Home / Opinion / Technology is a key for banking in 2009

Technology is a key for banking in 2009

I found a whole range of technology predictions for 2009.  One of the best general forecasts comes from Gartner, who say that the top ten technology areas to focus upon during an economic crisis are:

1. Reduce headcount or freeze hiring
2. Renegotiate with technology and service providers
3. Curtail data center expansion, virtualize assets and lease them back
4. Consolidate systems
5. Outsource commodity
6. Offshore outsource
7. Investment shutdown
8. Prioritize projects
9. Mothball businesses and projects
10. Change leadership and restructure IT teams

I agree with this list.

In banking, it goes further. 

In banking, technology is a critical part of the solution for the crisis, and technology also provides a way to avoid the crisis occurring again. 

That is why I titled this as technology providing ‘a key for banking in 2009’.

Technology is the key. 

It is a method of solving the market issues long-term – if deployed correctly – and banks, governments and corporations will realise this in 2009.

Five banking technology forecasts for 2009

As mentioned yesterday: this will “be a year for introspection
and circumspection rather than innovation and action.”

means that the majority of banks will focus upon highly conservative
cost saving projects with short-term returns on investment. The
long-term and strategic will be dropped by many, as will the
regulatory. That’s why some key milestones will be missed, particularly for the Payments Services Directive in Europe, which I’ll discuss later in the week. After all, what is the point of
implementing regulatory change in a year when all regulations are
likely to change?

Banks will avoid anything discretionary,
anything uncertain, anything unnecessary and anything intangible, so
here are the top five things that all banks will focus upon as a result:

# 1 Systems Rationalisation

consolidation, virtualisation and grid technologies will also be a
critical aspect of improving services and streamlining costs. Banks
will see the reduction of distributed servers and data centres, to
consolidation into a few centres as being a key focal point. This is
demonstrated best by the case study I discussed the other day relating
to HSBC.

In 2003, the bank had 130 data centres in over 80 countries. By 2008,
they had rationalised these centres down to just 20, and aim to reduce
this to six by 2010. Why? Because the bank is run on the network and
large data centres provide global platforms for reducing costs,
focusing skills in a few centres of excellence, improving resilience
and capabilities through economies of scale, and allowing any new
regional or local business to be established rapidly and easily by just
layering them upon the network.

These are critical aspects for all
banks to focus upon in 2009.

# 2 Outsourcing

We have seen
a move to offshoring and outsourcing for many banks over the past few
years, but 2009 will see a major increase in the focus of moving
non-strategic services out of the organisation in an effort to reduce
costs. The typical areas will include core applications maintenance,
ATM network management, server management, co-location and proximity
services. Equally, as more mergers and acquisitions occur, expect to
see the acquired operations being moved out of the bank to outsourcing

# 3 Networking

As Ken Harvey stated in the HSBC story,
the “network is the bank”. Banks that are not running on hi-speed
bandwidth will be challenged as speed is a critical differentiator. Low
latency in the investment markets for speed of trade execution through
to leveraging web technologies for better customer service in the
retail markets will be seen as a critical and core competence.
Therefore, all banks will see this as priority.

#4 Interoperability and Standards

it’s more than speed, it’s connectivity.

Connectivity between banks,
between banks and corporations, between banks and consumers and, most
importantly, between banks and regulators will mean that
interoperability and standards will come to the fore. Although
interoperability has been discussed for years, the fact that it is
still non-existent in many areas of the markets is now a known

As Donald Rumsfeld would say, it is a “known known”.

Therefore, regulatory authorities will rapidly move towards a fully
connected marketplace globally where all monetary movements and
financial instruments are connected and visible, rather than opaque or
transparent. This will be seen as a critical G20 change programme, and
will rise to top the agenda by end of year. Banks that are not on
global standards and networks will be seen as non-compliant.

#5 Risk Management

last two points build to the final point: the connectivity of bank
systems through real-time networks will be seen as a key driver and
motivator in order to provide effective industry risk management. I
mentioned this in the end of 2008 discussion about long-term solutions
to the banking crisis.
This is one where Colin Henderson mentioned that he was not so sure
what a global risk exchange would mean, so let’s get into this.

I actually blogged about this back in September 2007, where
I discussed the issues Lloyd’s of London faced when ineffective risk
management hit the market. The issue then was that risk was leaving
Lloyd’s through reinsurers who then reinsured back into Lloyd’s.
Result: the majority of risk lay with a few key players in the market
who collapsed when catastrophic risks occurred.

In banking, this
is exactly what has happened in the 2000’s, even though it is lending
rather than risk. The issue is that leveraged lending allowed banks to
create liquidity that did not exist. Result: the majority of leverage
lay with a few key players in the market who collapsed when liquidity

What did Lloyd’s do?

