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Making Leaders Successful Every Day November 14, 2008 The Future Shape Of Banking Architecture In 2023 by Jost Hoppermann for Enterprise Architecture Professionals

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Page 1: The Future Shape Of Banking

Making Leaders Successful Every Day

November 14, 2008

The Future Shape Of Banking Architecture In 2023by Jost Hoppermannfor Enterprise Architecture Professionals

Page 2: The Future Shape Of Banking

© 2008, Forrester Research, Inc. All rights reserved. Forrester, Forrester Wave, RoleView, Technographics, TechRadar, and Total Economic Impact are trademarks of Forrester Research, Inc. All other trademarks are the property of their respective companies. Forrester clients may make one attributed copy or slide of each figure contained herein. Additional reproduction is strictly prohibited. For additional reproduction rights and usage information, go to www.forrester.com. Information is based on best available resources. Opinions reflect judgment at the time and are subject to change. To purchase reprints of this document, please email [email protected]

For Enterprise Architecture Professionals

ExEcuTIvE SummAryForrester’s research on banking IT in 2023 identified a series of requirements and the architectural layers of the future banking platform. The key layers show: (1) a focus on personalized customer services and real-time information analysis; (2) a separation of product design and customization; and (3) a clear distinction between core competencies and nondifferentiation functions supported by selective sourcing. These layers will belong to one, two, or more financial services firms, and they will be connected via a federated semantic banking backbone. The outside world will use the services of these layers via the ubiquitous banking layer — also know as the evolution of the multichannel layer.

TABlE OF cONTENTSBanking’s Future Needs Loosely Coupled And Dynamically Sourced Apps

Apps Will Turn Into Networks Of Information And Business Services

Key Differences Between Today And The Future

rEcOmmENdATIONS

Manage The Present And Prepare For The Future

WHAT IT mEANS

Industrialized Banking Needs More Than Technology

AlTErNATIvE vIEW

The Disruptive Event May Have Emerged

Supplemental Material

NOTES & rESOurcESForrester surveyed British Telecom (BT), Fidelity National Information Services, Hewlett-Packard, IBm, Infosys, microsoft, misys, Oracle, SAP, Sun microsystems, Tata consultancy Services, and Temenos, and interviewed a large number of banks in four world regions.

Related Research Documents“Financial Services Of the Future: collaborative competition Will Be The Norm” August 20, 2008

“The multichannel Organization” August 30, 2006

“The Next-Generation Banking Platform” may 31, 2006

November 14, 2008

The Future Shape Of Banking Architecture In 2023Industrialized Banking And The New crm Will Support High-TouchThis is the fourth document in the “Banking IT In 2023” series.

by Jost Hoppermannwith Gene leganza, mimi An, and matthew czarnecki

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BANKINg’S FuTuRE NEEDS LOOSELy COuPLED AND DyNAMICALLy SOuRCED APPS

To help enterprise architects create an IT vision for their financial services firms, Forrester began compiling scenarios for the banking IT of the future. These scenarios target the next eight to 15 years, although the timeline will differ for individual banks. We based the scenarios on vendor surveys and interviews of banking executives around the globe. The earlier parts of this series developed a summary of business scenarios and offered a look at the different types of bank branches of the future and showed how channels will support convenient customer interactions.1 This fourth part will summarize the key requirements that are driving the future of banking architecture as well as a high-level target state architecture, based on the input of the vendors we surveyed and the banking executives we interviewed.

Business Requirements And Customer Behavior Will Drive Target State Architectures

Our research revealed a number of key trends that will affect the organizational structure of a bank’s IT department and the way it does its business as well as the as-is and target state architectures in 2023.

“Global firms will move toward more fluid, integrative enterprises.” (Vice president of strategy, large European bank)

What will these enterprises look like?

· There won’t be enterprise IT as we know it today.2 In 2023, business processes will go everywhere, and work time will be 24x7 around the globe. Enterprise and consumer IT will have converged. Wikis, blogs, community networks, and Social Computing will be a normal element of many IT environments. While the regulatory burden will most likely increase, it will be easier to deal with based on highly flexible systems and real-time availability of data, information, and related analysis. At the same time, old core competencies like core banking will move outside of banks’ interest, and utility-type service banks will offer many of today’s

“traditional” functions.

· Branches will use sophisticated technology to create a great customer experience.3 Multiple flavors of bank branches will deploy the most recent technology to serve customers with highly convenient interactions, presenting personalized offers and collecting information.4 Automated and human-directed avatars will extend the reach of the branch in terms of time, location, and product expertise. Collaborative technology will be mandatory to make customer information available at the best point in time and to combine the know-how of multiple experts across multiple bank locations. Branches will need to be a hub in a networked multichannel environment. They will connect locally to channel devices and use and present services that are also used via other channels, just more effective and more convenient for the customers.

