IBM Banking: IBM and Swift Survey on the Future of Transaction Banking

8/14/2019 IBM Banking: IBM and Swift Survey on the Future of Transaction Banking

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September 2009

A survey on the future of transaction banking by SWIFT and IBM:

risk and regulation will drive IT investment and outsourcing boom

The global financial crisis threw into stark relief the

industrys failure to properly manage risk. In the wake

of the crisis, transaction banks are determined to

address that shortfall, and are focusing heavily on

improving their risk management capabilities. They

also rightly anticipate having to comply with a slew

of new regulatory obligations.

The twin pressures of risk and regulation are amongthe factors driving transaction banks to make

investments in IT. There are some clear differences in

emphasis in IT spending by payments businesses on

one hand and securities business on the other, with

securities players focused more on reinforcing

existing capabilities, and payments players more on

innovation.

In order to concentrate on their competitive

differentiators and free up resource to cope with new

regulatory requirements, transaction banks are also

looking to exploit outsourcing and collaborative

solutions to maximise the efficiency of commoditized

functions such as back office processing.

These are just some of the key findings of a survey

conducted by IBM and SWIFT during July 2009.Almost 1200 business and technology executives

from around the world representing more than 600

banks, asset managers, regulators, back office

processors and corporates responded to the

survey, which solicited their views on the future of the

financial services industry, payments, cash

management and trade services, and custody and

securities processing.

This survey reveals that transaction banks are focused on improving risk capabilities

and braced for the impact of increased regulatory obligations and will marshal IT and

shared services as the foundation for ongoing success.


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Risk: the most powerful disruptive force impacting the transaction

banking industry forces a back to basics approach

The findings of the survey reveal a strong recognition that the

banks must get back to basics and redouble their emphasis on

risk management. This should have been their primary focus all

along, but, as the crisis amply demonstrated, it slipped down the

priority list with failings in the area of liquidity risk management

proving particularly calamitous.

As the survey shows, the banks are working hard to remedy this,

by investing in IT to improve risk management and adjusting the

governance model in particular the identification and

management of liquidity risk.

Importantly, although as a whole the survey results reveal a high

level of interest among the banks in exploiting outsourced and

collaborative services, in the area of risk management this is not

the case.

The banks are investing on their own account in risk

management, because they consider it too critical to entrust to a

third party and because they view risk identification and

management reporting as a future service differentiator and

source of business advantage.

Regulation: a drain on the banks resources

After risk, regulation is clearly identified by the survey

respondents as the next most important disruptive force

impacting the industry. In light of the inevitable increase in

regulatory imposition as a result of the financial crisis, this

preoccupation is entirely understandable.

The survey findings suggest that regulatory harmonization and

regulatory change designed to better mitigate risks around

liquidity, as well as security, fraud and money laundering, will

have the strongest impact on transaction banks.

Interestingly, given the extensive debate around these topics,

neither the representatives of the securities business nor those

representing payments believe there is a significant likelihood

that new regulation will force a separation of lines of business

(between transactions and investment functions) or affect

incentives and compensation.

Both payments and securities businesses anticipate and favour

the establishment of regulatory policy at a global level, with

implementation being a local responsibility.

The creation of better regulation is consistent with and should

support transaction banks in their bid to improve risk

management. In a similar vein, the survey reveals a strong

demand for regional (or global) consolidation of securities

processing infrastructures. Central counterparties (CCPs) are

considered the most potentially transformational, respondents

having clearly accepted the widely held belief that clearing as a

risk mitigation measure needs to be extended across more asset

classes, in addition to over-the-counter (OTC) markets.

But complying with new regulatory obligations and

accommodating new processing infrastructure - costs money,takes time, and absorbs resource and as such is also a driver

for the banks to seek new operational efficiencies by taking

advantage of outsourcing and collaborative services to handle

commoditized functions such as back office processing.


