The last year or two have been some of the most difficult on record for IT teams at financial institutions, as they have sought to learn the lessons from the banking crisis and comply with the raft of new regulations that are coming in post-crunch, while dealing with reduced budgets and impending revolutionary changes, such as the SEPA Direct Debit payment scheme and the rise of mobile banking. New technologies like cloud computing have also demanded the attention of IT teams across the sector. Neil Ainger looks ahead at what the challenges in 2010 are likely to be, as we move into a new decade and hopefully a strengthening of the recovery that has already begun

A new decade is always a time for optimism and after an extremely difficult couple of years for IT teams at banks, insurers, stock exchanges and other financial institutions, I thought it might be nice to do a bit of future gazing and see what we can expect in the teenies, so I have compiled a number of opinions here from various industry representatives, consultancies, trade bodies and vendors. If you have any feedback on the list please contact me via the blog on our website or on Twitter at http://twitter.com/FSTechnology. Submissions to the print letters page are also welcome addressed to me at neil.ainger@fstech.co.uk.

As can be seen from the various channels referenced above, social networking will obviously continue to make its way into the business operations and marketing strategies of financial institutions. Indeed the consultancy PricewaterhouseCoopers (PwC) and the vendor SunGard have even launched their own predictions for the year ahead, covering the economy, technology and so forth, on Twitter, illustrating the expansion of new media and marketing channels - see http://twitter.com/stay_ahead and every Tuesday on http://twitter.com/SunGardFS for the trends series.

Gartner has also produced its top ten strategic technologies for 2010, defining these as having 'the potential to significantly impact firms by disrupting their IT or business processes'. They could also require large investments or cause late adopters to fall behind, says the consultancy. The top ten techs are: Cloud computing; advanced analytics to optimise and predict needs and markets; client computing; green IT; reshaped data centres to improve performance and total cost of ownership (TCO); social computing; security activity monitoring to spot suspicious behaviours; cheaper flash memory providing new layers of storage with less heat and space; virtualisation for backup and flexibility; and mobile applications.

Of course, in order to be able to afford any of these new technologies, financial institutions outside of the wholesale banking arena, which has generally done well in 2009 off the back of government stimuli, will need to see an upturn in the economy which will generate money for new investments. With France, Germany, the US and even the laggardly UK recently coming out of recession this seems likely although it'll be a slow recovery. Dr Klaus Wiener, chief economist of asset manager, Generali Investments, is anticipating global economic growth of slightly more than three per cent in 2010 (see his comments overleaf) and he is not alone. Eric Siegloff, head of strategy and asset allocation at ING IM is also bullish about growth prospects citing emerging market equities as a strong area for investment banks in 2010 but, like Klaus, he sees global growth in the general economy interspersed with particular regional problems: "Our core theme is that investors should seek high, sustainable growth, complemented by yield support in what we expect to be a low-growth world for a few years [especially in the West]," he says. ING believes the biggest risks in 2010 will be associated with the withdrawal of quantitative easing; the move to higher interest rates; oil price volatility; impetus for financial sector regulation; and how governments deal with their debt - any and all of these could threaten the nascent recovery.

IT spend
According to Axel Pols, chairman of the European Information Technology Observatory (EITO) Task Force, an organisation supported by the EC and the OECD, who work with PAC, KPMG and many other institutions to provide a clear view of the Information and Communication Technology (ICT) markets in Europe, tech spending in Britain will grow slightly to EUR135.7bn due to the economic upturn; strong corporate demand as the investment backlog in projects is cleared; and a boom in mobile data services. This is against a contraction of 2.4% in 2009 to EUR135bn, so the recovery is still mooted. Revenues in information technology specifically (hardware, software and services) in the UK will rise by 0.3% to EUR65.5bn. Outsourcing service providers will also benefit with a growth in revenues of 4.1% to EUR23bn forecast for 2010.