· Ubiquitous banking will be the rule.5 Ubiquitous 24x7x365 access will be routine. Service availability will be based on various channels using devices in all sizes with heterogeneous

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capabilities. Ubiquitous banking will include a strong support of home entertainment and communication systems. Customers will not differentiate between mobile and nonmobile channels anymore. For the time being, Forrester calls these powerful, multifunctional devices wearable digital agents (WDA). At the same time, employees will have the full power of their organization everywhere in significant economies and at least in large cities everywhere else.

The bottom line? Every component of functionality will be used by employees and customers around the clock and entirely independent of location. Ubiquitous banking — the future shape of multichannel banking — will include the branch as one of the most powerful channels and truly create the notion of banking services everywhere, whether these services are offered by a bank, nonbank, or social network.

APPS WILL TuRN INTO NETWORKS OF INFORMATION AND BuSINESS SERvICES

Based on the ideas and thoughts of vendors and banking executives around the world, Forrester has identified a number of key requirements for a target state architecture that is up to the needs of banking in 2023. We designed a layered high-level target state architecture to structure these requirements into a number of buckets (see Figure 1). These layers are creating the notion of a target state architecture that we call “industrialized banking” and that interacts with a layer supporting ubiquitous banking.

Figure 1: The Future: ubiquitous And Industrialized Banking

Source: Forrester Research, Inc. 47356

Semantic banking backbone

Ubiquitous banking

The new CRM — intraday BI — customer data

Product definition and innovation

Dynamic business

The new core Open source Service banks

External services

by IT service providers

Ind

ustrialized

ban

king

Highly interchangeable

Ownership of data

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Networked Multichannel Capabilities Will Be Mandatory

“A branch with fully integrated cross-channel capability is an achievement in 2008; it will be the norm in 2023.” (Vice president, strategic planning, globally operating bank)

Most survey participants agreed that their architectures need a much better support of channels. Today, many banks and vendors state that they still do not see any real-world need for cross-channel capabilities. However, many banking executives told Forrester that they expect this true multichannel capability to become mandatory in the future. Evolutionary improvement of aspects such as common look and feel across the various channels, highly intelligent help functions, and fully parameterizable screen designs and interactions will make change a nonevent. They also identified further requirements for a layer supporting ubiquitous banking:6

· Flexible support of multiple channels and devices. Many vendors and banking execs identified the need for a high degree of a “dynamic plug-in” capability of new channels and devices. Today, it is not even possible to target mobile phones as a single channel. As soon as more comprehensive channel capabilities become necessary, the different phones from Apple, Nokia, Sony Ericsson, and the like will need separate consideration. In the future, “channel plug-and-play” will become key across all channels based on a lightweight technology usable for many, if not all channels. In addition, functionality would include streaming video for employee training and customer targeting educational purposes. Product messaging will strongly affect the multichannel architecture of the future: Customers identified by their WDAs would see customized advertisement on public display screens and “public near-cast systems” could wirelessly send advertisement to the WDAs in reach.7

· Acceptance of requests from multiple sources. Most banking executives understand that a multichannel architecture of the future will need to have the ability to accept any kind of transactional/information request from multiple sources. In a first step, many financial services firms (and also companies in different industries) still need to solve organizational challenges to arrive at a single approach toward multichannel support.8 However, technology and architecture needs to prepare for an environment where new functionality will be available much faster than today — if not instantaneously, then within days as opposed to the weeks and months it takes today. Thus, the ubiquitous banking layer must not create limitations for plugging any additional function, technology, or application into it.

· Channel-specific services. The ubiquitous banking layer will also include a high amount of broad and rich location-based services. Financial services examples include directions to the nearest ATM, self-service center, or advisory branch; automatically calculating the time to leave for a meeting in a branch; or switching micro- and macro-payment currencies and capabilities to the country in which a customer is currently located. All of these channel-specific services will need to be highly interactive (to take care of the Millennial generation of Internet and tech-adapted customers) and highly customizable in terms of screen design and interface experience — by customers and internal users.

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· Support of high-quality graphics for selected areas. Today’s early avatar-based financial services based marketing and advisory approaches often use orchestrated video clips to avoid either excluding customers with low bandwidth or poor graphics. Future avatar-based customer experience will need high-resolution, high-quality graphics that may go well beyond today’s animated movies. Devices such as home communication hubs, branch-based displays, and WDAs — combined with device-specific apps — will be necessary to support the graphic quality requirements, independent of limiting factors such as available bandwidth, display size, and resolution. However, a minor number of banking executives and a larger number of vendors stated that bandwidth would not be an issue in 10 or 15 years: Compared to today, bandwidth would be virtually unlimited. However, the same would have been true for today’s bandwidth from the perspective of the early 90s — and we have found ways to use this

“infinite” bandwidth.