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Customer focus: a sector in tune with the needs of its users

The survey findings suggest that, overall, the investment

priorities of the transaction banks are well aligned to the

requirements of their customers. There is evidence of some

disconnects between provider and user for example the banks

plan to invest in mobile payments and e-invoicing, neither of

which are shown by the survey to be in great demand. However,

mobile services target retail customers, a constituency not

covered in the survey, while corporate customers preferred full

trade and supply chain financing services to e-invoicing in

isolation. Since both are transformational and require significant

pre-investment, it seems likely the banks are focusing here to

satisfy future, rather than current, demand.

In general, the survey findings provide strong reassurance that

transaction banks with their focus on risk management and

regulation and their investment in IT and exploration of

outsourcing to enhance efficiency and customer service are

focusing in the areas their customers want them to, and are well-

attuned to the mood of their marketplace.

Transaction banking: a strong foundation for future industry growth

In the wake of the current crisis, the transaction banking sector is

responding pragmatically to the requirements of both the

practitioner and the regulator. There is a recognized need to get

back to basics, and a willingness to invest appropriately to

accommodate the twin demands of better risk management and

more thoroughgoing regulation.

A community focus will be vital for success, ensuring a close

match between development and demand, and enabling banks

to tap into collaborative and outsourced solutions to enhance

the efficiency of commoditized functions.

Whether they are in a phase of consolidation or innovation,

transaction banks will continue to provide solid support for the

global financial industrys drive back to health.

The following sections analyze in more detail the findings on the

future of the industry, payments and securities processing.

Unless otherwise specified, readers should assume that the

responses are consistent across geographies, role of the

respondent, size and type of the organization. Data on the

survey sample and quantitative results are included in the

Appendix.


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The Future of the Financial Services Industry

External risks

Although economies and markets are improving, participants are still concerned about external risks. These risks, including market

and counterparty risks, were cited by over half of the participants (56 percent) as the largest disruptive force expected to impact the

financial services industry over the next two to five years. At the same time, nearly half of the participants (47 percent) anticipate

increased government regulation.

FIGURE 1.

Which disruptive forces will most impact the financial services industry in the next 2-5 years?

Please select top 3.

External risks

Government regulation

Liquidity concerns

Technology issues

Changing industry landscape

New infrastructure initiatives

Non-bank competitors

Security

Decline in customer trust

Fraud

Corporate social responsibility, e.g. ecology/green

Other

60%50%40%30%20%0% 10%


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To address external risks, the majority of participants (68 percent) believe their organizations will focus on technology to improve risk

measurement, monitoring and management. At the same time, nearly two-thirds (65 percent) of participants foresee adjustments to

risk management governance models. Interestingly, adjusting compensation schemes isnt a major focus area despite the regulatory

and media discussion on compensation structures.

FIGURE 2.

How will your organization build, or improve, its ability to manage risk holistically over the next five years?


Form alliances

None

Source: The 2009 Sibos SWIFT IBM survey

60%50%40%30%20%0% 10% 70%

Hire talent with specialised expertise/training

Invest in risk analytics

Develop cross-organisation

reporting/recording/analysis capabilities

Utilize technology tomeasure/monitor/manage risks

Adjust risk management governance model

(e.g. reporting to executive management)

Adjust compensation schemes


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Regulation

Regarding regulation, the second highest ranked disruptive force, regulatory harmonization in particular is expected to have a

significant impact on the financial services industry over the next five years. Regulatory harmonization has both long and near-term

impacts: on the one hand, greater regional and global standardization will improve the efficiency and effectiveness of the financial

system over the long-term. However, in the near-term, firms must invest a significant amount of already scarce capital both financial

and human - to comply.

60%50%40%30%20%0% 10%

Regulatory harmonization

Capital / liquidity

Security, fraud,anti-money laundering

Transparency

Retirement / pension

Settlement risk

Conflicts of interest

Incentives /

compensation

Climate / sustainability

Other

FIGURE 3.

Which future regulatory actions are likely to have the most profound effect on financial services firms as a whole?

Choose all that apply.


