Bank IT spend is over-hyped, says Datamonitor

The financial services industry, which briefly rushed to achieve new economy measures of success such as levels of e-commerce investment, has reverted to traditional criteria, such as profit before tax, earnings per share, cost-to-income ratios, return on equity and return on assets. The only new criterion banks are measured on is bad debt.

Speaking at the Unisys International Management Centre in France, Remus Brett, lead analyst at Datamonitor, said that banks over the next five years will be squeezed on both sides "by shareholders to deliver cost control and tactical revenue growth", as well as by customers to create or maintain multiple delivery channels.

"Predictions of double-digit technology spending by financial services institutions (FSIs) are not true," he said. "Vendor forecasts might indicate this, but vendors have an obvious interest in upbeat forecasts."

This year, he declared, compound annual growth is predicted to dip from 5.7% to a mere 2.5%, and it will not pick up dramatically any time in the next four years.

"Most banks and FSIs will spend their budgets on consolidation, cost containment and building a platform for growth," Brett said. For global banks, he noted, 15% to 17% is a good benchmark for IT costs as a fraction of overall operating costs.

There`s been a lot of talk, but very little success in using technology to introduce new financial services to the unbanked masses, according to Brett. "Banks answer to shareholders, and not to customers."

Mobile technology would be a way to reach the unbanked, but handset subsidisation, which is already on the decrease among the hard-pressed telcos in Europe, is a prerequisite.

Addressing a typically South African concern, he said that the cost of wireless data access must also be low. "You can`t bank by SMS or even by WAP 1.2, which was never designed for that sort of transactional application. You need high-speed, low-cost data access."

If this isn`t likely in the foreseeable future, then neither is bridging the digital divide or bringing banking to the unbanked, he stated.

"That`s where the government must get involved. But they`re going to have to look to fund some of the cost of that, because trying to roll-out technology to areas where there isn`t much demand is not going to meet the cost of running it."

Smart card-based micro payments, loudly touted by several vendors, also provoke a sceptical reaction from Brett. "Setup cost is a high barrier. Barclays Bank in the UK wanted to give away card readers at one time, but cancelled that when they couldn`t see the certainty of resulting revenue streams. There are so many different B2C e-payment pilots that the future is unclear. We also see sufficient breaches of security to suggest that it`s not a mature technology"

Most banks worldwide have wised up to the need to integrate their delivery platforms in order to eliminate cost duplication. In this regard, Brett said, South African banks are "probably not in the upper quartile, but they`re certainly in the mid range of technology innovation".

He added that they`re quite different beasts in that the number of customers is a lot lower than in some of the other countries, so they don`t have the economies of scale that justify the kinds of substantial technology investment that cross-silo and cross-channel integration requires.

The need for "tactical revenue growth" will be reflected in continued high levels of spending on customer relationship management. Interviews in Europe reveal that 64.4% of FSIs consider "eCRM" a critical area for investment in 2001.

"But the only way it can work is if it can drive incremental revenue," qualified Brett. "CRM remains a massive area of investment, but only as a me-too, defensive, proposition."

He highlighted more advanced functions such as predictive modelling and online advice, both built on a strong CRM platform, as interesting areas for banks to build revenue.

The need for cost containment will make outsourcing THE growth segment, Brett believes. With a 9.8% compound annual growth rate for outsourcing compared with 2.7% for the rest of the market, companies like IBM Global Services, EDS and Unisys are the ones to watch.

A worldwide phenomenon is a new focus on so-called e-wealth management. This aims to capture a new market sector referred to by several publications as the "mass affluent". This "sweet spot" for the financial services industry consists of those individuals that have invested (successfully, one assumes) in equities during the bull run, that have benefited from privatisation or demutualisation, or that have succeeded at entrepreneurial ventures, and that have, in Brett`s estimate, between R400 000 and R1 million in liquid assets to invest.

He noted, however, that like with online banks, the market in SA is too small for dedicated niche players in this field.

"I`d be surprised if it`s a particularly large sector in SA. Banks there will have to follow the integrated model of someone like the Commonwealth Bank of Australia, which has articulated a clear service proposition to those customers."

Brett is highly sceptical of the chances of online banks such as 20twenty. "There are very few success stories worldwide. Egg in the UK is one of the few exceptions. Those that have done well have done so with big capital backing. You need extremely low cost and high volumes. On paper it could work, but it sounds like an all-too-familiar story of 'if we can acquire a large enough share of the existing market...`."