· Distributed multichannel support. All kinds of business and consumer electronics devices will interact with various “front-end” solutions. However, interactions will not be bilateral and “star-shaped” as they are today. Customer and employee WDAs will directly interact with branch systems, devices, and displays; phone calls will move from a WDA to a home communication hub; and phone sessions will turn into videoconference or multimedia collaboration sessions.9 Ubiquitous banking architectures need to be capable of moving an interaction session from one set of channels to another and from one set of media to another. These architectures need to support dynamic usage of distributed channels. For example, a videoconference between three people who are at home or at the office, while at the same time they are working with documents provided by applications or participants. Potential multichannel focal points are various: “central” multichannel systems, branch collaboration systems, or home communication hubs.

The New CRM Will Focus On The Customer

“CRM will make life more delightful.” (Vice president, architecture and strategy, large US bank)

Many of the bankers and vendors that we interviewed told us that customer relationship management systems (CRM) will still be here in eight, 10, or 15 years. Today, CRM is often used for the support of more basic interactions, for offering products within a certain marketing campaign, and for planning these campaigns. A number of banking execs believe that exactly this approach makes CRM inconvenient for their customers. If products are pushed out to the customer entirely independent of the customer’s financial demand and personal situation, than customers can easily perceive CRM as a nuisance. Therefore, the execs also believe that CRM needs to change in a way that takes care of the current needs of the customers. The new CRM will replace pushing products with comprehensive services and mass marketing with mass personalization and customization. The functional focus of CRM systems will extend beyond financial services and at the same time will need many additional new CRM ingredients. All of this will target an improved view on the customer and the ability to service the customer individually:

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· Product customization and bundling will be key. The new CRM will need comprehensive product customization and bundling capabilities. This will include the ability to adapt “raw products” to the individual needs and desires of a customer — maybe within a predefined range of parameters such as rates, fees, and conditions or by deriving a new individual product from a prototype or raw product. Furthermore, it will include creating custom bundles of products offered to a customer covering a specific demand such as a complex financing scenario with a single price that is different from just adding the individual product elements. In addition, both product customization and bundling will not be restricted to bank internal raw products, but will also include third-party products.

“You can’t put technology in between business people and pricing decisions.” (Vice president, strategy, large US bank)

The new CRM’s product customization capabilities will need to work with business services that are offered by multiple internal and external raw product configurators representing and offering raw financial services products. This will not be limited to a mere display of product features, but will also cope with negotiating product conditions with a raw product configurator inside or outside of a given bank. In addition, the new CRM will need to keep records of all of these customized products — if not for customer intelligence purpose, then at least for regulatory reasons. Eventually, this may even end up in the availability of basic product customization features for the customer. The bottom line: The new CRM will depend heavily on business process management capabilities. It will consume external and internal product presentation services as well as customer and business intelligence services. It will also need the ability to provide its capabilities via the ubiquitous banking layer. The new CRM will use, but not include, multichannel capabilities.

· Information is the crucial weapon in the battle for the customer. Some banking executives we spoke with that already have decently sophisticated solutions in the information gathering and business intelligence space offered ideas about extending what many banks have available today. Information gathering will move beyond internally available sources. It will integrate external sources with structured data (including those of partner banks and information providers) as well as with unstructured data from social networks and other Internet-based sources of customer-related information. Thus, future business intelligence systems will reach out into the Internet, prepare Internet information for analysis, and finally analyze it all. The semantic Web and its approaches to modeling semantic information will be important to make unstructured information more easily accessible. This will include specifications and standards such as the Resource Description Framework (RDF) and related Web Ontology Language (OWL).

Internally, this would include establishing a 360-degree view of the customer and business information. However, not all information may be available internally to the bank anymore or in the country in which a certain report or analysis was initiated.10 Thus, it won’t be sufficient

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just to integrate today’s “local” data silos. A truly businesswide 360-degree view will go beyond the boundaries of the enterprise and reach out to all kinds of business partners and/or countries of operation to compile the 360-degree view. Required mechanisms, tools, and architectures will include different flavors of data management tools and information services, as well as Forrester’s information fabric.11 In the future, at least intraday analysis of internal and external information and a truly businesswide 360-degree view will first be highly differentiating and then become commodities at a later point in time. When these approaches will come into existence will depend on the individual bank and its existing architectures and strategies.

