Optimistic Forecast for FinTech Providers

A new report, being released today by the William Mills Agency, reveals that spending by financial institutions is recovering as the economy and industry rebounds. The tenth annual ‘Bankers as Buyers’ study shares indepth insights and research from more than thirty individuals and organizations regarding what technology, services and solutions banks and credit unions are expected to invest in 2013. 

This report is a compilation of viewpoints from many of the most influential research and fintech support institutions in the country and is available as a free download here.

In this year's report, IDC Financial Insights projected that technology spending is expected to increase to $57 billion, with much of the spending expected to occur in the ‘second tier’ of financial institutions ($1 billion - $10 billion) as opposed to the largest banks.

"As technology continues to be central to customer interactions and an improved customer experience, we are constantly reminded that technology in not a banking department, but is everywhere . . . including in the hands of consumers”, states Scott Mills, president of the Williams Mills Agency. “Demographic and behavioral changes, combined with changing technology preferences and the need for improved trust and brand loyalty will force banks and credit unions to evaluate the role of technology in the delivery of services", adds Mills.

Additional findings of this year’s ‘Bankers as Buyers’ report include:

• A total of 14,210 financial institutions make up today’s depository landscape, which is down 3.7 percent from 2011 according to the FDIC and CUNA.
• While much of the focus on payments technology is on mobile, organizations are also looking at improvements in online payments, ACH, P2P and prepaid cards to attract customers.
• Mobile banking gained a stronger foothold in 2012, as FIs strived to meet increasing consumer demand for anytime, anywhere financial services.
• Consumer mobile banking is now used by 33% of mobile consumers according to Javelin Strategy and Research.
• According to the 2012 KPMG Community Banking Outlook Survey, 47 percent of responding institutions identified regulatory and legislative pressures as the most significant barrier to growth over the upcoming year.
• Raymond James predicts North American IT spending will continue to grow at a relatively modest three-year compound annual growth rate of 3.1 percent.
• Branch/teller capture will have a 98 percent expected adoption rate in 2013 and 2014 according to Celent.
• Cloud computing has had a rapid acceptance, with many banks inquiring about alternative cloud strategies, according to Dan Holt, president of CSI.
• Being able to leverage ‘big data’ will be increasingly important to profitably serving both retail and small business customers according to Jim Swift, CEO of Cortera.
• Mobile Remote Deposit Capture (RDC) is being considered by 80 percent of financial institutions according to Celent.

Spending Outlook

As mentioned above, IDC Financial Insights expects North American financial institution technology spending to increase to $57 billion, with the largest financial organizations seeing slower growth rates than their smaller counterparts. This trend is expected to continue in 2014 and 2015 as shown below.

This post is recapping some of the spending highlights from the 'Bankers as Buyers' report, including those in the areas of mobile banking, compliance and security and payments. Additional areas of spending covered in the 'Bankers as Buyers' study in significant detail include:

• Analytics/Big Data
• Small Business
• Branch Technology
• Cloud Computing
• Community Banking
• Loyalty Programs
• Personal Financial Management (PFM)

Mobile Spending

This year's report emphasizes that, with the penetration and use of smartphones and tablets continuing to increase, mobile banking technology is expected to impact all aspects of technology spending in financial services in the coming years. “Mobile payments are a major driver behind mobile banking and a potential customer retention and revenue tool for financial institutions”, states Richard Crone, founder of Crone Consulting, LLC.

Ron Shevlin, senior analyst from Aite Group agrees saying, “Aite Group anticipates that mobile banking users will triple between 2012 and 2016 in the U.S.” He continues, “Tablets will become financial management devices, and smartphones will become financial transaction devices. FIs need to invest accordingly.”

Many others in the ‘Bankers as Buyers’ study point to tablet growth as being the foundation for the next phase of mobile investment by banks and credit unions. With growth of this device category far surpassing that of smartphones, financial institutions are currently behind the eight ball, lagging in both offerings and functionality. In fact, some mid-tier banks still do not offer a customized tablet application for tablets, deferring to a reconstructed mobile or web application.