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In addition to the anticipated push toward greater regulatory harmonization, the majority of participants believe the most appropriate

level of regulation to be global (40 percent). The fact that very few participants (22 percent) selected regional as their response

implies that participants believe regulation should be applied either globally or nationally to have the most beneficial impact on the

industry. Respondents tended to propose national regulation for those activities that require more of a hands-on approach, such as

daily supervision, versus those activities that can be prescribed centrally such as capital, liquidity and transparency requirements. It is

interesting to note that participants were divided over which level would be best for regulating systemic risk, despite its global nature.

FIGURE 4

As it relates to regulatory harmonization, at what level should primary regulatory supervision be applied to the

following activities?

Security, fraud, AMLSettlement risk

Climate / sustainability

Transparency reporting

Capital and liquidity positions

Systemic early warning

Conflicts of interest

Stress testing

Incentives / compensation

General daily supervision

Total

Globally Regionally Nationally

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%


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Client behavior

In this economic environment, firms will have to become much better at understanding and addressing the needs of their clients.

Although 69 percent of participants believe that firms are most likely to offer products and services in their clients best interest, over

half (60 percent) of participants believe that providers offer products that serve their own best interests. While it may be the case that

firms are focused on the best interests of their clients, they also recognize they need to generate profits. One CEO we interviewed for a

prior study put it in simple terms: We are not a charity.

To maximize profits, firms must eliminate disconnects between what firms think clients value versus what clients actually value.

Relative to other financial services providers, providers across payments, cash, custody, clearing and settlement have a good

understanding of client priorities. Both providers and their corporate clients ranked client service, reputation and best-in-class

offerings at the top of the list, and ranked corporate social responsibility at the bottom of the list. However, there is still room for

improvement: areas of disconnect include client demands for transparency, which took priority over convenience and other demands

such as modularity (for example, the ability to integrate products and services with a competitors offerings) and the importance of

having a global footprint.

Providers Corporates

Convenience

Tailored Products

Transparency

One-stop-shop

Modularity

Global Footprint

Reputation

Client Service

Best-in-class Offerings

Corporate Social Resp.

Transparency

Tailored Products

Modularity

Global Footprint

One-stop-shop

Convenience

Reputation

Client Service

Best-in-class Offerings

0% 10% 20% 30% 40% 50% 60% 70%0% 10% 20% 30% 40% 50% 60% 70%

Corporate Social Resp.

FIGURE 5

What do your customers / you value? Rank from 1 = highest to 10 = lowest


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These disconnects are minor compared to those that exist in other parts of the financial services industry specifically in capital

markets and asset management. An 18-month study conducted by IBMs Institute for Business Value titled Toward transparency and

sustainability: Building a new financial order, found that these types of providers and their clients are disconnected 79 percent of the

time. (see chart below)

FIGURE 6

Question for Broker / Dealers and Asset Management firms: How much would your clients be willing to pay over existing

rates to ensure that you deliver on specific factors; select 0%, 5%, 10%, 15% or more, dont know.

Question for Clients: How much would you be willing to pay over existing rates to ensure that your provider delivers on

specific factors; select 0%, 5%, 10%, 15% or more, dont know.

(Source: IBM / CFA Institute Survey 2008; IBM Institute for Business Value analysis)

0% 10% 20% 30% 40% 50% 60% 70%

n=398

Best-in-class offerings

One-stop-shop

Reputation / integrity

Convenience

Modularity

Transparency

Global footprint

CSR / green

Customization

15% or more

10%

5%

Not willing to pay more

Unbiased quality advice /client service excellence

0% 10% 20% 30% 40% 50% 60% 70%

n=754

Best-in-class offerings

One-stop-shop

Reputation / integrity

Convenience

Modularity

Transparency

Global footprint

CSR / green

Customization

Unbiased quality advice /client service excellence

Broker / Dealer and Asset Management

Perceived Values

Client Indicated Values


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Strategic investments

In order to address many of the challenges outlined in this section, approximately half of participants (49 percent) plan to invest in

information technology initiatives, while other strategic investments include expanding risk management capabilities (47 percent),

process transformation (45 percent) and new product development (44 percent). Similar to the risk management priorities outlined in

Figure 2, compensation structures ranked at the bottom of the list, with only 3 percent of participants expecting to make investments to

improve compensation structures.