· Banks will analyze customer actions instantaneously — and react to the analysis. Some of the banking executives assume that they will make at least intraday or even close to real-time analysis available to their banks’ employees.12 Today it’s already an accomplishment if a branch advisor learns in near-time that one of his or her more interesting customers is just visiting the branch. Real-time analysis — combined with real-time alert capabilities targeting customers as well as bank employees — will allow for more personal interaction, more on-the-spot identification of business opportunities, and more relationship development. Examples include near-time outreach to customers, consideration of the comprehensive individual financial needs of a customer, and communication with the customer using his or her personal preferences. Similar to more customized banking products, marketing campaigns will become more personal and lose their mass-market character.

Many banking executives and vendors expect a massive move to operational data stores and/or data warehouses with aggregated internal and external information — plus real-time analysis before data reaches its warehouse. At least intraday intelligence on customer and business events and an almost instantaneous analysis of customer actions will be possible. Real-time alert solutions need to be capable of sending alerts to customer and/or bank employees. Alerts will use the best channels for the customer and the bank advisor including voice and video messages; phone and video calls; online chats, as well as by classic means such as a letter. Common purpose or customer-specific triggers and alerts that can be easily defined and customized will be a key ingredient. In a first step, these multichannel real-time alerts will target the “more interesting” customers, and later on it will become a commodity feature. The bottom line: Close to real-time customer and business intelligence functions and multichannel real-time alert functions will become part of the new CRM.

Product Configurators Will Strengthen The Notion Of Industrialized Banking

Many banking executives and some vendors see banking in 10 or 15 years as much more industrialized than it is today. This will not only touch areas that are already visible such as payment processing that is outsourced to another bank, for example. It will also affect the way that banks do business including the fragmentation of the value chain.13 In turn, this fragmentation will also need a new approach to product definition and innovation, the related architectural layer, and in particular the product configurator:

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· Product configurators will focus on raw products. Today, many people will not buy a car exactly as it has been designed by its manufacturer. At a car dealer, they will customize color, engine, and many other details according to their needs and preferences. The new CRM will play the role of a car dealer, and the product configurator belongs to the car factory’s design office. However, while a car buyer will have the choice between several engines of a given car make, the banking customer may require combinations of bank and third-party products. While the factory — and not the dealer — is manufacturing a car, involving the IT organization to “manufacture” each customized product bundle would be impossible. The IT organization would consume too many resources, and the business would complain about untenable delivery times. Raw products need to become available to the new CRM layer with little IT involvement, and moving customized raw products into production must require no IT resources.

· Product design and innovation need various sets of product metadata. A sound product configurator will use at least two sets of product metadata or parameters, one a subset of the other. One metadata set will define a banking product and all of its allowed flavors. The new CRM will use various permutations of the other metadata set — a subset of the first — to turn a raw product into customer-specific ones. Raw product definitions need to be able to inherit the properties of existing raw products thus enabling reuse — without establishing product silos as they exist today. Furthermore, the product configurator needs to provide the product definitions represented by product services to the bank internal or bank external new CRM layers, and it needs to be capable of consuming external raw products to refine and/or integrate them within internal products. The bottom line: The product configurator of the product design and innovation layer is a core element of industrialized banking and one of evolutionary improvements of Forrester’s next-generation banking platform.14

The Dynamic Business Layer Will Be In-House And Dynamically Sourced

Most bank executives and vendors we spoke with agreed that enterprise systems will be used from everywhere at any given time, will consume functionality from multiple sources, and will need to be designed for both flexibility and availability. Many also agreed that the “back-end” of tomorrow will be virtual in nature, designed for throughput in a lean and green way, real-time where necessary, free of any batch processing, and capable of working with internally and externally provided business and information services. Most banking executives expect to have less and less commodity functionally in-house. Many bankers and vendors also agreed that service-oriented architecture (SOA) as well as business and information services will be the approach of choice to implement tomorrow’s “back-end.”15 This is in line with Forrester’s observations that SOA is the strategic direction for many banks, but SOA still needs to reach a major portion of their application landscape. Many aspects of the new “back-end” will gradually evolve out of Forrester’s next-generation banking platform. However, there are a number of changes and extensions, such as:16

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· The new core. This is the architectural area that is focused on the new core competencies such as compliance and risk management. The new core is focused on functionality that is meant to accelerate the business or to create ways of differentiation and will support the upper three layers. There will be little or no bank-internal coding anymore. The new core is based on assembling business “applications” along the lines of processes and on custom-built and off-the-shelf business and information services. Custom development will be the exception rather than the rule — even for the larger banks.

