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Publication Date: 15 September 2011 ID Number: G00215781

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Market Insight: A Banking Industry Primer, 2011

Vittorio D'Orazio

Despite the economic slowdown that has affected the banking industry, IT budgets will continue to grow faster in this sector than the global cross-industry rate. Drivers of growth will be:

A focus on customer centricity, which calls for serving the client when and where he or she needs it, by providing more empowerment and control over current accounts and investments, thereby improving the overall customer experience

A short-term revamp of capital budget projects and attention to the cost optimization of operational spending in the longer run, by, for example, heavily reducing the head count and introducing further automation

The need to achieve enterprise growth

These dynamics will affect the markets differently at the regional level.

Key Findings

Cost-reduction initiatives that were top of the mind for banking CIOs in 2010 are giving more space now to project optimization that ultimately results in increased efficiency. This basically relates to an increased focus on the optimization of the operational spending (opex) compared with past focus on the capital budget optimization, as Gartner predicted in 2010.

Front-office technologies are still at the forefront and are extremely attractive for banks. This is largely the result of a geographic expansion trend (mainly in developing countries), which is encouraging the creation of new front-office infrastructure, and by the need to optimize the operational costs (mainly in developed countries) with the adoption of more automation and straight-through processes. In addition, front-office initiatives are driven by the expansion of the customer base that results in the difficulty of servicing new types of clients, such as the emerging middle class in developing countries or the new richer and poorer people from the middle-class-less societies across Western countries.

The vertical-specific software (VSS) global market for the banking and securities industry accounted for more than $16 billion in 2010, and it is extremely fragmented, with the top five largest providers holding only 13% of the market share.

Publication Date: 15 September 2011/ID Number: G00215781 of 24

© 2011 Gartner, Inc. and/or its Affiliates. All Rights Reserved.

Recommendations

IT providers in the banking sector should clearly focus on the external stakeholders that influence the decision makers and the decision-making process. In practice you must:

Proactively join all relevant technology groups that are part of the decision-making process for your specific market.

Sponsor universities with specific programs that, in the short term, provide more visibility into the industry and, in the longer term, could influence future decision makers by educating them on the benefits of technology to their respective job roles.

Organize industry events, such as conferences, and invite both academic professors and industry analysts to attend, either as guests or as speakers.

Be more transparent by proactively providing information to the press and industry research firms about your offerings, operations and latest success stories.

Build solid business cases that demonstrate your presence and expertise in the banking industry.

Software providers: Shape your offerings around customer-centric solutions, especially for front-office applications. In particular, banks will invest in mobile applications to capture smartphone users in both developed and developing economies.

Cloud services providers:

Consider the cloud to be the new frontier of interest for banks, but sell your offerings mainly within the private cloud domain because banks are not ready to accept public cloud offerings. Within this segment consider the software as a service (SaaS) offering as one of the most attractive for the banks.

Treat security issues as a top priority. Security is the strongest inhibitor for this kind of offering in the banking sector.

Sell your offerings by accenting the advantages that cloud services would bring in terms of cost structure (that is, transforming fixed costs into variable costs) and agility, rather than by just focusing on the achievable cost savings.

Beware of the connectivity problems and political implications that cloud offerings would face when sold in or via emerging markets (for example, via offshore centers); therefore, execute a proper feasibility study first.

IT services and software providers: In the emerging markets, concentrate your efforts around the payment sector and particularly in the card and mobile banking segments with further focus on the remittance market, as well as the services for the emerging middle class.



TABLE OF CONTENTS

Analysis ....................................................................................................................................... 4 Fast Facts........................................................................................................................ 4 Business Priorities and Key Technology Drivers and Inhibitors ......................................... 7

Business Priorities ............................................................................................... 7 Key Technology Drivers and Trends of IT Spending ............................................ 8 Key Technology Inhibitors of IT Spending .......................................................... 10

Banking Solution Maps .................................................................................................. 10 The Banking Solution Map................................................................................. 10 The Banking Solution Heat Map ........................................................................ 12

Buying Centers, Messaging Map and Key Influencers .................................................... 14 Vertical-Specific Technologies ....................................................................................... 19

Vertical-Specific IT Services .............................................................................. 19 Vertical-Specific Software .................................................................................. 20

Background and Context ............................................................................................................ 21

The Impact ................................................................................................................................. 22

Conclusion ................................................................................................................................. 22

