The market is being driven by a combination of factors, including the economic climate. Industrialized countries are still benefiting from the tail end of the most recent economic expansion which drove higher trading activity, more mergers and acquisitions, and an increase in demand for corporate lending. Developing countries are benefiting from the democratization of wealth in their economies, which is spreading from the high-net-worth population to a much broader mass-affluent population as manufacturing and professional services jobs are generated by global trade.
Banking will continue to be the largest financial service segment worldwide in 2006 because of the size of the mass market for banking services in both industrialized and emerging economies. Banking services spending is expected to total $222.7 billion in 2006, an increase of 3.7 percent from 2005 spending. The insurance and investment services segments are expected to grow 3.1 percent, reaching $136.8 billion and $113 billion, respectively. Global spending in these segments is slower because they tend to serve only the most affluent in emerging economies.
| Key Banking and Financial service Industry Trends: |
- Private Banks have led the way in terms of automation and also in using technology to reach customers by migrating from legacy systems
- The Public Sector Banks are also moving towards centralization, but most of them are looking at it in phases. Virtual centralization initially and then complete centralization. This also suits the vendors as banks, usually, prefer to work with the same service provider
- The Industry has also seen technology segmentation. Specialized vendors in the areas of investment Banking like Risk Management, Treasury Operations which need low investments and deliver high profit areas is seeing high usage of specialized technology
- The Financial Services segment has also seen specialized vendors offering technology solutions for Mutual Funds, E-Broking etc, emerging. These services also find a huge market in South East Asia
- Many other major vendors are attempting to enter this segment through the M&A route
- Service stream wise, many of them are Core Banking Solution vendors. Along the way many finer niches have arrived mainly due to the size of this industry. Retail Banking, Investment Banking including Risk Management & Treasury Applications is emerging as specialized areas
- On the non-banking financial services side, a lot of smaller products in terms of value but larger market volumes have emerged. These essentially service mutual funds, equity trading, e-broking etc
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- Although new technologies, channels, regulations and methodologies are constantly being introduced or refined, the basic services offered by FS Institutions (FSIs) remain broadly the same, and so do the types of IT systems needed to support them. Thus, the solution maps shown here will not evolve rapidly
- The IT systems for FSIs tend to be highly specialized — superficial adaptations of generic applications used across other industries will not be fit for FSI purposes in most cases
- Demand will not be even — for example, FSIs in the U.S. now are investing more heavily in front-office systems than in core banking systems for the back office
- In 2007, 30% of European financial services firms intend to offer back-office functions to other financial services companies. A comparatively stable situation: The number of service banks or firms will increase only very slightly
- The number of firms using other financial services firms’ more than triple by 2007, to 17%.UK financial services firms, for example, now intend to move toward industrialization faster than the average European financial services company
- Thirteen percent of financial services firms outsource back-office functions to an IT service provider or intend to do so. While this number is comparatively low, this is in line with observations regarding the renewal of the application landscape in financial services
- More than one-third of the financial services firms — 43% currently and 37% in 2007 — do not intend to go in any of the aforementioned directions. Fifteen percent of these companies have yet to choose a direction — and 20% don’t know where they will be in 2007. Consequently, interest in the industrialization of back-office functions of financial services may be even stronger beginning in 2007 — as long as a significant portion of currently uncommitted firms decide in favor of industrialization
- The other variable is how that functionality is bundled. For example, with the move to service-oriented architectures and things like shared data resources, pieces of functionality will move from the front and back offices to a shared infrastructure layer. Financial services firms will move to more-flexible service-oriented architectures (SOAs) based on Web services and composite applications
- With rural banking becoming the new mantra, banks are constantly reinventing schemes to improve rural penetration. Rural credit cards and ATMs, a franchisee network, supply chain financing for agriculture; investments in rural infrastructure and cross selling of products are some of the schemes directed at the village folk. The need of the hour is to build a specialized cadre for rural banking and make these schemes effective
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Key IT trends within the BFS segment.
Banks seeking to use new technologies for competitive advantage would invest in portals, Web services, Linux, J2EE on the mainframe, blade servers or network-based storage. Banks looking to reduce risk would invest in artificial intelligence. Banks seeking to improve productivity for employees would invest in employee-facing portals and advanced human resource applications for human capital management. Banks looking to cut costs would invest in e-procurement, e-sourcing solutions or supply-chain solutions.
Information technology- general
Flexibility, cost and integration among the top concerns in IT
Banks bulk up on storage but not applications
Banks upgrade security but not desktop operating systems
A componentized, service-oriented architecture is seen as a key feature for the target IT state
Basel II
Banks being subjected to regulated requirements: Basel II
Check 21; need to digitize check handling process
Banks to invest in imaging technology
Data and IT systems most costly component of Basel II compliance
The New Basel Capital Accord (Basel II) requires that banks address operational risk
15% -25% of expenditure relates to operational risks
SOA
SOA market fastest growing in APAC at a CAGR of 49% from 2006-2009
SOA essential for Banks
New forms of middleware, ESBs and APSs will become prominent
ERP with Accounts
Core Financials is a homogeneous market
ERP to grow at a CAGR of 13 -14 % through 2006
Financial supply chain gaining importance
Core Banking
Core banking process should be built around customer convenience
Multi-channel co-ordination, interbank payments, debit cards and internet banking all drive customer demand for real-time core banking systems
Maintaining core systems take more than 50% of IT budgets
Legacy based core banking is product centric
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