· Commodity functionality: open source and service banks. Banks will consume nondifferentiating functionality in multiple ways. In particular, the banking executives assume that in 10 to 15 years nondifferentiating functionality will be available as open source. This could mean the return of a model similar to the early days of electronic data processing — sharing applications for routine activities between enterprises. Banks may run these open source “applications” or business services bundles internally or externally. Utility-type service providers — service banks — will also offer functionality such as core banking, credit factories, and payment as functional or BPO-type services: Banks will consider these services as “plumbing” or nondifferentiating “banking infrastructure.”17 To leverage the service banks’ offerings in a dynamic market, banks will need to work with the semantic specifications of service interfaces.18 Without some “plug-and-play” capability, service banks would be just another name for a rigid sourcing approach.

· Off-the-shelf services. Many banking executives and some vendors assume that vendors will move away from selling applications as software licenses toward selling services — maybe based on different licensing models, for example, based on consumption. Nondifferentiating off-the-shelf services would have to compete with open source and service banks. Similar to the service bank model, this would allow a bank to use the services of vendor X and, at a different time or in a different location, the services of vendor Y — for example, due to different fee structures. This approach would be easier if nondifferentiating business services would also be offered “on demand,” thus establishing a broader SaaS environment in banking. One banking executive even predicted that SAP and Oracle would establish global “services” hubs. However, niche providers may cause a shift in the balance of power by offering highly differentiating and highly specialized business services that can collaborate with other niche offerings within a given business services ecosystem.19

· Granularity of business services. Lively discussions are currently arguing the “right” granularity of business services. Even today, the answer is neither more coarse nor more fine-grained — most firms will need both for an optimum level of agility. For example, the recomposition of a coarse business service can be based on fine-grained services to ensure a better fit to a redesigned business process step. This will become even more important than it is today when it comes to fitting the capability of a utility-provided service to a bank’s demand.

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In the future, banks’ as-is architectures need to represent inter- and intra-enterprise SOA. They need to offer business functionality internally and externally, to support consumption of internal and external functionality provided via business services as well as by vintage means, and to compose business services out of internal and external services.

· Semantic banking backbone. Many vendors and bankers believe that the entire architecture will be based on SOA to manage the dynamic business and technology relationships. Forrester recommends going beyond pure SOA and using Forrester’s Digital Business Architecture in the shape of the next-generation banking platform as the basis for a target state architecture. However, the next-gen banking platform and its banking backbone need extensions for 2023. An even stronger focus on supporting and leveraging the power of semantic business services specifications will allow a faster and more reliable composition of rich business and information services — thus increasing the speed of change. However, this alone won’t be enough. Business processes will go everywhere around the globe on a 24x7 basis. Thus a key focus will be supporting business processes across the boundaries of a single instance of an

“application,” across enterprise boundaries, and across multiple infrastructures. One approach for this could be a federation of more local sub-backbones — similar, but not identical to Forrester’s federated SOA model.20

· Predictive monitoring. Currently, predicting the effect of a large change on an entire set of enterprise applications is a complex task. The future environment will be characterized by the “dynamic” consumption and composition of business and information services. Thus, one of the key success factors of such an environment will go beyond the current system and application management approaches: It will include a predictive modeling capability that — based on data about system and application configuration and behavior — will offer insight of what affect certain systemic trends and changes will have on a banking platform that is based on the “industrialized banking” target state architecture.

· Vintage sourcing. Today, some banks are still using back-end systems — core banking systems in particular — that are 10, 20, or even 30 years old. Fifteen years hence, we can expect to see remnants of the vintage applications that are mainstream today. Reasons for that include budgets, risk, and long-term contract inertia as well as using old contractual models to run the

“new core” of tomorrow.

Enterprise Systems Won’t Be Apps Anymore, But Networks Of Services

Banks will combine the new core with open source and service banks and off-the-shelf services in various flavors. The evolution of the next-generation banking platform and the federated semantic banking backbone will support this approach that will be controlled by predictive monitoring. This will create a highly flexible environment that will eventually drive firms away from monolithic apps toward a network of business and information services — with a single “industrialized banking” platform acting as a “router” of business services (see Figure 2).

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Figure 2: collaboration And A Network Of Services characterize Industrialized Banking

Source: Forrester Research, Inc. 47356

Retail branch

Trader/broker

Nonfinancial services firm

Insurance broker

Retail bank

Mortgage bank

Insurance company

Nonbank?

Custody

Credit/mortgage back office

Sales Product (bank) Service (bank)

Clearing and settlement

Legend entities Business relationships/“distributed”

business processes

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The built-in flexibility of these service networks could lead to a single platform even for the most global bank. However, structural organization and geopolitics as well as security will continue to create obstacles. In addition, there is always the reliability and resilience perspective: Some years ago, the entire multicountry ATM and online banking business of a large bank was unavailable for a couple of days because of a serious storage issue. Who would like to repeat this experience on a global level? For some time industrialized banking will offer a more global architecture, but it will still use more regional deployment.