In summary, future external risks and the future regulatory structure present significant challenges as well as opportunities for

participants. Although there is a good understanding of what clients value, there is still room for improvement in addressing not onlywhat products clients need, but what clients value such as client service and reputation. Firms will look to leverage technology and

improve governance models to address risks and increasing regulation, as also to deliver on the activities that clients value.

FIGURE 7

Within the next five years, in which areas will your organization invest most heavily

in order to develop strategic capabilities? Please select top 3.

10%0% 20% 30% 40% 50%

Information technology initiatives

Expanded risk managementcapabilities

Process transformation(e.g., finance, back office)

New product development

Client analytics (e.g., view of clientneeds, risk-adjusted client profitability)

Expanded regulatory compliancecapabilities

Alternative sourcing strategies

Collaboration capabilities

Compensation structures

Other


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Payments, Cash Management and Trade Services

Regulation, technology, customer demands and the need to reduce operating costs are recognised as the principal factors impacting the

payments business.

Regulation

Standardization, risk, capital and liquidity were seen as having the most impact on payment operations by close to 50 percent of

respondents. The overall majority (62 percent) were of the opinion that standardization (for example SEPA) would have the greatest

impact. This result must however be viewed with caution as the respondents were mainly from European organisations in the midst of

SEPA implementation. The majority of non-Europeans considered that regulation around risk and fraud would have most impact.

Regulations concerning capital and liquidity scored a consistent third across geographies but were ranked second by C-level

respondents, followed by lower limits and demands for higher collateralisation across payment systems. Access by non-bank

competitors ranks a consistent fourth, possibly reflecting a lesser sense of urgency in comparison with more immediate demands on

resources.

FIGURE 8

What are the major regulatory actions that you anticipate will have the most profound

impact on the payments and cash management industry?

Standardization (e.g. SEPA)Risk / fraud

Capital / liquidity increase s

Access by non-bank competitors

Lower limits / higher collateral onpayment systems

Separation of lines of business, e.g.,

investm ent banking and comm ercial

Account number portability

Restrictions on card credit limits

Other, please specify

0% 10% 20% 30% 40% 50% 60%


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Technology

Security concerns, if we aggregate the choices of security, trust/identity and encryption, rank top of the areas most likely to be affected

by technology. Mobile technology ranked the individual highest, except in Asia Pacific where security ranked higher. This can be

explained by the advanced mobile solutions already available throughout Asia Pacific, where contactless technologies were ranked

third. Security also ranked higher amongst C-level and IT respondents.

FIGURE 9

What technology advancements will most affect the payments industry in the next 2-5 years?


Mobile technologies

Security

Trust/Identity

Contact-less technologies

Encryption

Cloud computing


60%50%40%30%20%0% 10% 70%

Analytical tools (e.g., predictive

modelling, monitoring systems)


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Customer requirements vs. investments

Transaction banking divisions appear to be better aligned with the demands of their customers than their colleagues in other areas at

financial institutions, although some disconnects persist. The top ranking of electronic payments and cash management services was

consistent across all geographies and roles, with larger organisations (over 100,000 staff) ranking cash management highest.

Remittances scored highest in Asia Pacifica, Middle East and Africa and the Americas, but lowest in Western Europe where electronic

invoicing was ranked third, reflecting the current drive by the EU. Despite the top ranking of mobile technologies among disruptive

technologies, mobile payments scored low in terms of investment areas (except by IT respondents) and also showed the widest gap

between customer demand and investment area. This could be explained by a wait and see attitude with respect to strategic

positioning and technical standardization, as well as security concerns from customers. Corporates appear most interested in

electronic transfers, followed by cash management and trade and supply chain financing services, showing very little interest in

mobile payments. We should however bear in mind that the only customer group surveyed was made up exclusively of corporates.

