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How Banks Invest Their Money

The following is an excerpt from our 9th annual banking survey, open for Business, and offers insight into the way banks are prioritising Corporate Investment and IT spend.

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Temenos – Company

The following is an excerpt from our 9th annual banking survey, open for Business, and offers insight into the way banks are prioritising Corporate Investment and IT spend can be viewed here

This year’s survey encompasses 235 senior bankers’ opinions, who attended Temenos Community Forum in Barcelona; in 2016; the results are presented in association with Capgemini.

Digital channels top the list of corporate investment priorities

One quarter of the respondents to this year’s survey cited digital channels as their top investment priority, with little variation by region or by banking segment (corporate banks being the only exception, where only 17% saw it as their top priority). Banking is quickly dematerializing and moving online – mobile phones are becoming both banks and wallets—and, against this backdrop, it is not really surprising that banks are investing heavily in digital channels (or that branch investments continue to get de-prioritized).

What is more interesting is that the investment in digital channels is being made alongside wholesale IT modernization. 19% of our respondents told us that IT modernization was their biggest priority, slightly down from 2015 levels, but dramatically higher than in 2014. This is encouraging since, in our view, investments in digital channels in the absence of more general IT renovation will soon hit limits in terms of effectiveness. Frankly, there is little point in having state-of-the-art digital channels if the data and content being served up is neither relevant nor timely and if the underlying fulfilment mechanisms are not instant and frictionless: user experience cannot be meaningfully enhanced under these conditions.

Product innovation, cited by 22% of respondents, continues to be a major priority for banks. This likely owes in part to the constraints posed by legacy systems on banks’ ability to define and create new products based on insights into their customers’ preferences. This is further supported by the World Retail Banking Report 2016 by Capgemini and EFMA, i.e. a low percentage of customers (15.9%) indicating that they are likely to purchase another product from their bank. We also believe this finding reflects the greater level of choice that consumers are now afforded by the burgeoning FinTech sector (see next section), which is forcing banks to innovate. To support this, we would highlight that far more retail banks (25%) and even private wealth institutions (22%) are investing heavily in product innovation compared with wholesale banks, where—up until now—there has been less FinTech investment.

Mergers and acquisitions remain out of favour. Just 2% of our respondents said that M&A activity was a top priority reflecting the fact management remains focused on internal issues, especially defining the strategy and business model for the digital future. The slight exception was in private wealth where 5% of bankers cited M&A as a top priority and likely owes to a greater need in many mature markets to consolidate to raise margins in face of increasing costs and low AUM growth. Nonetheless, we would expect M&A interest to rise as some banks retrench to focus on key geographies/segments while regulatory changes such as Basel III force greater consolidation to improve capital strength.

IT spending plans remain at all time high…

Every year we take a reading of IT spending plans for the coming year. This year, survey results remained bullish with 65% expecting an increase in their budget and only 7% expecting a budget reduction. The 58% difference between these figures is flat compared with 2015 and up versus 56% in 2014 and 53% in 2013 and, in fact, is the highest recording in the nine years we have conducted the survey.

Respondents were consistently positive across all regions and segments, showing banks’ need to invest in IT to remain competitive, to sustainably lower costs and to meet regulatory demands. However, there were some noticeable variances by region with banks in Asia the most positive (albeit slightly less so than in 2015) with 72% expecting budgets to be higher and 68% of banks in the Americas expecting higher budgets. Banks in Europe remain noticeably more positive with 58% expecting budgets to be higher (compared with 44% in 2014), likely due to a combination of a more stable macroeconomic situation and an increased urgency to act as most European institutions are running legacy core platforms.

By segment, retail bankers are planning the biggest budget increases with 78% of respondents expecting IT spending to be higher next year, followed by private banks, 73% of which expect higher budgets next year. Corporate bankers are the most cautious with 59% expecting budgets to increase in the coming year (although this has increased markedly from 44% last year).

…With core banking, digital channels and analytics the focus areas

Core banking has remained the number one IT investment priority for the third consecutive year (cited by 23% of survey respondents, the same as in 2015). This is not necessarily surprising as we surveyed mostly Temenos customers and prospects, most of whom have either recently undertaken or are in the process of making such an investment. However, we should also note that core banking typically encompasses nearly half of a bank’s total IT investment and therefore makes it a primary area to focus on when looking for efficiencies. It is also worth mentioning that in order maximize the impact of investments in areas such digital channels, analytics and CRM, that a real-time, customer-centric core banking system is essential. For example, an institution could invest significantly in state of the art digital channels applications, but the user experience would be limited if it was supported by realtime customer information that is only possible with a modern core banking system.

Digital channels were the second-biggest priority within IT spending by banks in 2016.

Consistent with 2015, digital channels were the secondbiggest priority within IT spending by banks, cited by 22% of respondents in our survey this year. In our view, this is likely due to the fact that many banks have already invested in digital channels in recent years; and now they realize that to maximize the benefits of these investments they must also invest in a modern core banking system that offers real-time processing (as discussed above).

Investment in analytics was highlighted as the third-largest priority by our survey respondents, cited by 14%. Banks now acknowledge that to capitalize on their strengths and competitive advantages, they must use data to become more essential in their customers’ lives. Banks can no longer rely solely on new products, an enriched online experience and improved customer service to combat the threat of increased competition and new market entrants (as discussed above). Practically speaking, this will require banks to have the ability to analyze data not only related to their finances, but also from non-banking sources such as social media and their location. Using this data, banks will need to offer insights to their customers into, for example how they can save money. It will also involve recommending products and services, both financial and non-financial, branded, white labeled and third-party, which add real value to customers’ lives.

To read more, the full TCF survey here.