Recommended Reading ............................................................................................................. 23

LIST OF TABLES

Table 1. VSS Market Share in the Banking and Securities Industry, Worldwide, 2010 (Millions of Dollars) ...................................................................................................................................... 21

LIST OF FIGURES

Figure 1. Banking and Investment Services: Industry Segmentation Map by ISIC Code ................ 6

Figure 2. Top 10 CIO Business Priorities in the Banking Sector, 2009-2011 .................................. 7

Figure 3. Solution Map 2011 for Key Banking Technologies........................................................ 11

Figure 4. Solution Heat Map 2011 for Key Banking Technologies ............................................... 13

Figure 5. Solution Heat Map 2011 by Main Banking Processes Technologies ............................. 14

Figure 6. Key Buying Centers and Messaging Map ..................................................................... 16

Figure 7. Banking Key Influencers Map ...................................................................................... 18

Figure 8. IT Services Providers in the VSITS Sector Divided by Global VSITS Revenue in the Banking and Securities Industry ................................................................................................. 20



ANALYSIS

Fast Facts

The banking sector has suffered from the global financial crisis during the past three years; however, it has regained much lost ground. The IT market offers a broad range of opportunities in many functional areas, with a growth rate in the midrange for 2011. This will progressively improve in the coming years:

For total IT spending (that is, combined internal and external IT spending):

Gartner defines the banking and securities industry as identified by the sectors (and International Standard Industrial Classification [ISIC] codes) shown in Figure 1. In 2011, this industry will account for 71% of the overall financial services industry's IT spending (the remaining 29% being the insurance industry) and is composed of the banking segment (67%) and securities (33%).

The banking sector is 11.0% of the overall worldwide IT market share in 2011, and this will increase to 11.4% in 2015 through growth that exceeds the cross-industry average.

A five-year compound annual growth rate (CAGR) of 4.9% in overall IT spending in banking worldwide (2010 through 2015) is also above average, compared with a cross-industry CAGR of 4.1% for the same period.

For all external IT spending (that is, the portion of IT spending that relates to the provision of IT products and services by external providers in terms of software, hardware, IT services and telecommunications):

Worldwide, banking's external IT spending is projected to total $224.1 billion in 2011, a 6.7% increase from 2010 spending of $210.0 billion.

In 2012, banking's external IT spending is expected to grow 4.9% to $235.1 billion.

From 2010 through 2015, banking's external IT spending is expected to grow at a 5.5% CAGR, while internal services IT spending will decline in many Western countries and overall will have a lower CAGR of 2.9% for the same years.

Figure 1 shows the segmentation map for the banking and securities industry, which is divided into separate banking and securities sectors. The ISIC codes are shown according to Revision 4 of 2008. Further ISIC specifications as well as U.S. SIC codes (1987) and North American Standard Industrial Classification System (NAICS) codes (2007) across the two industries are found in the vertical industries' methodology document, "Market Definitions and Methodology Guide: Vertical Industries." Specifically:

Banking: "Banking includes monetary authorities (such as central banks or federal reserve banks); depository institutions (such as national and state commercial banks, savings institutions, credit unions, branches and agencies of foreign banks and other depository credit intermediation); nondepository credit institutions (such as credit cards, sales financing, consumer lending, real estate credit, international trade financing and secondary market financing and other nondepository credit intermediation); activities related to credit intermediation (such as mortgage and nonmortgage loan brokers, building societies, financial transactions processing, reserve, and clearinghouse activities and other activities related to credit intermediation)."



Securities: "Securities includes security, commodity brokers and services, such as security dealers and underwriters, flotation companies, security brokers, oil and gas lease brokers' offices, commodity contracts brokers and dealers, security and commodity exchanges, and investment advice. Funds, trusts and other financial vehicles managers include insurance and employee benefit funds or other investment pools and funds. This includes investment and private banks as well as other financial institutions that operate wealth management in the capital market space."



Figure 1. Banking and Investment Services: Industry Segmentation Map by ISIC Code

* ISIC partial match.

Source: Gartner (August 2011)



Business Priorities and Key Technology Drivers and Inhibitors

Business Priorities

Gartner's 2011 CIO survey identified business priorities across the banking sector (see Figure 2). Attracting and retaining new customers, increasing enterprise growth and improving enterprise efficiency are the top three business priorities among banking CIOs globally. This behavior confirms that:

Clients will be the top priority, and customer-centric strategies will be paramount. This is a clear continuation of the mind-set of 2010, when CIOs cited clients as their No. 1 priority. However, the focus was primarily on existing customers in 2010, and banks are already shifting focus toward new market share by attracting new clients in 2011.

