Economy Slows IT Initiatives

CU360
July 8, 2009 | COMMENTS

Analysts and research firms in the business of forecasting financial technology trends have faced unusual challenges lately. Their outlook for the financial services industry, reports Bank Systems & Technology, includes predictions for major changes in IT strategies.

While the largest banks are consolidating, the number of smaller institutions is shrinking and the middle market is growing, observes Bart Narter, senior vice president with Celent's banking group. One reason for the decline in the smallest institutions has to do with economies of scale. They need many of the same systems as a larger bank, but they lack the scale to run them in-house and lack the buying power to drive low pricing. This translates to a poor efficiency ratio.

Overall, Celent expects financial institutions to focus on deposit-gathering initiatives that include:

• Remote deposit capture for businesses and consumers
• Web 2.0 Internet banking to engage and retain customers, with emphasis on appealing to young consumers.
• Health savings accounts (HSAs) to attract new types of deposits. Account holders are increasingly looking to community-based institutions as HSA custodial alternatives to large national banks.

Credit unions are competitive

While the largest banks have moved away from new product development toward cost cutting and risk management, the financial crisis has brought new opportunities for many credit unions and smaller community banks. Many are seeing double-digit growth in loan originations and an influx of consumer deposits switching from larger institutions.

IT priorities at smaller institutions now focus on technologies that generate new revenues and enable them to better compete with the larger banks, notes Christine Barry, research director with Boston-based Aite Group. They will invest significantly in the online channel, as well as in customer analytics. They're seeing new opportunities to deploy systems to serve small-business customers, and they'll be investing in lending and credit-management systems.

Large-scale enterprise projects are on hold as IT departments and business sponsors are focused on survival tactics, notes Virginia Garcia, senior research director at TowerGroup. While new technology initiatives are delayed, many institutions are likely to build strategic plans for IT transformation.

Smart actions to rationalize IT and remove decaying technology may offer immediate returns and also yield strategic benefits, advises Garcia. Mandates for improved risk management and compliance, plus shifts in customer demographics, will force the retirement of old business models, making technology innovation essential for survival and growth.

Let's make a deal

Financial institutions that remain well-capitalized will find that vendors are willing to strike attractive deals. For those institutions, the time is right to move ahead, says Jeanne Capachin, research vice president with Financial Insights. If the need is real and solutions are available, this is a great time to make strategic investments. Competitors will be inwardly focused and vendors very willing to negotiate.

As institutions work to conserve capital, they'll increasingly outsource IT and business processes. Institutions that can off-load capital-intensive operations and focus on differentiators can fix their balance sheets and remain focused on making the most important processes better. Two areas that are ripe for outsourcing are payments and loan processing.

Those institutions that are able to focus on long-term benefits and innovation will be better positioned to capture business from competitors as the economy—including the financial services sector—emerges from this recession.