According to David Peterson, executive vice president for Q2 in Austin, TX and a report contributor, “The key for financial institution executives is to understand and leverage the tablet, smartphone and other devices that customers use, and present them with the right capabilities for the right device.”

Additional areas of technology investment for mobile in 2013 will be focused on remote deposit capture capabilities (beyond check capture), improved mobile alert functionality and voice recognition.

Perhaps reflected in the increased technology investment by mid-tier financial institutions, many community banks have lagged their larger counterparts and credit unions in mobile banking offerings. With mobile banking becoming the primary way many consumers interact with their bank on a transactional basis, hesitation to respond to consumer behavioral trends could have a significant impact on customer acquisition growth in the future.

Compliance and Security

Compliance and security costs continue to put a strain on financial institutions of all sizes according to the study. Beyond the extensive investment in human resources required to keep abreast of requirements, data management tools are being used to comply with new regulations and to monitor all areas of the organization for potential security breaches.

Some institutions are adjusting to the new regulatory reality, however, with some costs seemingly being reduced over time. According to report contributor Jimmy Sawyers from Sawyers & Jacobs, LLC, “Some institutions are getting innovative (around the cost of compliance). They are starting to do more with less and adapting to the new playing field.”

Unfortunately, the same can’t be said for security costs, which are increasing and a very high priority for all institutions given the growing threat from a highly creative fraud community. All is not bad news on the security front, however, since the report indicates a direct correlation between superior security and loyalty according to Javelin Research. In other words, the investment in security may have a consumer payback.

Payments Technology

While the majority of the focus around payments technology is on mobile, financial institutions are also looking to improve online payments, ACH, P2P and are spending funds to develop prepaid offerings according to this year’s report.

“The challenge banks have is in trying to better understand how people will transact in the future”, said David Wilkes, CEO of Fuze Networks and one of the report’s contributors. “The reality is that there is really no such thing as an ‘unbanked’ consumer.” While some may interact with their financial provider in a non-traditional manner, there is some form of payments system supporting virtually every consumer.

While many theories of how the payments marketplace will finally settle exist, the competition (and the need to keep up with new entrants and innovation from traditional players) will require significant investment to support the payments process.

“Payments will continue to evolve.” says John Balose from ORCC. “Fifteen years ago, few people were using online payments. Mobile solutions have changed everything. It’s a very fractured market.” According to the report, there are nearly 50 digital wallet providers currently, with more expecting to emerge.

It is clear from the report that financial organizations may want to opt for playing a game of ‘payments roulette’, placing smaller bets on a variety of potential outcomes, hoping to hit the jackpot when the competitive dust settles. One thing is clear, however. Financial institutions should not sit on the sideline and wait for a winner. By then it may be too late.

Additional Insights

Beyond the insights collected for the development of this year’s ‘Bankers as Buyers’ report, Williams Mills provides four feature articles from some of the best minds in the FI space. The titles of these must-read articles and are included in the free download:

‘U.S. Banks and Core Replacement’ - Jeanne Capachin

‘Technology in Wealth Management: Opportunity or Threat?’ – JP Nicols

‘Mobile Payments Offer a Variety of Payment Opportunities’ – Richard Crone and Heidi Liebenguth

‘Top Ten Trends Impacting Bank Technology for 2013’ – Jimmy Sawyers

FREE Downloadable Report

Bankers as Buyers 2013: William Mills Agency (January, 2013) 

Contributors to Report

Aite Group, American Banker, BankInfoSecurity, Banno, Jeanne Capchin, CARDFREE, Clelent, Clientific, Comscore, Cortera, CSI, Credit Union National Association, Crone Consulting, Finovate Group, Federal Deposit Insurance Corporation, Federal Reserve Bank of Cleveland, First Annapolis Consultion, Fuze Networks, IDC Financial Insights, Jack Henry Banking, Javelin Strategy and Research, KPMG, Mercator Advisory Group, MoneyDesktop, Morgan Stanley, Online Banking Report, ORCC, ProfitStars, Q2 Banking, Raymond James, Sawyers & Jacobs, Symitar, Wells Fargo and Zions Bank.