January 17, 2003

Heightened competition from non-banks, a persistent bearish market, and a general erosion of consumer confidence will continue to influence banks' IT decisions in 2003. In particular, Celent expects banks to step up their privacy, security, and risk management efforts. In addition, banks will tackle two daunting areas in need of an overhaul: check processing and core processing. Within retail banking, we predict that investment in multi-channel integration and customer knowledge will continue to expand and that these projects will come to fruition within the next three years. In wholesale banking, banks will further harness Internet-enabled technologies to improve customer offerings and service.

Banks will pay more attention to privacy and identity theft concerns
Banks are becoming more proactive in assuaging consumer concerns regarding Internet banking privacy and the broader issue of ID theft. Banks are increasingly recognizing that privacy concerns have impeded Internet banking adoption by the mainstream. Privacy concerns in turn fuel lack of confidence across all electronic channels and new payment systems. Thus, banks have a long-run stake in mitigating privacy breaches.

Enterprise-wide risk management will rise on the agenda of senior executives
Capital regulations (in particular Basel II) are pushing banks to measure and manage not only credit and market risk but operations risk as well. Bankers will increase their understanding of the dynamics of the various risk types. In particular, an alliance between asset-liability management and credit risk management will grow. Ultimately, more integrated risk management systems and robust analytics will lead to increasingly more efficient use of capital which will, in turn, benefit shareholders.

An increasing number of check imaging and truncation pilots will be kicked off
2003 will usher in more check image archiving and electronic exchange pilots. Given the exceptional cost savings that can be gleaned from removing the paper in check processing, most of the top 25 banks will experiment--to varying degrees--with imaging. Within the next two years, a few will launch check truncation pilots.

The daunting task of replacing core processing systems will be undertaken
Celent foresees that many large financial institutions will invest hundreds of millions of dollars over the next few years to replace outdated mainframe legacy systems. A core system replacement is perhaps the most complex IT project a bank can undertake, but one which is necessary as older systems have proven to be extremely inefficient, transaction- based as opposed to customer-centric, and no longer flexible enough to handle the growing number of new applications deployed. As banks proceed with caution, many will look to solution providers for best of breed applications. These projects are likely to take several years to complete and most will be rolled out in phases to minimize the risk.

Banks will continue to improve their customer knowledge
While CRM has often failed to deliver on its promises, banks recognize that its promise is worth pursuing further. To that endeavor, retail banks are building a customer service infrastructure that is able to utilize CRM data effectively and are evaluating their front-end branch automation software based on customer management goals. In particular, banks are seeking CRM and cross-selling features within front-end applications that can leverage past investments in CRM database management and analytics to increase branch profitability.

The migration toward an integrated multi-channel platform will speed up
Multi-channel management has become a long-term (5 years+) project at many retail banks. It is encompassing not only integrating information across channels but also workflow management (e.g., loan application processing via the Internet and via the branch). Moreover, it is necessitating an overhaul of branch systems. The end game of channel integration will be twofold: 1. providing uniform service and customer data and 2. tracking channel usage, which will allow banks to calculate cost-to-serve more accurately and thereby better gauge customer profitability.

Corporate cash management will become fully browser-based
Great strides have been made in browser-based cash management over the past year, bringing it up to par with the features and functionalities of Windows-based solutions. As a result, banks will phase out Windows and DOS solutions by the end of 2003. The migration to a browser-based system will yield substantial benefits in the areas of cost savings and ease of use.

Banks will extend their reach in business's financial supply chain
Banks will increase their promotion of electronic payments to businesses by integrating well-established payment systems (purchasing cards, ACH, and wire transfer) with accounts payable/receivable and ERP systems. They will strive to provide value-added by adding rich remittance data to the payment.

Alenka Grealish is the manager of the banking group at Celent Communications, a financial services technology research firm based in Boston. She can be reached at agrealish@celent.com.

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