When answering this question, the institutions were most likely also considering retail consumers.

FIGURE 10

For providers: What will be your organizations primary investment areas in the next 2-5 years? Please select top 3.

For clients: Which service areas are most in demand by your customers? Please select top 3.

Primary Investment Area

0%20%40%60%80%

Electronic Transfer

Credit Cards

Electronic Invoicing

Mobile Payments

Trade/Supp Ch Finance

Remittances

Cash Management

Electronic Cheques

Other

Debit Cards

Most in demand by customers

0% 20% 40% 60% 80%


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Efficiency

In their quest for efficiency gains, respondents considered that validation, fraud detection, AML and OFAC checking offered the most

scope for improvement, except in the Middle East and Africa where improvements in settlement ranked highest. Payment initiation and

capture ranked overall second, except in Western Europe where enrichment and repair ranked higher. This was also the case with the

largest organisations overall. C-level respondents and business managers appeared more concerned about customer service

which did not seem a major preoccupation amongst IT staff! The heightened interest in customer service appears at first sight to

conflict with the low ranking attributed to dispute resolution, but this mismatch may be down to the fact that dispute resolution is one of

the most difficult areas to automate.

FIGURE 11

Which payment areas have the most scope for efficiency gains / automation?


Validation, fraud, AML, OFAC checking

Payment initiation and capture

Settlement

Customer service

Clearing

Customer reporting

Enrichment and repair


60%50%40%30%20%0% 10%

Dispute resolution


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FIGURE 12

Which services and/or processes is your organization considering for outsourcing to external vendors as part of your

payments services? Please select top 3.

Electronic payme nt processing

Card processing

Clearing and settlement

Cheque processing

Back office functions incl. dispute

resolution and customer service

Anti-money laundering

Fraud detection and monitoring

Trade finance

Cash management


0% 40%30%20%10%

Yes

57%

No

43%

Planning to outsource as part of

payment services?

Processes considered for outsourcing

Outsourcing

The majority (57 percent) of respondents are considering outsourcing some payments processes. With the exception of dispute

resolution and customer service, institutions are seeking to outsource processes dependent on economies of scale, while retaining

value-add services that yield competitive differentiation, such as trade finance and cash management. Organisations employing

between 50,000 and 100,000 people showed the strongest propensity for seeking to outsource card and cheque processing.


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FIGURE 13

For your payments processing, is your organization considering any of these options to contain costs, to reduce risks, to

enhance monitoring and/or to improve efficiencies:

None Service Oriented

ArchitectureUtility or shared

service

Single customer

view

0%

10%

40%

20%

30%

Forthcoming initiatives

Two out of three respondents (68 percent) are considering initiatives to re-engineer payment processing. First choice, particularly for

IT management respondents, is to implement a service oriented architecture (SOA), which will also help facilitate the objective of

achieving a single customer view within the organisation. A substantial number of respondents, particularly at C-level, are considering

creating a utility or shared service centre for payment processing.


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FIGURE 14

With ever-increasing methods and levels of fraud, has your organization implemented additional real time and/or

near real time applications to identify and stop these transactions?

If Yes: What percentage of the transactions are analyzed real time?

if Yes: What percentage of the transactions are analyzed near real time?

Does the application learn and automatically change, with appropriate human supervision, the business rules?

Yes71%

No

29%

< 10%11% - 25%26% - 50%51% - 75%> 75%

Real Time Near Real Time

10%

20%

30%

40%

50%

0%

Implemented realtime applications to mitigate fraud? Transactions analyzed realtime or near realtime

Fraud detection

Finally, with ever-increasing levels of fraud, it is reassuring to note that the vast majority of institutions (71 percent) have implemented

real-time and/or near-real-time applications to identify and stop fraudulent transactions. A third of the respondents analyse over 75

percent of their transactions in real time, and the majority of the systems are self-learning. Western European institutions appear to

have implemented the most sophisticated systems.


