Strategic Planning, SPA-21-4253 A. Earley, B. Adrian, D. Free, K. Harris, M. Knox, M. Kun, A. Litan
Research Note 12 November 2003
Mixed Success for 2004 Financial Services Applications As financial services providers struggle to connect backoffice functions to front-office business processes, new processes and technologies will present a variety of FSP benefits and problems in 2004. Core Topic Financial Services: Financial Services Drivers, Strategies, Direction and Vision Key Issue How will changes in technology and processes affect financial services requirements and efficiencies? Strategic Planning Assumptions By 2010, 40 percent of Tier 1 banks will replace their core banking solutions with component-based systems (0.6 probability). By 2006, 50 percent of large banks will refurbish their retail Internet banking channels to extend functionality (0.7 probability). By 2010, 60 percent of EFT transaction processors will replace their proprietary platforms (0.7 probability); by 2010, there will be no differentiation in EFT vs. card networks (0.7 probability). Through 2007, multiple XML standards will be used in financial services (0.9 probability). Through 2006, process management, integration and data management will drive insurer technology investments (0.8 probability). By 2007, identity scoring will be a routine process for identity fraud prevention (0.7 probability).
Meeting competitive threats, changing customer expectations and the need for partnership in an increasingly global financial services marketplace will challenge financial services providers (FSPs) in 2004. They'll be seeking systems and applications that provide flexibility, fast responsiveness and collaboration, while letting them exploit promising business opportunities in new technologies and processes. FSPs must successfully confront these predictions concerning financial applications in 2004: Prediction: Tier 1 banks will move to component-based core systems. As layers of heavily customized core banking solutions continue to impair bank marketing efforts and require increased maintenance costs, replacing such systems will earn the attention of senior management in 2004. Previously, most large banks built their own core systems or bought (and substantially modified) packaged solutions to cope with the inability of vendors to accommodate volatile market conditions. However, this approach diminished the original architecture and degraded flexibility. Now, business initiatives such as globalization and enterprise risk management, which requires greater transparency, are spurring banks to move to component-based systems.
Strategic Planning Assumption: By 2010, 40 percent of Tier 1 banks will replace their core banking solutions with componentbased systems (0.6 probability). Action Recommendations for 2004 • Large banks should resurrect their year 2000 remediation system documentation and align their business processes to current technology support systems to get ready to replace their core banking solutions Gartner © 2003 Gartner, Inc. and/or its Affiliates. All Rights Reserved. Reproduction of this publication in any form without prior written permission is forbidden. The information contained herein has been obtained from sources believed to be reliable. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of such information. Gartner shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof. The reader assumes sole responsibility for the selection of these materials to achieve its intended results. The opinions expressed herein are subject to change without notice.
• Escalate efforts to map and execute a strategy for a cohesive service-oriented architecture; this process will simplify future efforts to replace associated core banking applications • Use reputable and knowledgeable consultants to break down barriers to change (such as corporate culture and politics) and accelerate project completion Prediction: Banks will accelerate overhauling their Internet banking solutions. Retail banks have long depended on their Web sites as key customer self-service channels. Yet, many early adopters of online banking still rely on homemade or underdeveloped packaged solutions, which are inadequate to handle rising customer interest and more-complex activities. Moreover, because of the Web's cost-efficiency, banks are eager to migrate other functions online. As a result, banks must renovate their Internet banking capabilities, focusing on greater scalability and new self-service functionality such as e-statements, stop payments or check images. Because the Internet banking market has matured, banks will choose packaged solutions over homemade ones.
Strategic Planning Assumption: By 2006, 50 percent of large banks will refurbish their retail Internet banking channels to extend functionality (0.7 probability). Action Recommendations for 2004 • Evaluate your Internet banking capabilities against those of your primary competitors • Identify the specific needs of your customer base for online self-service and collaborative service • Invest in Internet banking solutions that provide greater functionality such as e-statements, check image retrieval, Web chat and co-browsing Prediction: Electronic funds transfer transaction processors will accelerate open systems development in IT infrastructures. Electronic funds transfer (EFT) processing systems sit behind a proliferating and diversifying universe of points of payment tied by complex telecommunication networks. The back-end support for these systems is based on proprietary infrastructures, where fault-tolerant hardware and closed software rule, and where around the clock availability is essential. However, several factors — regulations, enterprise risk management, cost concerns and new technologies — are driving FSPs to consider changing their IT infrastructures as EFT supporting platforms near the end of their useful lives. © 2003 Gartner, Inc. and/or its Affiliates. All Rights Reserved.