Industrialized Banking Will Change IT Organizations

Most of the banking executives we interviewed identified a few key impact areas for the IT organization of the future. Following their line of thought, IT organizations will move in very close proximity of what Forrester calls Business Technology (BT). In addition, they identified the need to increase the business knowledge of today’s IT organization and to focus on various partnerships.

“Financial service firms will retrain partner resources and focus on core competition around risk, compliance, product design, and client relationship.” (Vice president, business architecture, large European bank)

The IT organization that supports the bank of the future will be characterized by:

· Business knowledge. Most banking executives agreed that the relationship between business and IT will change significantly, in particular between business and forward-looking functions and roles within IT such as IT strategy and enterprise architecture. It will include collaboration between all IT planning functions and the business and IT using business language. To understand the business and to help the business to differentiate itself will be even more important. Some of the executives in the banks’ IT organizations that we interviewed even offered more thoughts about their bank’s long-term business than about their target state architecture or IT strategy. The bottom line: Business technology is here, and business architecture will become more and more crucial for banks.21

· Selective sourcing. The summary of opinions and predictions indicates a clear increase in outsourcing compared to today, but also different approaches to sourcing. Many of the banking executives we interviewed expect close to full outsourcing of infrastructure for their bank and an increasing share of application outsourcing — in existing and emerging flavors. At the same time, they also state that they do not expect that custom application development will completely vanish — neither in-house nor contracted. However, they expect it to focus on assembling functionality along the lines of business processes and only in rare cases on constructing the individual functional building blocks such as business services. In addition, most banking executives clearly stated that the application architecture and software knowledge must be kept in-house — and maybe even extended — to be able to navigate through the myriad future architectural options.22

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· Vendor partnerships. To develop and run an efficient application and services landscape in such an environment will be difficult at best for banks with small IT organizations. They will need the help of partners that are competent in the world of industrialized banking. Smaller vendors or vendors with architectures that are not aligned with business models will be less suited to this environment unless they focus on differentiating niches.

“To be successful in 2023, banks will need a large IT shop, a banking consortium, or a vendor that follows this line of thought.” (Director of enterprise architecture, bank in Asia Pacific)

KEy DIFFERENCES BETWEEN TODAy AND THE FuTuRE

Forrester’s survey and interviews have led us to identify the directions of the overall financial services business, and the ways that customers will interact with their banks by using branches and a variety of channels. These directions lead to requirements that define a number of key differences from banking today that affect channels and ubiquitous banking, customer interaction and the new CRM, old and new core competencies such as product innovation, and a number of additional areas (see Figure 3).

Figure 3: Key changes: Today to 2023

Source: Forrester Research, Inc. 47356

IT/BT building block

Multichannel interaction

CRM

Product design

Core banking

Business applications

External business functions

Geographical scope

Vintage applications (a.k.a. legacy)

Today

Incomplete

Inconvenient

Siloed

Important

Monolithic

Rigidly sourced

Limited

Under renewal

2023

Ubiquitous

Customer-oriented

Personalized

Commoditized

Assembled

Utilized

Regional/global

?

Key changes: today to 2023

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Legacy Systems Strangle Will Hold, Just Differently

As banks move forward, however, some banking executives also told Forrester that they consider it likely that they will have a huge amount of new legacy systems in 2023. Their reasons? Most if not all front- and back-end systems will have been completely redeployed by 2023. However, an increasing stream of new business requirements plus the acceleration of mergers and acquisitions will make a “clean” architecture impossible. This will create the same type of functional patches and the need for large-scale integration scenarios that we have already known for years.23 These banking execs see two options to avoid creating outdated systems and redundancy all over again: A reduction of the overall pace — which is less likely to happen — or a focus on methodology and architecture that targets long-term benefits.24

”New systems do not offer long-term advantage without radical change in methodology and technology.” (Vice president, enterprise architecture, bank in Asia Pacific)

r E c O m m E N d A T I O N S

MANAgE THE PRESENT AND PREPARE FOR THE FuTuRE

It has been said that you can make the most money when the streets are burning. For enterprise architects this means that even in dire economic times they cannot afford to focus just on the present, extinguishing fires and helping to manage cost. One of the key aspects of EA work is to establish the big picture and to be prepared for more than the next few months. The key question is how architects can reach these goals in times like these?

· Accelerate when others are putting on the brakes. Financial services firms that are still in decently good shape may decide to gain competitive advantage while the others are still assessing the damage. Enterprise architects and target state architectures and strategies will be a key enabler in such a scenario. Next to a sound understanding of current business needs, ideally combined with a move toward business architecture, these enterprise architects will also need a concrete view of the future of the business and the technology driving this business in the future. Enterprise architects should use the scenarios of banking and banking IT in 2023 as a basis to discuss the future direction of their own bank, to establish a better understanding of what their business executives have in mind, and to describe what business and business technology environment enterprise architectures should target.

