The Future of Banking and the Role of Technology

Industry Trends As we transition away from the high growth years of the past two decades, it's an appropriate time to reflect upon the future of the banking industry. As the economy continues to slow from what has been a remarkable global expansion, the banking industry finds itself in the middle of a dramatic transformation. Several significant trends are impacting key decision-makers of traditional financial institutions, and many are grappling with their role in the New World economy even as they try to reinforce the traditional attributes that have made them competitive. A Different World Today, Chief Executives arid the boards of financial institutions are faced with a very different world than even a decade ago. Traditional banks have been struggling with several strategic changes to their livelihood. These include the steady decline in assets held in traditional banking products as a percentage of total wealth in the country and lower margin rates on those products as the increased commoditization of these products has accelerated. This has been exacerbated by legislative changes that have allowed non-traditional competitors to enter the market for traditional banking products. Many of these non-traditional competitors have much higher profit fee-income sources that allow for the subsidization of incremental revenue from traditional banking products. Financial institutions also face challenges on the services-side as there has been a proliferation in the number of customer touch points with the growth of the Internet, wireless, as well as traditional channels such as branches and telephone banking. This has added further pressure on profitability and on increased efficiency. Many boards today are trying to reconcile the need for greater operating efficiency while realizing that traditional channels are not going away any time soon, and at the same time recognizing the need for newer distribution channels to serve the changing demographics. There is also the need to be more creative in offering traditional and non-traditional banking and other products. This need complements the need for new revenue streams particularly non-interest fee income sources. Additionally, there is a keen acknowledgement that banks must know a lot more about their customers so they can serve them better and more profitably. As the commoditization of traditional products increases, driving down margins, banks must be smarter about matching products, services and pricing to the appropriate type of customer. As this transition is occurring, there have been few breakthroughs in technology tools for financial institutions. Many vendors continue to sell legacy-based systems that are inflexible, proprietary and expensive to maintain. Institutions are often forced to purchase separate Teller, CRM and channel systems to meet their needs and bear the cost of integrating and supporting these multiple systems. This often extends the life of the legacy systems by masking the weaknesses of this very old technology and it does not allow for the flexibility, openness or information needed by financial institutions to effectively compete. Convergence Challenge Meanwhile, legislative changes have accelerated the convergence of all financial products into a single institution. Others have defined their role as financial intermediaries and have therefore begun offering any products and services where a financial intermediary is needed. This definition allows for a very wide range of products and service to be offered. Like most evolutionary processes, not all customers will accept this expanded role of traditional financial institutions. There are clear benefits to a one-stop shop for financial and even non-financial products and service where the trusted financial institution can fulfill the intermediary role. However, different demographic sets will prefer different roles for different institutions. …