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5 Key Growth Segments for Banking ITS & BPS in 2019

 

The banking industry cycle has turned towards austerity for 2019 as indicated by recent events, including:

  • Labor cost cutting: State Street announced 1.5k executive layoffs, and Santander will close 20% of its bank branches in the U.K. Both are part of long-term trends incurred by automation and the shift to omni-channel delivery  
  • M&A activity: Cost pressure is driving banks to sell their operations centers to third-party services vendors. For example, in the past month, Cognizant acquired the operations of three Nordic Banks which were joined into one vehicle, Samlink. Also, long-time banking operations industry consolidator Fiserv acquired First Data, a payment processing services and solutions vendor, to increase its scale in payments
  • Tightening financial conditions and slowing of economic growth: U.S. Fed and other central banks raising interest rates, and slowing economic growth in the U.S., China, EU, and U.K. 

These events underline conditions where the financial services industry will face slower revenue growth and will need to aggressively reduce costs to remain profitable. Because of this, we expect 2019 to be a strong year for banking outsourcing, with banking ITS and BPS markets growing as fast in 2019 as in 2018. Below I identify five key growth areas for 2019.

IT outsourcing

Banks are merging or selling unwanted branches and lines of business, and this trend will continue until the next recession. M&A will drive IT outsourcing deals, as banks look for temporary labor to integrate targets quickly to realize efficiency benefits.

Core banking platform expertise will be key to winning deals, but digital technologies will be required to support the agility needed to cost effectively reengineer the operations of both the acquiring and acquired banks. Currently, Europe is showing the highest level of activity in this area. Later in the year we expect the U.S. to accelerate. Asia will remain a laggard in this area over the next year.     

Open banking

In 2019, open banking will take off, due to regulatory deadlines requiring go-lives in 2019, as banks look to monetize their assets. Open banking is the concept whereby banks open their platforms to third-parties for them to transact business with the banks’ customers and suppliers. And currently, banks are playing with business models, pricing schemes, and target customers.

The banking industry provides no direct comparable offerings to guide banks looking to monetize open banking assets. Setting up a business will require significant investment in security and vendor quality controls before the first dollar is made. Expect there to be many missteps along the way. ITS vendors working on infrastructure enablement will be the ones to make money in 2019. We expect interesting ideas to come to the fore from 2020 onwards. It will take five years for successful business models to take root and consistent earnings to start rolling in.

Automation & AI

RPA and AI implementations have been growing rapidly for the past three years and will continue to do so in 2019. Key initiatives for 2019 will be for services vendors to improve their use case development and create the ability to manage RPA bot groups.

RPA use cases do not make their cost projections over 60% of the time when deployed in POCs. Development of use case libraries and improved analysis is mitigating, but not eliminating, this challenge. Vendors are now repurposing successful use cases across clients and geographies. 2019 will need to be the year where vendors and banks consistently identify winning use cases prior to POC deployments. Vendors who succeed in this challenge will be able to deliver much higher return on engagements for their clients. 

Management of deployed bots has been a significant challenge for banks and vendors. By integrating AI into controller bots, vendors can increase the uptime and effectiveness of bot teams. Where bots operate 24/7, it is more effective to automate the management than to have humans managing with shift handoffs.

Cloud delivery

Banks are finally willing to aggressively make the transition to cloud delivery. Currently, the primary venue for cloud is on-premise. However, to achieve aggressive cost takeout under conditions of rapid IT infrastructure/application change, it requires external cloud delivery from a shared environment.

Banks are grappling with redefining the internal/external operations split. In 2019, banks will articulate what needs to remain internal (high value, non-repetitive processes) and what can be delivered externally (low value/less differentiated processes). Operations will still need to integrate these two types of processes effectively. Cloud delivers high cost savings, but on a small operational footprint. Enlarging the operational footprint is the highest cost saver and will be undertaken by successful banks this year.   

Transaction processing management

Banks will focus on transaction processing management. Regulations requiring real-time payments have led to new regional platforms which deliver instant payments, including NPP in Australia, RTP in the U.S., and Instant Credit Transfer scheme. Now banks need to understand and manage these high-speed transactions within their internal operations. Banks will deploy AI to achieve better, more efficient processing of transactions. The AI will need to pull and process data in real-time to stop unwanted transactions and report suspicious ones. And because the transactions are between counterparties, banks will seek third-party IT services vendors to support processing and coordinate across counterparties.

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