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Custody and Securities Processing

The key topics highlighted by custody and securities respondents were regulation, customer demands and the need to reduce operating costs

through technology and outsourcing.

Regulatory Challenges

First and foremost in the minds of the securities respondents is the likely impact of new regulatory changes that the industry is currently

expecting. While existing market requirements such as Fraud/AML, MiFID, and Liquidity reporting are all having an impact, it is the

new, yet-to-be-formalised regulations which are causing greatest concern. This is presumably because of the risk that they may be

more far-reaching than the current regulatory challenges. Such new regulations may be locally inspired and formulated, or indeed may

arise from existing and new supranational entities.

Unease about new regulations was seen across all geographical regions - with the exception of Central and Eastern Europe, where

existing market regulations such as MiFID were seen to have the greatest impact. This presumably reflects the variable speed of

implementation of regulations such as MiFID across the EC, illustrated by last years referrals by the European Commission (EC) to the

European Court of Justice regarding delays in MiFID implementation in Spain, Poland and the Czech Republic.

FIGURE 15

What are the major regulatory actions that you anticipate will have the most profound

impact on the custody and securities processing industry?

Impact of existing market

regulations, e.g. MiFID

Risk / fraud

Liquidity


60%40%20%0%

Separation of lines of business, e.g. investment

banking and commercial banking

Impact of potential new regulationse.g. financial stability regulations

80%


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Market Landscape

In terms of the overall market, securities participants believe that no single party will have an overriding impact on the securities

processing landscape. CCPs, the aforementioned supranational regulators, and SWIFT itself were identified as the entities most likely

to have the largest impact. This presumably reflects in part the role played by the CCPs in delivering ongoing improvements in

efficiencies and risk mitigation for the industry, the concerns expressed earlier regarding new supranational-inspired regulation, and

the continuing innovative and transformational role played by SWIFT.

FIGURE 16

Which external party do you think will have the biggest impact on securities processing in the next 2-5 years?

There was some geographical variance seen in the responses, with North America highlighting the roles of CCPs, while the impact of

regulators was the biggest focus for Europe (supranational regulators) and Asia (local regulators). The Middle East and Africa showed

the strongest support for SWIFT in terms of impact.

Interestingly, it appears that the roles played by the ICSDs and CSDs are seen as having a lesser impact - possibly given the focus onCCPs and also the evolving role played by ECB and T2S as far as the Eurozone is concerned.

Clearing Houses (CCPs)

SWIFT

Local regulators

CSDs


60%50%40%30%20%0% 10%

ICSDs

Supranational regulatory change, e.g. for financial stability


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In terms of expectations of how the securities processing landscape may consolidate over the next five years, there is a high degree of

confidence that this should not remain at national levels. Indeed, the ECB Target 2 Securities (T2S) initiative is a good example of the

continuing migration of the securities post-trade infrastructure away from national borders. However, views are split in terms of whether

the target state should be regional or global consolidation, both for trading platforms and for clearing and settlement infrastructures.

Perhaps time will tell which of these options is the more attractive, given the relative benefits, costs, and industry and political will.

19%

17%

16%

17%

44%

45%

42%

44%

38%

38%

42%

39%

Consolidation of trading platforms

Consolidation of clearing infrastructures

Consolidation of se ttlement infrastructures

Total

Nationally Regionally Globally

FIGURE 17

Where is securities processing likely to consolidate over the next five years, across each of: trading platforms, clearing

infrastructures, settlement infrastructures? Please choose: nationally, regionally or globally.


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Customer Centricity

Regarding client demand, participants indicated a continuing need to get closer to their customers, and to differentiate themselves

from their peers. It appears that they plan to achieve this through a combination of technology and skills.

The customer demand most often cited by respondents was to improve the reporting provided by banks, for example through portals.