· Prepare for acceleration during the lull. The financial services companies that are struggling will need to prepare for their future — to (re-)establish key differentiators and to remain competitive, albeit with little or no investments in the short term. Or just the opposite: cost management will once again be high on the list; enterprise architects need to prepare for this. In such an environment, business executives will not spend a lot of time on the shape of their business in 10 years. However, enterprise architects can identify which elements of banking IT in 2023 are most aligned with their current corporate strategy. Thus,

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they can, for example, ensure that cost management mechanisms such as sourcing are aligned with the notion of services banks and utilities and that remaining investments are aligned with a forward-looking target state architecture.

This is all the more important because the complexity of IT/BT scenarios on the way to 2023 will move enterprise architects into a key role to enable the business strategy if — but only if — they are sufficiently prepared and if they have a sound understanding of business requirements, directions, and strategies. All of this will ensure that the bank will be able to accelerate after the current lull.

W H A T I T m E A N S

INDuSTRIALIzED BANKINg NEEDS MORE THAN TECHNOLOgy

Forrester’s digital Business Architecture, the next-generation banking platform, and all other emerging ingredients of a target state architecture such as the (federated) semantic banking backbone, business services ecosystems for banking covering semantic service interfaces, and the semantic Web, offer a sound starting point for banking platforms supporting industrialized banking. But there are functional and organizational requirements beyond today’s approaches:

· New core competencies. The new core competencies, such as those driving the new crm, and product innovation competencies are creating functional requirements far beyond today’s still often silo-oriented product design approaches and also beyond the boundaries of a single financial services firm. Banks will have to look for application and business service vendors that will align their product portfolio with this way of thinking. However, this won’t be enough.

· Bank structure. To get the most out of ubiquitous banking and industrialized banking, banks will need to adapt their organizational structure. An organizational layering similar to the more architecture-driven layers of industrialized banking may come into existence, and ubiquitous banking certainly needs more homogeneous and coherent approaches to multichannel banking than many banks have today.25

· Ownership of data. The ownership of data and information will be even more crucial than today. A firm focusing on customizing, bundling, and selling financial services products — a sales bank — will need its customer information as much as a firm creating raw products — a product bank. Service banks, on the other hand, will need customer data to deliver their services. However, both sales and product banks may anxiously guard their customer data because it will become one of the most differentiating and competitive elements of their business. The bottom line: mechanisms to protect the ownership of data will not only be a task for lawyers but also for enterprise architects.

These scenarios are eight, 10, or 15 years in the future. most vendors and banking executives think that — based on the experience of the past — the emergence of disruptive technology is close to certain. But despite the near certainty of its emergence, the disruptive nature of this type of technology means that predicting its impact is impossible.

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A l T E r N A T I v E v I E W

THE DISRuPTIvE EvENT MAy HAvE EMERgED

In July 2008, the first part of our “Banking IT In 2023” series stated that events such as global catastrophes and global man-made disasters could cause an entirely different set of scenarios. The ongoing banking crisis is significant, dangerous, and could lead to lasting change. However, interactions with Forrester’s banking clients currently show that banks are still designing target state architectures, are still planning renewal projects, and are identifying investment areas just like they did before. Perhaps we came close, but the global man-made disaster has not arrived to alter the evolution as we see it — at least not yet. If the crisis turns into a true global banking disaster then many of the business scenarios of “Banking IT In 2023” and some of the IT scenarios will most likely look substantially different in 2023.

SuPPLEMENTAL MATERIAL

Methodology

Forrester sent a questionnaire to more than 15 vendors in the telecommunications, network infrastructure, consumer electronics, application infrastructure, IT services, and banking application software space. The questionnaire touched on topics related to business scenarios 10 to 15 years in the future, the role of bank branches, and changes to customer interactions, as well as the progress of information technology — and its evolution to business technology. In a second step, we interviewed bank executives from banks in North America, Europe, the Middle East, Asia, and Australia to discuss their thoughts on banking and banking IT in 2023. Forrester is in no position to disclose the names of the participating banks. In most cases, the complete research report would have to be subject to an extensive bank internal review and approval process. In a minority of cases, even the legal department would have been involved.

Companies Interviewed For This Document

British Telecom

Fidelity National Information Services

Hewlett-Packard

IBM

Infosys

Microsoft

Misys

Oracle

SAP

Sun Microsystems

Tata Consultancy Services

Temenos

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ENDNOTES1 These earlier parts of the series summarize business scenarios in 2023 and describe how different types of

branches will make transactions more efficient and customer interactions more pleasant. They also look at customer interaction scenarios in a world of converged networks and devices. See the August 20, 2008,

“Financial Services Of the Future: Collaborative Competition Will Be The Norm” report; see the September 19, 2008, “Bank Branches Are Here To Stay, But With Key Differences”; and see the September 23, 2008, “Intelligent Devices Will Drive Ubiquitous Banking” report.

