Special Report | Banking Systems & Technology
OBSTACLES TO INNOVATION
As large as fulfilling client expectations looms for banks, there are other factors to take into account when allocating budget. “Roughly 20% to 25% of bank spending globally is dedicated to new investments, such as putting in new software solutions,” says Jacob Jegher, a research director with consultancy Celent’s banking practice. “This is because the majority of the budget is tied up in other things, such as maintenance costs, regulatory spend—and, of course, keeping the bank safe.”
With other demands on banks’ budgets, cash is not always available for innovation. A report published by Aite Group in September found that 29% of bank respondents were not satisfied with their corporate banking portals, but less than half were planning to increase spending in this area over the next two years. In addition, only 34% said they were satisfied with their corporate mobile banking offerings, although 53% were set to invest more in this area.
Although compliance with regulations is required, it certainly does have a material impact on the funds that are left over to spend on new investments.
~ Jacob Jegher, Celent
One critical cost is that of regulatory compliance. A report on corporate payment trends published in January by Celent notes that regulation is still a major factor in most banks’ IT budgets. This has been the case since the financial crisis hit in 2008. “Although compliance with regulations is required, it certainly does have a material impact on the funds that are left over to spend on new investments,” says Jegher. “This is not necessarily anything new, but the complexity of the task has changed with more regulations coming into play.” Dessing agrees that regulatory costs are having a significant impact on innovation in corporate banking technology. “It’s fair to say that a lot of investment dollars and euros have gone into the regulatory requirements that we are all experiencing on a day-to-day basis after the crisis, as well as penalties and repayments of government support,” he says. “Banks have had to pause or hold their investments in ideas they have been developing for innovative value-adding solutions.”
On the other hand, compliance and innovation are not necessarily mutually exclusive. Nick Blake, head of sales, global transaction services, at RBS, argues that systems investment for the purposes of regulatory compliance and that driven by client criteria are intrinsically linked. “The regulatory requirements both make the banking environment safer and are complementary to our approach of building a simpler business for our clients, which focuses on doing less but doing it better,” he says. “Clients and regulators are both looking for greater operational stability, improved reporting/transparency and for developments to keep pace with technological advancements. The benefits of investment in these areas are mutually shared.” Blake says that, for example, enhanced transaction monitoring and the overall integration of risk management tools help ensure the safety of financial systems. This, in turn, affords corporate clients protection against exposures in global transaction flows.
Finally, while some treasurers are concerned about the impact of regulatory compliance on technology, others see communication between banks and corporations as a more pressing issue. “The main problem is that, to date, the banks have not shared much with us about their plans for dealing with the new regulations,” says Damian Glendinning, president of the Association of Corporate Treasurers (Singapore). “What we have seen is a series of additional requests from banks to protect themselves in case of issues with the regulators, but little in the way of investments to handle these regulations—at least, investment which is visible to us.”