Cost-reduction initiatives, which were top of mind for banking CIOs in 2010, are giving way to project optimization initiatives that ultimately bring increased efficiency. This basically relates to an increased focus on the optimization of the operational spending (opex) as opposed to past focus on the capital expenditure (capex) budget optimization. This was predicted by Gartner in 2010 (see "Market Insight: A Banking Industry Primer, 2010").

While regulatory compliance issues cited in the 2010 CIO survey are still present, banks are now relatively more concerned with enterprise growth. Gartner believes that regulatory compliance will still be an important driver for IT spending in 2011 and 2012; this should be interpreted as a "lesser focus."

Figure 2. Top 10 CIO Business Priorities in the Banking Sector, 2009-2011




However, this global analysis must be adjusted to the different local economies. In particular we found that:

For developing countries, the top two business priorities are identical to those identified in the global survey, while the third choice was "creating new products, services and innovation." This shows:

A clear focus of these countries on the future growth that need to be properly sustained in order to achieve results

The lesser level of maturity in IT adoption

For developed countries, the top two priorities are again identical to those cited in the developing economies, but the third and the fourth choices show a clear fear of the unstable economic situation and the possibility of a double-dip recession. In fact, we found that — as in 2010 — "reducing enterprise costs" and "improving enterprise efficiency" imply a focus on cost-optimization strategies.

Key Technology Drivers and Trends of IT Spending

The analysis of the top three business priorities can justify the IT spending pattern of the banking sector and its technology drivers. More specifically:

Focus on customer centricity — To achieve customer centricity, banks are enabling a set of initiatives, such as the enhancement of the customer experience, the reach of the client across multiple channels, the provision of cost-effective products/services at reasonable prices and security in banking transactions, and increased nonviral know your customer (KYC) practices. Gartner surveys and anecdotal evidence from inquiry calls and interaction with banks confirm that banks are largely focusing on the front office. All of this will affect the banking sector's adoption of technology, including:

Service-oriented architecture (SOA)-based core banking software that enables multichannel integration.

New front-end systems that allow greater personalization of the banking products/services and empower the customer to access the account when and where it's necessary.

Improved security in banking transactions by providing anti-malware or antivirus software, as well as hardware security keys to clients.

Increased KYC initiatives by using analytical applications especially in:

Western countries, where the middle class is relentlessly shrinking and the society is increasingly divided between new richer and new poorer people.

Developing economies, where the emerging middle class is demanding more advanced and sophisticated products

Revamped capital budget projects — Cost-reduction strategies and a shift in cost-optimization efforts from capex to opex budgets have become a top priority among banks during the recent turmoil in the credit sector (with a few exceptions in the growth geographies):

Capex reduction during the crisis led to a depressed market for hardware and other capital-intensive technologies. In 2010, revamped budgets in the capex side helped



to regain lost ground in terms of dollar revenue, and hardware and other capital-intensive areas are still experiencing good growth, especially in storage and servers. This growth is largely driven by regulatory compliance, expansion strategies in developing countries and the data growth in data centers.

At the same time, cost-optimization initiatives are:

On the one hand, strongly driving the adoption of technologies that produce cost savings on the opex side (that is, employing greater efficiencies through the adoption of technologies that can reduce costs, such as with offshore services)

On the other hand, promoting cost cutting (that is, the reduction of existing costs often associated with internal staffing or services)

Also, the shift in focus across these optimization projects from capex to opex is definitely driving demand for alternative delivery models, especially to manage the IT infrastructure, including:

Cloud computing and SaaS are becoming increasingly attractive for cost savings and, above all, for transforming fixed costs into variable costs, as well as for enabling the scalability of projects.

Offshore or nearshore IT services are much more attractive than in past years, and many banks are strongly considering them. Gartner is closely monitoring the trend of selling captive centers to IT services providers, and captive sales can be a win-win situation for the banks. This allows them to make cash out of past investments, while acquiring the new desired agility. It can also allow IT providers to acquire unique skilled resources in vertical-specific domains, providing a valuable asset that can help win new clients, while earning a stable cash flow.