This was followed by the need for investment in local market expertise as a differentiator. Geographically, there was a stronger

response for the need for local market expertise from the EMEA and Central/East Europe region, whereas the other regions highlighted

reporting and portals.

The approach to increasing customer satisfaction in this market therefore appears to be a harmonious blend of local market insight

and experience, combined with effective technology solutions, particularly focused on reporting and self-service.

Outsourcing

Cost is clearly on the minds of many respondents. Clearing and Settlement was indicated as the area of greatest focus for efficiencygains (see Figure 19 on next page). This is perhaps not surprising, as it represents the area of greatest cost for most firms. Second was

corporate actions, where the industry has been working on increased standardization and common data/processing for some time.

Likewise, respondents highlighted reference data, where again standardization and utility models are being explored by vendors and

clients alike.

FIGURE 18

Which services area are most in demand by your customers?


Local market expertise

Cross-product support

Enhanced risk management


60%50%40%30%20%0% 10%

Greater integration

Enhanced client reporting, portals etc


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Coporate actions

Reference data

Post-settlement reporting

Other post-trade processing

60%50%40%30%20%0% 10%

Order management

Clearing and settlement

70%

FIGURE 19

Considering the outsourcing of business processes, where do you see the greatest potential efficiency gains?

Yes

56%

No

43%

80%

Reference data

Complete back office

Reconciliations

Corporate actions

Other

60%40%20%0%

Over 60 percent of respondents are considering outsourcing one or more processes (see Figure 21). Reference data was the most

popular outsourcing area, followed by the complete back office, reconciliations and corporate actions. Reference data presumably

represents the outsourcing decision which can generate the greatest cost saving at lowest risk, though probably is only commercially

viable through a utility-based model, given the synergies that could be realised on that basis. It is interesting to reflect that an industry

approach to reference data is also a key topic of discussion in the efforts to better manage systemic risk, as raised by the European

Central Bank, the Enterprise Data Management Council and the proposed National Institute of Finance.

FIGURE 20

Which services and/or processes is your organization considering for outsourcing to external vendors as part of your

securities services? Please select top 3


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FIGURE 21

What will be your organizations primary investment area in the next 2-5 years?

New platform replacement to support securities processing

Incremental updating of legacy applications

Updating external infrastructure to interfaces street-side


40%30%20%0% 10%

Consolidation onto cross-asset platforms

Major Investments and Technology Challenges

Looking ahead to the investments that respondents expected to make in support of their businesses, the complete replacement of the

securities processing platform was the most common priority.

This may reflect a lack of investment over the last 2 or 3 years, an increased need driven by rising volumes driven by electronic trading,

and a desire to reduce Run-The-Bank costs through more efficient platforms. For those firms unable to justify platform replacement,

the focus was very much on incremental updating of existing applications and interfaces. Interestingly, the need for a replacement

platform was most pronounced for American and Central/Eastern European firms. Western European and Asian firms seem to be

more resigned to incremental updating.


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FIGURE 22

What technology advancements will most affect the custody and securities processing industry?


Automation

Processing capacity

and cost effectiveness

Business process management

Encryption and security issues

Analytical tools (e.g. predictivemodeling, monitoring systems)


60%50%40%30%20%0% 10%

Cloud computing

Messaging standards

70%

Given the frequently mentioned focus on cost, it should come as no surprise that the most commonly cited technology advancements

were focused on increased automation, followed by processing capacity and cost effectiveness. Operational processes such as

corporate actions and reconciliations can be very manually intensive, and it is areas such as these where automation can have the

greatest impact.

Messaging standards and Business Process Management were also highlighted by respondents, again presumably because of the

roles they can play in increasing process efficiency and reducing individual firms costs.


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In terms of specific technology challenges, integration with new initiatives such as T2S was the front runner, with the connected impact

of cross-border consolidation in second place.The need for firms to upgrade their legacy infrastructure was also mentioned, reflecting

its status as an overall investment priority, as stated earlier in this paper. Upgrading the legacy infrastructure can be a business-case

challenge for many firms, as the front office frequently receives the lions share of discretionary expenditure.

