IBM Software Day 2013. Banking trends and transformation

Trends and Transformation …..Driven by Software………….

Neil BeckleyFSS Industry Leader, GMU

The ROE Challenge

In the “New Normal” of lower-for-longer interest rates, below-trend growth and less leverage, we expect banks’ management to increasingly focus on restructuring business models in order to improve returns - Citi, 4 January 2013

In Europe, shareholders have been asked to provide double the amount of capital for effectively the same level of return - profit having only recovered to 2007 levels

Global Banks The lowest level of revenue growth for the banking

industry globally since 2008, at the height of the global financial crisis – UBS

Emerging Markets Declining ROEs – In 2013, banks across emerging

markets could face one of the most challenging operating environments in recent years, culminating in sector ROE falling to its lowest level since 2003 – UBS

North America Expect the median bank to see revenue decline 1%

yoy as balance sheet growth is offset by NIM declines and mortgage banking shifts from a source of earnings growth to stability – Goldman Sachs

Europe In the UK upcoming banking reforms could cost GBP

4bn-7bn, which will likely reduce the UK banks’ ROEs by c 2.4-4.1 – UBS

What Banking CIOs tell us:

Source: 2011 CIO Study, Q12: “Which visionary plans do you have to increase competitiveness over the next 3 to 5 years?”; Global sample (n=3,018); Banking (n=311)

Most important visionary plan elements (Interviewed CIOs could select as many as they wanted)

Business Intelligence and analytics

Virtualization

Business process management

Self-service portals

Risk management and compliance

Cloud computing

Mobility solutions

Collaboration and Social Networking

83%

74%

68%

60%

60%

58%

57%

55%

81%

76%

70%

48%

70%

72%

53%

48%

Global sample Banking

Tougher Banking Environment• Increasing regulation & control• Mature markets continue to deleverage• Declining profitability• Compounded by trust & reputation Issues

Smarter & More Demanding Customers• Technology explosion• More demanding, less loyal customers• Comparison Shoppers• New entrants will exploit gaps

Tremendous Growth Potential• Banking the unbanked• Leverage the SME opportunity• Drive new revenue growth through

customer centricity• Continue to exploit cost efficiencies

Dynamic Banking

This translates into a few key focus areas…

Create a customer focused enterprise

Improve operational efficiency and agility

Optimize enterprise risk and compliance

The 2013 Point Of View

• Empowered Customers - Think Like a Retailer• Simplicity Low Cost - Act like a Manufacturer• Common Agile Processes - Operate as One Bank• Capital – Embed Risk Management

To thrive in the new environment Banks will need to “Think Like Retailers, Act Like Low Cost Manufacturers”

Right Customer

Right Time

Right Product

Right Price

Right Place

Right Service

Multi-Channel Optimisation

Product / Service Lifecycle

Price Optimisation

Customer Segmentation

Customer Service

Customer Insight

Enabled through Front Office Digitization, Advanced Business Analytics & Information Management

The ability to create competitive advantage using analytics surged dramatically in 12 months; the bottom-line impact is clear

Respondents who say analytics creates a competitive advantage

58%2011

37%2010 57%increase

Organizations achievinga competitive advantage with analytics are

2.2xmore likely to

substantially outperform their industry peers

Ratio of respondents who indicated analytics creates a competitive advantage to those who indicated it did not and the likelihood they also indicated their organizations was “substantially outperforming their competitive peers”. The ratio was 2.0 to1 in 2010.

Source: The New Intelligent Enterprise a joint MIT Sloan Management Review and IBM Institute of Business Value analytics research partnership. Copyright © Massachusetts Institute of Technology 2011.

69%Banking

35%Banking

97%increase

Early adopters have outpaced others in gaining competitive advantage by expanding the use of analytics

Respondents who cited a competitive advantage using analytics year-over-year

80%2010

2011

63%2010

2011

38%

37%2010

2011

39%

Transformed

Experienced

Aspirational

23%increase

66%increase

5%decrease

65%


Transformed organizations outpaced all others in integrating analytics into core strategies and operations in the past 12 months

Transformed organizations creating a

competitive advantage are

3.4xmore likely to

substantially outperform their industry peers

Ratio of Transformed organizations creating a competitive advantage compared to Aspirational organizations not creating an advantage that self-assessed as “substantially outperforming their competitive peers.”

Transformed

Experienced

Aspirational

70%

55%

34%

Respondents increasing their integration of analytics into strategy and operations


The BAO Reference Architecture OverviewMaster Data Management

Data Integration

Data Repositories

BI / Performance Monitoring

ContentManagement

Security, Privacy & ComplianceCollaboration

Information Governance

AdvancedAnalytics

Business Process Management

Reference Data Management

Operational OrchestrationComponents

Data Load Components

CRUD Transactional Components

Access

Web / Services

Portal

Device

Composite Application

Sources

Collaborative Application

Productivity Application

Enterprise Search

Business Unit

Application

Service Management

Transport & DeliveryInfrastructure

Extract / Subscribe

Transform

Load / Publish

Enterprise Apps

Unstructured Data Stores

Informational

External

Web

Structured Data Stores

Devices

Master / Reference

Data

Document Management

Services

Federation

Ingestion

Base Services

Records Management

Services

Extraction

Simulation

Optimization

Visualization

PredictiveAnalytics

DataMining

Text Analytics

Reporting

Planning, Forecasting, Budgeting

Scorecards

Guided Analysis

Dashboards

Querying

Monitoring

Operational Data Store

Data Warehouse

Time Persistent Repository

Dimensional Layer

Master Data Store

Content Store

Staging Area

Data Quality

BATCH

REALTIME

TRANSACTIONAL

Volume

300 million transactions processed

every day in North America

Velocity

5 million trade events occur

every second

Variety

1.5 billion total Facebook posts &

Tweets per day

Veracity

80% of all available data will be uncertain by

2015

Big Data: The Next Natural ResourceData “behaves” like a natural resource in that it can be found, extracted, refined, and fuel the cognitive engine

What does a Big Data platform do?