Enterprise growth — Growth is urging banks in three directions:

Achieving more-agile infrastructures. Agility is the ability of an organization to sense environmental change and to respond efficiently and effectively to that change. Agility can be time-related (reacting faster) or range-related (adding new products or new branches or new channels). In this contest, the need for agility is driving the spending by adopting architectural frameworks, such as SOA, and technologies, such as complex-event processing (CEP) or business process management (BPM), that can help banks achieve the right degree of agility in several ways. For example, by supporting changes through small adjustments in business engine parameters or by achieving increased speed in straight-through processing, as well as by supporting those channels that are increasing customer penetration, such as the Internet and wireless channels. The need for agility is strongly driven by the increased intensity of regulatory compliance.

Transforming traditional fixed costs (related to the ownership of IT assets, such as storage capabilities, computational power associated with mainframes/servers or software-related assets) into variable costs. This change in the consumerization of the IT via utility-based pricing (that is, by paying per use) is creating a lot of interest in the banking sector, and it is behind the high level of attention that cloud services are receiving in the marketplace. Another important macro trend that Gartner has detected is the divestment that some global banks are achieving by selling off their onshore/offshore captive centers, replacing their own resources with external ones.



Good examples of such divestments have been the deals signed between Citibank and TCS, and UBS and Cognizant.

Introducing more automation and reducing head count per branch. Banks are clearly pursuing reductions in head count by increasing the automation of processes. This leads to an overall reduction of costs per employee and can financially sustain the growth of banks. In this perspective, the captive centers' divestments look perfectly in line with these expectations. Also, the need for more automation is in line with the need to react to the regulatory storm that is affecting the banking sector.

Key Technology Inhibitors of IT Spending

IT spending in the banking sector is inhibited across regions by differing factors of differing weights. Overall, the following inhibitors have been identified by Gartner:

The economic slowdown persists in some countries, and that is reducing the profitability of many banks and ultimately their IT budgets (see "Market Trends: Three Megatrends Will Affect the Financial Services Industries in 2011-2014").

The rationalization of systems such as data centers and hardware budgets on a global basis due to the consolidation of IT systems through the mergers and acquisitions (M&As) of banks is reducing overall opportunities for new projects for longer time frames.

Global sourcing creates the ability to get more services at less cost.

Security breaches are strongly inhibiting the adoption of cloud computing projects across the banking sector, especially for public or hybrid clouds and the start of new projects.

The high complexity costs of the new major projects and long-term returns are still affected by the low IT budgets of many banks.

The lack of continuity in executive champions and the bonus restriction on executive pay by new regulations in many countries, such as the U.S. and the U.K., are slowing down the implementations of new IT strategies that are better connected with the business processes.

The application of efficiency and cost disciplines has been persistent.

Banking Solution Maps

Banking is a complex market, and for IT vendors new to the venue (or for vendors reassessing their offerings and portfolio) it is important to understand the way its practitioners describe and segment the arena. A solution map is a graphical presentation that explains how a market's IT landscape is perceived in terms of the major business functions in each subindustry.

The Banking Solution Map

Figure 3 depicts the solution map for banks by dividing the several technologies across the four tiers: the front office (that is, communicating with customers and third parties); the middle office (that is, internal services and administration); the back office (that is, where the transactions are managed and processed); and infrastructure (that is, the basic and most common technology layer independent from the specific industry requirements).



Obviously, some systems will span more than one area (for example, there are multiple boxes for payments across the front and back office). This represents the different kinds of payment technologies that are involved in the different tiers. Biometrics payment systems might be included in the front-office box "payment systems," while the processing of those payments would fall into the "payment services" box of the back office.

Figure 3. Solution Map 2011 for Key Banking Technologies




The Banking Solution Heat Map

Those boxes included in the banking solution map do not cover the entire landscape of available technologies for the bank, but rather, they refer to a list of key technologies (horizontal- and vertical-specific) in the banking sector, according to the Gartner surveys and the Gartner banking-related Hype Cycles (see "Hype Cycle for Banking and Investment Services Core Applications and Architecture Technologies, 2011," "Hype Cycle for Financial Services Payment Systems, 2011" and "Hype Cycle for Banking and Investment Services Customer Acquisition and Retention, 2011"). The analysis of how quickly these technology profiles are estimated to move along the Hype Cycle and the interest shown by surveyed banks has led to the "heat map" shown in Figure 4. This map separates the "hot" reddish boxes from the "cold" bluish boxes, according to the legend on the side of the picture. In particular:

Front-office technologies are still at the forefront and are extremely attractive for banks. This is largely driven by the expansion trend (mainly in developing countries) that is urging the creation of new front-office infrastructure and by the need to optimize the operational costs (mainly in developed countries), with the adoption of more automation and straight-through processes.