SPA-21-4253 12 November 2003
Strategic Planning Assumptions: By 2010, 60 percent of EFT transaction processors will replace their proprietary platforms (0.7 probability); by 2010, there will be no differentiation in EFT vs. card networks (0.7 probability). Action Recommendations for 2004 • Design the evolution plan for your technology while monitoring innovation opportunities • Closely monitor security and reliability enhancement tools to determine opportune implementation • Adopt architecture principles to enable channel consolidation and the rapid implementation of new products and services Prediction: Indecision over standards will thwart FSP use of external Extensible Markup Language and Web services. Immature technology standards — particularly at the industry or function content layer — are significant barriers to the use of Extensible Markup Language (XML) and Web services between third parties. Many FSPs and their vendors are taking a wait-andsee approach in supporting industry XML-based content standards, fearing to commit until clear winners with sizable market penetration emerge. Although no one standard has claimed a majority of the market, some standards have made inroads in specific financial sectors. Nonetheless, the fencesitting by the majority of FSPs means that the benefits of these initial standards may be lost. That puts pressure on FSPs to support multiple standards and accommodate their interoperability.
Strategic Planning Assumption: Through 2007, multiple XML standards will be used in financial services (0.9 probability). Action Recommendations for 2004 For FSPs: • Be prepared to support multiple standards, but gravitate toward one primary standard for each major line of business or messaging set • Invest in solutions that facilitate mapping and transformation among industry standards and standards' versions for interoperability • Work with industry associations and vendors to promote the adoption of standards that meet your needs and those of your external partners • Insist that your vendors support industry standards in their products and services For vendors: © 2003 Gartner, Inc. and/or its Affiliates. All Rights Reserved.
SPA-21-4253 12 November 2003
• Support multiple standards and standards versions in your products • Promote solutions that facilitate mapping and transformation among industry standards and standards' versions • Work with your customers' industry associations to promote standards and interoperability among standards Prediction: Insurers will focus on process management, centralization and transaction processing. Pressure to reduce operation costs will continue to plague the insurance industry in 2004. As a result, insurers will search for more cost cuts in their infrastructures and systems. Prior mergers and acquisitions left many enterprises burdened with redundant and incompatible systems. The replacement of legacy systems will be too costly and require a long-term commitment, which will drive insurers to leverage their systems rather than replace them. Operational and information control will be central, encouraging the implementation of business process management tools and standards, such as XML, to support straight-through processing.
Strategic Planning Assumption: Through 2006, process management, integration and data management will drive insurer technology investments (0.8 probability). Action Recommendations for 2004 • Evaluate back-office systems and eliminate redundancy • Implement XML standards in conjunction with enterprise application integration • Look for solutions that are open and that will easily integrate with surrounding systems • Implement business process management tools to ensure that processes are efficient and effective Prediction: To reduce identity fraud, FSPs will use identity scoring. Seven million Americans have reported that they have been victims of identity theft, according to Gartner research. However, banks and credit issuers don't know the true extent of identity theft or application fraud theft; they assume if a bill doesn't get paid it represents a credit loss rather than identity fraud (see "Underreporting of Identity Theft Rewards the Thieves"). Identity scoring, a new technique introduced by ID Analytics, offers an effective way to combat identity fraud. Identity scoring maps the behavior patterns of an identity across industries (such as retail or wireless) by analyzing data from account applications submitted to different companies, which necessitates sharing of information into a shared scoring system. Without such sharing, © 2003 Gartner, Inc. and/or its Affiliates. All Rights Reserved.
SPA-21-4253 12 November 2003
however, fraud prevention solutions will be limited if a thief's movements can't be easily tracked.
Strategic Planning Assumption: By 2007, identity scoring will be a routine process for identity fraud prevention (0.7 probability). Action Recommendations for 2004 • Banks and lenders should implement identity scoring solutions that leverage shared application data shared across industries to check the validity of identities submitted for new accounts, credit lines or service • Banks and lenders must share information with providers of identity scoring applications that analyze suspicious patterns of behavior across industries • Banks and lenders must be careful not to misclassify fraud losses as credit losses; they should consider that if a bill is not paid within 180 days, it likely represents identity theft fraud, rather than credit loss
Acronym Key EFT electronic funds transfer FSP financial services provider XML Extensible Markup Language
Bottom Line: The push for consistent interaction across all delivery channels and a platform to sustain growth will compel financial services providers to concentrate on linking their customer-facing business processes to back-office functions. This initiative will dominate resources and budgets through 2004.
© 2003 Gartner, Inc. and/or its Affiliates. All Rights Reserved.
SPA-21-4253 12 November 2003