Analyze Information in MotionStreaming data analysisLarge volume data bursts & ad-hoc analysis

Analyze a Variety of Information Novel analytics on a broad set of mixed information that could not be analyzed before Multiple relational & non-relational data types and schemas

Discover & ExperimentAd-hoc analytics, data discovery & experimentation

Analyze Extreme Volumes of InformationCost-efficiently process and analyze petabytes of informationManage & analyze high volumes of structured, relational data

Manage & PlanEnforce data structure, integrity and control to ensure consistency for repeatable queries

Extract insights from a large volume of data, including a wide variety of types, with high velocity

IBM Big Data Platform

What are Social Technologies

Source: McKinsey & Co. The social economy: Unlocking value and productivity through social technologies, Jul 2012,

What is Influencing This Trend?

CONTROL changes hands

• The front office is now customer-owned-devices • The next App Store - who owns it?• Cloud as a business model vs. just technology• Payments multiply: “50 ways to give you money”

CUSTOMERS change segments

• Mobile adds billions of newly banked• The “pre-inheritance” periods where aging parents need help managing

finances• Wealth Management as $trillions transfer• New value aggregators steal customers

TECHNOLOGIES change Interactions• Learning systems interact with humans• Analytics create value for clients • Slick integration between platforms, channels, computers, phones,

devices…or not• Biometrics for authentication

CULTURAL THEMES change value propositions• No “normal” household of customers• Location services, meet-ups, value in the app• Security issues migrate to each new service• Privacy continues to decline• Social media usage is no longer age-related

17

How are Banks Trying to Use Them?

Source: The Financial Brand, Oct 25 2012, http://thefinancialbrand.com/25875/bank-and-credit-union-technology-trends/, quoting Celent report “Emerging Technologies in Retail Banking: The Long Road to Customer Centricity”. Aug 2012

http://thefinancialbrand.com/25875/bank-and-credit-union-technology-trends/

The 2013 Point of View


Process Automation and Optimisation

Process Agility

IT Automation and Optimisation

System Agility

Enterprise Performance Optimisation

Business Agility

• Automate a manual process

• Visibility and ROI

• Quicker, better, cheaper

• Compliance

• Target operating model

• Time to value

• Total cost of ownership

• Prebuilt assets

• Reuse

• IT standards

• Innovation

• Go to market

• Customer centricity

• Product flexibility

• Industry standards

C-LevelLoBIT

Why do Clients Buy BPM?

After: Streamlined and efficient process with BPM

Before: Long, multistep process without BPM

Inefficient processes:Paper-based processes

requiring human intervention Wait time

Efficient processes:Semiautomated activity

Fully automated electronic activity

BPM reduces paper consumption, streamline processes and shorten cycle times

Onboarding & Origination

Optimization

The reference architecture

IT

Modelling

Simulation &Optimizzazion

Workflow

Business rules

Data

User Interface

Documents

SOA Services

ApplicationsintegrationMetrics & Monitoring

Analysis & Reporting

BPMSOA

Org & Functions

ExecutiveManagement

CustomerService

InvoiceReconciliationTeams

AccountAdministration

UsersFinance& Ops

Client

Branch

Origination

CreditBureau CRM

Systems

Loan Application

CreditScoring SupportingDocs

Initial Decision Appraisal Underwriting Loan Doc

Packaging Securitization Payment &Servicing

ClientSign off

Typical Results:

Reduce cost per loan by 50%

Reduce processing time by 80%

Simultaneous and effortless access to all parties

Process over 85% of loans electronically

Resolve 60% of inquiries on first call

Decisioning Validation Processing

Businesslending

Studentlending

Consumerlending

Mortgagelending

Credit cardprocessing

Generic Lending Process Flow

Onboarding & Origination

Optimization

The 2013 Point of View


Capital – Embed Risk Management

• Basel II / Basel III / Liquidity………….. • G-SIBs• D-SIBs?• Business Model Reinvention - Capital Planning / Forecasting • Risk Data • Embed into Business Decisions

IBM Confidential – Internal Use Only

Our Capabilities Client Needs Addressed

1 – Regulatory Compliance -Process and Governance

Transformation driven by Regulatory Changes (i.e. Fed/OCC, FSA, Dodd-Frank, Living Wills, etc.)

FED/OCC Consent Orders in Mortgage/Lending, FFIEC Exam Prep, Internal/External Audit Findings, Legal eDiscovery, Records Mgmt

Operating Model Improvements, Data Security/CyberSecurity

2 – Risk and Security Application Architecture and Implementation

Address new Compliance Mandates (Basel AMA, RCSA, Solvency II, Dodd-Frank, FSA, IFRS)

Reduce cost of compliance, while improving transparency Improve automation, risk/control monitoring effectiveness

3 – Data Architecture New Data and reporting standards for Basel II/III and Solvency II and Architecture needs

Finance and Risk Data Integration and Consolidation Time to Data and Cost of IT Accelerated Reporting (Intraday) requirements

4 – Risk Analytics and Reporting New Regulatory Requirements for Basel III – Liquidity, ALM, Reg/Economic Capital, Stress Testing

Data Quality and availability for timely, accurate reporting Automation and Instrumentation of Risk and Control Data for reporting, analytics and

key risk indicators/metrics

IBM’s Strategy – To be the leading provider of integrated risk and compliance solutions to the Financial Services Industry by enabling clients to effectively manage evolving regulatory compliance mandates while improving performance.

IBM Risk Management, Solution Domain Summary: CRO

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Thank you