Risk is still a big concern for banks. Therefore, risk management will have a huge impact on many functional sectors of the bank such as in governance best practices, reporting and internal control. Obviously, regulations can enforce these practices, but beyond that, banks are voluntarily taking actions to avoid past mistakes.

Security is another big thing. In the infrastructure functional area, security software and service solutions are constantly adsorbing a lot of the IT budget. Also, these solutions are currently the most broadly externalized on the cloud in the banking sector, and they are often paired with the need to rationalize and improve communications systems within the bank (for example, by adopting unified communications technologies).

Figure 5 depicts the same hot and cold technologies, by showing them across the main industry-specific processes within the banking sector: core banking, payments, lending and treasury. Notably, the analysis highlights that technologies that relate to core banking processes are the ones with the greatest number of reddish boxes and, therefore, the most in demand, soon followed by the payments, the lending and finally the treasury that is more bluish.



Figure 4. Solution Heat Map 2011 for Key Banking Technologies




Figure 5. Solution Heat Map 2011 by Main Banking Processes Technologies


Buying Centers, Messaging Map and Key Influencers

The strength of buying centers in the financial sector has been shifting away from the back-office and toward front- and middle-office buyers where operational efficiency and risk control are relevant issues for the bank. Even in companies that utilize a centralized model for IT, executives



with business and/or change management backgrounds often play major roles in buying decisions. The COO and business unit VPs gained stronger control over IT budgets and a more implicit role of tactical decision makers, while the CIO's role is more related to the IT strategy. For major business applications, it's common for business buyers and IT to play a major role. The CFO office has started to play a very active role in a minority of companies, often through procurement and, less frequently, through sourcing professionals reporting to the CFO. Also, CFO suggestions are becoming more compelling in sight of the aftermath of the economic crisis and low liquidity environment, especially related to the cash outflows and to the capital costs. Overall, Figure 6 shows the buying centers relative to the functional areas and key business and technology issues that are aligning business and technology strategies within banks.



Figure 6. Key Buying Centers and Messaging Map

Note: Goal of messaging varies according to the type of buyer. Vendors must target different buyers at all touchpoints in the purchase decision cycle to influence the decision to buy.




In the banking industry, there are many stakeholders that can influence the decision maker at different stages of the decision-making process. The government — represented by government organizations and the official regulators — usually ignites the spark by setting up rules that can lead to dramatic changes in the business models of banks. For example, the expected regulation on Basel III will increase the capital adequacy ratio and, consequentially, reduce the capital available for the business. Before a regulation is set, industry associations and technology groups analyze and test the new scenario by screening the impact over the industry and its feasibility. Unfortunately, their feedback is seldom considered by the decision makers in the regulatory bodies, and this is resulting in misalignment among stakeholders. IT and business providers are the most obvious candidates for composing those groups.

Other important stakeholders are universities, publications and events, such as industry conferences. These influence the decision maker with some direct possibility for the IT provider to interact in the process. In fact, they might be part of these three groups or influence their actions with their marketing strategy.

Figure 7 summarizes this entire process in a nutshell but this list of stakeholders at global level does not pretend to be exhaustive, and can certainly be broadened, especially on a regional basis.



Figure 7. Banking Key Influencers Map




Vertical-Specific Technologies

Technology can influence the banking sector in many ways, although Gartner identifies only two main IT segments that are vertical-specific to this industry (see "Market Definitions and Methodology Guide: Vertical Industries"): vertical-specific IT services (VSITS) and vertical-specific software (VSS).

Vertical-Specific IT Services

All IT services that are specifically delivered to functional areas of the banking sector are defined as VSITS. Gartner identifies, within the Gartner taxonomy for IT services, four segments that can include — but are not exclusive to — VSITS:

Consulting: All consulting services (business and IT) that relates to the development and integration of VSS or vertical-specific processes.

Development and integration services: All system integration and software development for VSS such as core banking, payments, treasury, etc.