FIGURE 23

What do you see as the greatest challenge from a technology perspective that cross border settlement will impose in the

next 2- 5 years?

Integration with new infrastructure

initiatives, e.g. T2S

Upgrading the legacy infrastructure

New technology developments, e.g. cloud

Managing a network of externalback-office sourcing providers


40%30%20%0% 10%

Vendor dependencies

Cross-border consolidation


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Page 28

Concluding summary

The findings of the survey reveal a strong recognition that the banks must get back to basics and redouble their emphasis on risk

management. This should have been their primary focus all along, but, as the crisis amply demonstrated, it slipped down the priority

list with failings in the area of liquidity risk management proving particularly calamitous. The banks are investing on their own account

in risk management, because they consider it too critical to entrust to a third party and because they view risk identification and

management reporting as a future service differentiator and source of business advantage.

After risk, regulation is clearly identified by the survey respondents as the next most important disruptive force impacting the industry.

In light of the inevitable increase in regulatory imposition as a result of the financial crisis, this preoccupation is entirely understandable.

Both payments and securities businesses anticipate and favour the establishment of regulatory policy at a global level, with

implementation being a local responsibility.

Complying with new regulatory obligations and accommodating new processing infrastructure - costs money, takes time, and

absorbs resource and as such is also a driver for the banks to seek new operational efficiencies by taking advantage of outsourcing

and collaborative services to handle commoditized functions such as back office processing. The survey reveals that some 60

percent of both payments and securities businesses in the transaction banking world are considering outsourcing some aspect of

their activities that is, commoditized, volume-based functions that benefit from scale and do not directly impact competitiveness.

This figure is remarkable in that it is close to double the proportion found to be pro-outsourcing in previous IBM studies, surely an

indication that, in the current economic climate, the operational efficiencies to be gained through outsourcing are of greater appeal

than ever good news in these tough times for providers and facilitators of outsourcing and collaborative services.

The survey reveals a difference in emphasis for IT investment between the payments and securities businesses, with securities

businesses focused on making what they already have work better and payments businesses pursuing more transformational

change.

In general, the survey findings provide strong reassurance that transaction banks with their focus on risk management and regulation

and their investment in IT and exploration of outsourcing to enhance efficiency and customer service are focusing in the areas their

customers want them to, and are well-attuned to the mood of their marketplace.

In the wake of the current crisis, the transaction banking sector is responding pragmatically to the requirements of both the practitioner

and the regulator. There is a recognized need to get back to basics, and a willingness to invest appropriately to accommodate the twin

demands of better risk management and more thoroughgoing regulation.

Whether they are in a phase of consolidation or innovation, transaction banks will continue to provide solid support for the globalfinancial industrys drive back to health.


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Respondent Demographics

72 Asset / wealth management

Main Business of Organization Sample size

All Respondents 1188

Universal bank 304

Retail bank 258

Wholesale bank 212

Government regulator 80

Corporate 72

Back office processing co. 60 Investment bank 56 Other 74

0%

30%

40%

20%

10%

< 1K1K -

9.9K

10K -

49.9K

50K -

99K

> 100K

Worldwide employee count

Western Europe

Central/Eastern Europe

Asia-Pacificexcluding Japan

North America

Middle East,Africa

Japan

Latin America

0% 10% 20% 30% 40% 50%

Geography of coverage

Western Europe

Central/

Eastern Europe

Asia-Pacific

North America

Middle East,

Africa

Latin America

0% 10% 20% 30%

Geography of residence

Appendix


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0%

30%

40%

20%

10%

$500M -

$999M

$1B -

$4B

$5B -

$19B

$20B -

$49B

> $50B < $500M

Annual revenues

62%21%

13%

4% LoB Exec / Mgr / Staff

IT Manager / Staff

C-Level (Business)

C-Level (IT)

Job title


32/32

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IBM Banking: IBM and Swift Survey on the Future of Transaction Banking