partially with VoIP connections.

Other areas where Financial Insights expects to see outlay of financial IT dollars in 2006 include selective sourcing, core banking systems and intelligent interaction management.