Process management: All the core part of the outsourced services for vertical-specific

processes such as for mortgage, lending and other account servicing, payment processing, card management that do not include the consulting and IT part of the contract.

Software support services: Services that are generally technical support or break/fix services that are delivered for specific software products. Software support services may include new product installation services, installation of product updates, migrations for major releases of software, other types of proactive or reactive on-site services, and support for custom application or infrastructure software. Services may be delivered by a product vendor, a consulting firm or third-party software maintainers.

Across this segment, Gartner has identified the key global players shown in Figure 8.



Figure 8. IT Services Providers in the VSITS Sector Divided by Global VSITS Revenue in the Banking and Securities Industry


Vertical-Specific Software

VSS is defined as software applications that are unique to a vertical industry. These are stand-alone applications that are not modules or extensions of horizontal applications. This category does not include custom-developed applications that are instead included in the VSITS. In the banking sector, examples of VSS are core-banking systems software, lending systems software, treasury software, payment systems software, regulatory compliance software packages (such as anti-money-laundering [AML], KYC, Basel II and Sarbanes-Oxley solutions), trade finance systems, channel services systems, risk management software. VSS in the banking and securities industry is divided into five segments:

Core banking and related systems: Core banking, Islamic banking, online banking, mobile banking, ATM, check processing, card processing, lending, syndicated lending, leasing, dealer finance, factoring, credit admin, repo and securities lending, specialty lending, private banking, payments, cash management, funds transfer, automated clearinghouse (ACH), estate planning software, financial planning software, and equipment finance/leasing.

Treasury management: banking treasury systems, reconciliations, cash-flow management, corporate finance, treasury management, trade finance, asset and liability management (ALM).



Governance, risk, compliance: Liquidity risk management, VAR calculations, risk databases, operational risk, credit risk, enterprise risk management, AML, KYC, regulatory reporting, Basel II, data solutions for risk (AML, PAC, etc.).

Trade/trade related/settlement: Order management, trade capture, reconciliation, confirmation, document and collateral management, settlement/exchange systems, valuation, P&L, derivatives, multiasset, clearing, data providers, and data solutions/reference data management.

Investment management: institutional "asset management" and retail "wealth management" (funds management, portfolio analytics, performance attribution, wealth management, trust, share registry, NAV calculations, financial planning).

Other: Pitch Book and others.

The VSS global market for the banking and securities industry accounted for more than $16 billion in 2010.

Across this segment, Gartner has identified the following key global players as shown in Table 1 (see "Market Share Analysis: Banking and Securities Vertical-Specific Software, Worldwide, 2010"). In this analysis, Gartner has identified the top five largest VSS providers in terms of license revenue 2010. The VSS market clearly appears extremely fragmented with a dominance of local players not represented in Table 1 and aggregated in the "others" category together with smaller global players. Also, some of the top five players are strong in a single region, such as Fiserv in the U.S., while others such as Temenos Group are solid across a large number of emerging markets.

Table 1. VSS Market Share in the Banking and Securities Industry, Worldwide, 2010 (Millions of Dollars)

Rank VSS Provider 2009 2010 2010 AGR (%)

2010 Market Share (%)

1 SunGard 408 530 29.9 3.3

2 Fiserv 449 455 1.3 2.8

3 FIS 411 440 7.1 2.7

4 Misys 407 391 -3.9 2.4

5 Temenos Group 243 314 29.2 1.9

Others 13,356 14,117 5.7 86.9

Total 15,274 16,247 6.4


BACKGROUND AND CONTEXT

After a couple of years of constrained spending, the banking market has started to resume its positioning across the industries with a leading growth rate that is expected to stabilize as a growth sector for the upcoming years, according to Gartner's forecast. Overall, there will still be areas of restricted IT budgets, including risky projects with low or uncertain ROI and projects that are not aligned with the banking strategy. However, the general focus will be on the front-end and operational spending. The reduction in overhead and the transformation of the fixed costs into variable costs will lead the initiatives in this sector. For this reason, cloud services and other on-demand services will look extremely attractive to banks, if security concerns are properly managed. On the other hand, some other key trends will continue to dominate this industry



globally, such as regulatory compliance, back-office replacement and increased automation, especially on the front end.