They created a run-off
company, Equitas, that took all the toxic risk from the market and
managed it in a long-tail trade-off firm, whilst creating a centralised
risk system where all firms logged their underwriting. The latter
allowed the supervisory administration of Lloyd’s to see the total risk
portfolio across the market and the exposures of each firm. Any firm
that over-leveraged their risks were curtailed, such that the
catastrophic risk exposures that hit the market in the 1980’s would
never happen again.

What will the banking system do?

the governments all their toxic financial instruments whilst creating a
centralised real-time risk system to ensure this never happens again.
The real-time exchange will log financial instruments being traded by
whom with whom. The real-time system will also log the total capital of
the institutions involved against their portfolio of risk, borrowing
and trading, to see their total leverage position. Firms will be
provided with leverage and capital limits as an enhancement to Basel,
which will be managed in real-time.

Effectively, governments,
banks and corporations will all be connected to a massive data
warehouse which runs a global real-time risk exchange. And I would
propose that the DTCC, now that they have LCH.Clearnet and EuroCPP in
their camp, are well positioned to provide this.

Either way, the
capability to focus upon networks, interoperability and standards in
2009, combined with regulatory changes that enforce the centralisation
of risk management in a real-time system, will provide one cornerstone
towards the long-term solution for this crisis.

Meantime, these five areas of technology operations will be the focal points for all banks in 2009.

What about the few banks who have some discretionary spend?

Yes, there are a few.

A very small few, but there are a few.

What will they be doing?

who have discretionary spend will be able to invest in disruptive
technologies, such as social networks, video over broadband, branch 2.0
or even 3.0, mobile financial services, wealth management online
advisory services and more.

These areas have been a theme for
the last few years, but banks will get the message in 2009 and, for
those who can afford to leverage, they will be even more in vogue in
2009. To take just one example that covers all of the above, deploying
new network-enabled financial services across multiple devices will be
a major point of differentiation.

This has been illustrated
recently by BBVA in Spain, who launched a service in summer 2008 called tu cuentas (“you count”).

offers an ability to use personalisation with total
customisation for all of the bank’s services. The service offers a mix
of rich financial management tools and personalization features,
integrated with personal recommendation technology. There are basic
payments and banking services, as well as budgeting applications,
alerts, aggregation services, recommendation engines, comparison tools,
financial widgets, and all of this is device neutral for both internet
and mobile access.

If you have not seen the service, then I recommend you view this video:

Although in Spanish, it illustrates the system pretty well.

much more to discretionary technology spend than just device-neutral
semantic social networking however. For example, Gartner state that the
Top 10 disruptive technologies for 2009 are:

1. Multicore and hybrid systems
2. Virtualization and fabric computing
3. Social networking
4. Cloud computing
5. Web mashups
6. User interface
7. Ubiquitous computing
8. Semantics
9. Augmented reality
10. Contextual computing

There are also other forecasts that are relevant here.

example, from a solution providers’ perspective, there will be more
service offerings delivering what the market wants in terms of
functionality; better domain positioning of technology players
targeting financial services; more focus upon the contribution of firms
as deliverers of infrastructure; more inclusion of vendors in industry
initiatives, as per the global risk warehouse; more focus upon making
technology more effective in terms of speed, cost,
power consumption and so on and so forth.

But the bottom-line is that this is a year of consideration, and the top things the banking industry will be considering are:

  • Systems Rationalisation
  • Outsourcing
  • Networking
  • Interoperability and Standards
  • Risk Management

working out a way for governments, banks and corporations to all be
connected to a massive data warehouse which runs a global real-time
risk exchange.

About Chris M Skinner

Chris M Skinner
Chris Skinner is best known as an independent commentator on the financial markets through his blog, the Finanser.com, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal’s Financial News. To learn more click here...

Check Also

Why bankers only see horses and technologists are creating cars

I was at a large bank’s wealth management conference recently, where the CEO was being …

  • While risk management will certainly be the focus for the banking industry in 2009, it will not only resonate across the trading floors but also other areas of banking such as retail banking. Already we are seeing banks taking strong action to lower their risk profiles and protect their shareholders. However, there is a very real danger that this swing from aggressive selling towards a more conservative mindset could result in lost opportunities, as potentially high-value customers are ruled out by too stringent risk guidelines.
    The key lies in finding the right balance between managing risk and promoting growth. While prudence may find more favour than growth in the current climate, risk decisions can still be, and should be, made with a clear view of what is best for the organisation’s bottom line but also with a full understanding of the long-term value of a customer. In addition to market conditions and corporate rules, a bank’s risk management strategy should also take into account the value a bank has received from a particular customer over time and employ predictive decisioning to determine the potential value of that customer. In other words, banks need the ability to infuse customer marketing and retention strategies with risk assessments. Such an approach using customer experience technology can enable a bank to automatically guide every decision and customer interaction across every channel, delivering a consistent and appropriate customer experience that minimises risk.