By Rajesh Kandaswamy, Research Director, Gartner
Though the banking and securities industry has recovered well from the financial crisis, but it is still struggling to raise revenue and Return on Equity (RoE) for its investors in many mature markets. While the banking and securities industry’s focus on reducing costs and risks has helped, revenue growth remains an issue that the firms have to overcome. Firms in the industry have to deal with such investor expectations, while handling the increasing regulatory requirements that curb undue risk-taking by banks. In the meanwhile, customers have become much more digital savvy, and technology has brought in new competition from non-banks.
Technology Reshaping Banking
The industry is more reliant than ever before on technology for many aspects of their business. Technology is used more to sell products, manage internal operations, and control risks. Many of the advances in technology— mobile, analytics, and cloud have a direct role to play in these areas. They enable services from incumbents and new entrants, and improve financial inclusion for the ones not served well by the traditional banking products.
In the past year, the world’s largest listed company, Apple, has entered payments, and the world’s largest retailer, Walmart has announced that it will offer checking accounts. Non-banks are a growing phenomenon in many parts of the world. While the portion of revenue that non-banks get at the expense of banks is miniscule today, they are growing and creating new services in the unserved areas. Gartner projects that the banking and securities industry worldwide will spend $502 bn on IT products and services in 2015, an increase of 2.7% over 2014. IT services, the largest segment at $193 bn, will grow by 3.3%. Software will be the fastest growing segment at 6.5%, and the projected spend is $70 bn.
Among priorities for technologies, analytics retains the top position for the third year in a row, while infrastructure/ datacenter, mobile, and cloud are the others that make up the top four technology priorities for the banking and securities industry. The increased reliance on technology for business goals has increased the participation of business leaders in technology decisions.
More consumer banks rank mobile as a higher priority, compared to cloud, whereas it is reversed for security firms. Pure technology initiatives take a backseat to the ones that are tied to specific business initiatives or regulatory requirements. Banks continue to tweak their technology investment for projects that are cost-efficient, revenue enhancing, and have the ability to control risks. As the customer’s adoption of technology increases, banks continue to invest in customer facing services and solutions. Cybersecurity has increasingly come to the fore, spurred by the rapid adoption of digital channels by customers, ubiquitous connectivity, and the increased sophistication of cyber attacks.
The potential to use mobile to improve access of financial services to the unbanked has piqued the interest of the government, and many are actively creating favorable legislation or rules to enable entry of non-banks. For instance, Brazil and India have issued guidance that allow the creation of new legal entities that can offer many banking services needed by the poor and/or remote population who might not have access to the traditional banking services. These entities will not have all the privileges of a regular bank (eg, ability to lend money), but will have less regulatory expectations.
IT spending in the Indian banking and securities industry will grow by 10.7% and reach $8.5 bn in 2015. Banks are continuing to invest in their channels, whether branches, ATMs, online, and mobile. Investments in back-end processing solutions will also continue. The Reserve Bank of India’s proposal to issue ‘payments bank’ licenses, an initiative to increase the availability of banking services for the unbanked and the underbanked, has attracted the interest of many large companies from other industries such as telecom and retail. The payment banks will rely much more on technology for all aspects of their functioning and the issuance of these licenses will spur a wave of technology investments in the banking sector.
The role of technology is becoming even more and more vital for the banking and securities industry to perform better, amidst regulatory constraints. It also enables banking services to reach a large population, who have not been able to make use of them before. While banks are positioned well to seize the opportunities opened by technology, the future will have many innovative and useful financial services, offered both by banks and non-banks.