THE IMPACT

The general economic recovery timeline will continue to dictate the growth rate in the market size of the overall IT spending. However, Gartner recognizes that:

The banking sector is behaving well, and even if profits are falling in some countries, in many others expansion is set to continue aggressively in future years with cross-border M&As from emerging countries into developed economies and the creation of Pan-European/Pan-Asian banks.

In developed countries hardly hit by the crisis such as in Spain and Greece the weakening banking sector will require more consolidation with domestic M&As (see, for example, the merger between Alpha Bank and EFG Eurobank Ergasias in Greece).

Banks are among the most-aggressive organizations in adopting new technologies for addressing strategic changes, and, in general, the IT intensity of this sector is still outpacing other industries.

The size of new giant markets across emerging economies is pulling the whole industry and also boosting IT spending in developed countries (see "Market Trends: Three Megatrends Will Affect the Financial Services Industries in 2011-2014").

Islamic banking is increasingly capturing the attention of global banks, largely because of the importance it has in some key emerging markets such as the Middle East and Southeast Asia (see "Market Trends: Three Trends Will Boost Revenue of Islamic Banking Systems Providers in 2010-2014").

The impact on IT spending is expected to produce a profound change in how IT is utilized by banks. In particular, banks will need to change their business model by:

Reducing their opex by increasing the automation and the adoption of automated channels such as smartphones and tablets.

Transforming more IT fixed costs into variable costs by considering new IT delivery models such as cloud services.

Reacting more quickly to environmental changes by becoming more agile with SOA.

Following specific local trends, such as:

The need for new products in the Islamic banking sector for Middle Eastern banks

The high demand for specific products in the remittance market

The fast-growing mobile banking market, especially in those countries where a branch network alternative is expensive and difficult to achieve

CONCLUSION

Despite the global financial crisis, the banking industry is still a top sector that offers many opportunities to IT providers, especially in light of the tremendous changes that banks will face as a consequence of new regulations, tough market conditions and the entry of new competitors. In



fact, all those challenges will require a better alignment between business and IT strategies on the foundation of new business models that can be enabled only by technology.

RECOMMENDED READING

Some documents may not be available as part of your current Gartner subscription.

"Market Trends: Three Megatrends Will Affect the Financial Services Industries in 2011-2014"

"Market Trends: Three Trends Will Boost Revenue of Islamic Banking Systems Providers in 2010-2014"

"Forecast: Enterprise IT Spending by Vertical Industry Market, Worldwide, 2009-2015, 2Q11 Update"

"Marketing Essentials: How to Improve Your Go-To-Market Strategy in the Financial Services Industry of the Developing Countries"

"Market Insight: Investment Banking and Capital Markets Primer, 2011"

"Market Insight: An Investment Services Industry Primer, 2010"

"Market Definitions and Methodology Guide: Vertical Industries"

Evidence

The analysis of this report is largely based on the following sources:

CIO Survey: It is an annual survey conducted by Gartner. The 2011 study surveyed 2014 CIOs, of which 127 were in the banking sector. Sixty-two CIOs were surveyed across developing countries (China, India, Malaysia, the Philippines, Thailand, Croatia, the Czech Republic, Kuwait, Nepal, Poland, Saudi Arabia, the Slovak Republic, Slovenia, South Africa, Turkey, UAE, Argentina, Brazil, Chile, Colombia, Mexico, Peru and Venezuela). Sixty-five CIOs were from developed countries (Australia, Hong Kong, Japan, New Zealand, Singapore, Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Israel, Italy, Luxembourg, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, the United Kingdom, Canada and the United States).

The 2011 Gartner enterprise IT spending survey

The evolution of the Hype Cycle and its expected outcome for the different technologies from 2010 to 2011.

The analysis of the inquiry analytics tool at Gartner.

Anecdotal evidence from the daily interactions with both IT providers and end users.

This document is published in the following Market Insights:

Industry Market Strategies Worldwide



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Asia/Pacific Headquarters

Gartner Australasia Pty. Ltd.

Level 9, 141 Walker Street North Sydney

New South Wales 2060 AUSTRALIA

+61 2 9459 4600

Japan Headquarters Gartner Japan Ltd.

Aobadai Hills, 6F 7-7, Aobadai, 4-chome

Meguro-ku, Tokyo 153-0042

JAPAN +81 3 3481 3670

Latin America Headquarters Gartner do Brazil

Av. das Nações Unidas, 12551

9° andar—World Trade Center 04578-903—São Paulo SP

BRAZIL +55 11 3443 1509

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