Reputational Risk: Emerging Issue In BFSI

As per a recent Gartner prediction, the banking sector is set to witness a 20 percent cut in IT spending this year. With slashing IT budgets and a parallel need for innovation, leveraging on existing investments seems to be the only solution for organisations. Rodney Nelsestuen, research director, Towergroup Research, gives an insight on how IT in BFSI will shape up in the coming year.

Which innovations do you foresee in the BFSI sector in the coming year?

Innovation has a lot do to with what organisations are planning to do with their businesses. When it boils down to execution, then there are a lot of IT issues. Presently, one of the things happening in technology is reduction in latency and BI suite. BI is quickly moving toward dynamic information, which is current, which has implications on how you do your business, what decisions need to be made within the risk element, opportunities within the customer element to make the customer an offering etc. It cannot be done without the right information at the right time.

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Also, data warehousing which used to be a pretty static type of environment has become dynamic today. The analytics is being employed to evaluate risk and make decisions about how to make an existing offer to a new customer etc. This analytics is not being done in data warehousing so there is reduced latency. There are rich Internet applications available so that users get the right information at the right time. So customer service knows how to deal with customers based on the risk characteristic, which is real and current. Thus, innovation works up to the bottom of the technology stack right up to the delivery mechanism.

How are banks going to use technology to approach more customers?

We have witnessed big investments in resurgence of customer focus and the importance of individual customers in different markets. It means using target marketing for target customers but also using it on individual customers looking at the lifecycle of the individual. Presently, financial institutions are becoming a lot more proactive in tracking the lifecycle of individual customers within their market segments and understanding when there are shifts and anticipating those shifts. It can be called as customer intelligence, which is to be combined with business intelligence. Also, institutions should share this information internally so that it is actionable.

How will banks plan their risk management strategy in the future?

Risk management is not a policy or procedure but is more dynamic than that. You need to have the policy and procedure, but you also need to have the expertise and technology that can present value portfolios, value a derivatives portfolio and look at cross risk, what was missing till now was the ability to look across all of the business units within an institution and add them together. Financial institutions are demanding higher visibility and transparency; not only deep into each business line and each individual function, but also for putting them together and cross-referencing them for understanding holistic risk. It is integrating the risk across the firm to know where the organisation stands.

What changes do you foresee in IT in banking in 2009?

Limited spending today will be pretty heavily focused around compliance. You are not in business to comply; it is something you simply must do because you are required to. The best institutions are going to find vendors and technologies that will not only help them comply but also provide a rich set of information that they can use in other ways. Most institutions are going to the vendor and asking them to help them comply and also see what else can be done.

What are Towergroup’s latest findings on trends in the banking sector?

The main challenge is centred on how to make situations risk averse. There have been so many changes that a lot of institutions are stepping back and becoming risk averse. However, the major focus is customer retention. There are some, which did not suffer, in this latest collapse in the financial services market. They are looking at different markets and evaluating new opportunities. They have started working on the reputation aspect of things and reputational risk has become a new issue. For those institutions, which have been affected, there is an effect on the quality of customers too. Others, who have been strong, will be using technology to leverage their brand and make their presence felt in the market.