2 For a more detailed summary and discussion of related business scenarios, see the August 20, 2008, “Financial Services Of the Future: Collaborative Competition Will Be The Norm” report.

3 For a more detailed summary and discussion of the different shades of the branch of the future, see the September 19, 2008, “Bank Branches Are Here To Stay, But With Key Differences” report.

4 A branch high-tech example: Branches will use sensory technology to identify customers and to recognize their key areas of interest. After identifying the area of a product advertisement a customer is looking at and offering additional details and/or related products, information about this interaction can be stored away if the customer has been properly identified.

5 For a more detailed summary and discussion of how customers will use channels and how channels will interact with each other and “applications,” see the September 23, 2008, “Intelligent Devices Will Drive Ubiquitous Banking” report.

6 Some of these requirements are not dissimilar to those identified by Forrester. See the May 17, 2006, “Next-Generation Banking Platform Requirements Revisited” report.

7 It is obvious that this could include another way of designing mobile communication fees — lower rates, but acceptance of “near-cast ads.”

8 Effective multichannel solutions need strong cross-unit organizational support. See the August 30, 2006, “The Multichannel Organization” report.

9 At least customers, and most likely also bank internal users, will see the value and convenience of switching communication sessions from one channel to another within an ongoing channel. See September 23, 2008,

“Intelligent Devices Will Drive Ubiquitous Banking” report.

10 This scenario would come into play, if – for example – a country would not allow storing data on its citizens outside of its physical borders. See the August 20, 2008, “Financial Services Of the Future: Collaborative Competition Will Be The Norm” report.

11 Enterprise architects should evaluate Forrester’s definition of information fabric 2.0 and use it to guide their IaaS strategy. See the April 9, 2007, “Information Fabric 2.0: Enterprise Information Virtualization Gets Real” report.

12 While more and more powerful technology will make “real time” easier to achieve in a cost-effective way, IT and the business need to make sure that these different perspectives don’t seduce an IT department into designing and implementing application system capabilities without true business background. See the June 24, 2004, “Banking Real Time Equals IT Near Time” report.

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13 Collaborative competition and the industrialization of financial services drive the fragmentation of the value chain. See the August 20, 2008, “Financial Services Of The Future: Collaborative Competition Will Be The Norm” report.

14 Forrester’s target state architecture for banking supports product definition across silos as well as the industrialization of financial services. See the May 31, 2006, “The Next-Generation Banking Platform” report.

15 Some executives added that this will be the outcome if no disruptive technology will unexpectedly push SOA from its throne.

16 With Forrester’s Digital Business Architecture and the emergence of technologies supporting the concept of the banking backbone, next-generation banking platform requirements have a solid architectural basis. See the May 31, 2006, “The Next-Generation Banking Platform” report.

17 The utilities can be consortia of financial services firms charged with the delivery of one or many of those functional areas; joint ventures of banks and IT service providers; larger banks leveraging their infrastructure; as well as any kind of nonbank moving into this traditional banking space.

18 Forrester surveyed IT vendors in the banking space about their positions regarding business services ecosystems driving semantic specifications. See the March 17, 2008, “Business Services Ecosystems For Banking: The Future Is Bright And Most Likely Heterogeneous” report.

19 Forrester identified a number of emerging and planned business services ecosystems for banking. See the March 13, 2008, “Semantic Business Services Specifications Support Business Agility” report.

20 Federated SOA will work against SOA silos. See the October 9, 2008, “Building Interoperability And Federation Into Your SOA Platform Strategy” report.

21 For more on business architecture, please see the October 23, 2008, “Business Architecture’s Time Has Come” report.

22 Even when the bulk of IT is outsourced, several key functions should be retained. See the July 26, 2004, “Functions To Retain When Outsourcing” report.

23 Forrester identified a starting point for the planning of banking platform renewal. See the November 29, 2004, “End Of The Line For Vintage Banking Platforms” report.

24 Forward-looking architecture planning struggles with the fact that there is not just one future — neither on the business nor on the IT side. Scenarios provide ways to capture multiple futures and to assess their impact on architecture and application landscapes. See the August 8, 2006, “Scenarios Provide Forward-Looking EA Capabilities” report.

25 Companies have wrestled with multichannel solutions for years. Today, technology is available to build comprehensive multichannel platforms — but that’s not the main problem. See the August 30, 2006, “The Multichannel Organization” report.

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