The recently released fourth Capgemini Global CIO Report 2009 illustrates the tough times technologists faced last year with its 490 face-to-face interviews with CIOs in 14 countries, representing all industries, including financial services, showing that the majority (70%) faced an average fall of 15% in their IT budgets last year. Measures taken to mitigate budget drops included renegotiating supplier contracts (67%), outsourcing services (45%), accelerating projects with high business impact (55%), giving priority to projects with an early return on investment (55%) and reorganising the IT function (41%). Hopefully things will get better in 2010. A selection of opinions from across the industry follows:

Dr. Klaus Wiener, chief economist of Generali Investments
Generali Investments is the asset-management company of the Generali Group. About 370 employees worldwide manage assets of approximately EUR290bn. We are, therefore, key players in the financial markets and can say with confidence that the threat of systemic crisis is long gone, but second-round effects of the crunch persist. In the banking industry there is the danger of further write-downs and a lower level of capitalisation, leading to reduced credit availability. Recent examples with Greece, Ireland, and Dubai World have made clear that entities with large refinancing needs could face problems to secure funding at reasonable costs. In addition, financial and monetary policy in 2010, particularly stimulus plans, will have to steer a less expansive course in order to avoid risks and side effects, such as inflation. Financial markets can expect less dynamic growth as a gradual exit from government support means that 2009-like returns will be out of reach.

Investment-grade corporate bonds will be the most attractive asset class in 2010, but government bond yields are expected to remain low, which is a particular worry for UK-based firms who have to invest heavily in them under the FSA's new liquidity rules (see page 44), potentially reducing the amount of money available for technology investment. For the year ahead we anticipate global economic growth of slightly more than three per cent.

John Colley, CISSP, EMEA managing director of non-profit security education and certification body (ISC)2
Companies are set to stumble into new areas for putting data at risk with the do-it-yourself accessibility of cloud computing and a recovering economy fuelling new initiatives before they can be properly resourced. After the cutbacks in 2009, most financial institutions will be eager to re-engage business initiatives. They should beware of rushing in without giving proper consideration to the security requirements however, especially since security teams and projects have been pared back to minimum requirements and it will take time to build them back up.

Adding to this dynamic is the concern that cloud computing will make it very easy for people to get around the internal limitations of their IT department. An Autumn 2009 poll of over 300 (ISC)2 certified security professionals, indicated that more than 92% anticipate employees will circumvent the IT department to trial Software-as-a-Service (SaaS) or cloud-based solutions. I advise information security professionals to put more emphasis on user accountability. It has never been enough to secure the systems; data is manipulated by the people that use it and they are the ones introducing much of the new risk of its compromise. The good news is both businesses and individual users trusting cloud services will not tolerate data compromise for long. This will force them to prioritise security and in turn positively impact priorities for developers and in-house users alike.
• John spent 20 years working in software and systems development before moving into information security. He has held posts as head of risk services at Barclays, and been group head of information security at RBS.

Daoud Fakhri, financial services analyst at Datamonitor, and author of the Non-traditional Players: Retail Banking report
I believe the negative publicity surrounding the UK's top five High Street banks in 2009 will not lead to a loosening of their stranglehold on consumers, as new players entering the market have largely missed the boat. The best time for non-traditional players to launch would have been early 2009 in the aftermath of the banking crisis, when customer dissatisfaction was at its height. Datamonitor believes customer inertia will be the single biggest hurdle affecting the likes of Metro Bank, Tesco and Virgin, all of whom are due to launch full banking services this year, after the forced sale of Northern Rock and parts of RBS and Lloyds Banking Group.

New entrants such as Tesco and Virgin will hope to benefit from the 'halo effect', where a positive perception of a retailer's main activity feeds through to create a positive perception of its financial operations, especially in the lucrative mortgage and current account markets. Both businesses will be aware though that it could work in reverse and any difficulties could damage their reputation across all their other business areas.

The accessibility of the current account market in the UK is very small with the top five banks continuing to dominate, accounting for two thirds of the market in 2009 despite the banking crisis. Our latest figures show Lloyds Banking Group, including HBOS, top with 27% of the market; RBS/NatWest with 19%; HSBC on 14%; and Barclays on 11%. Other major players include the Nationwide Building Society on 9%; the combined Alliance+ Leicester /Abbey operation, under the Santander name, on 10%; and First Direct, part of HSBC bank of course, on 2%; with others accounting for 8% of the market.

Despite being established for 20 years and regularly scoring highly for customer service, First Direct has still only achieved a 2% market share, illustrating the difficulty of breaking into this market. Egg and Standard Life, who launched in the last decade, offered a 'new way of banking' with convenience as their USP. They were both backed by established financial institutions but failed to break consumer inertia. As a result both business have been sold off by their original owners and incurred sizeable losses over the course of their lives.

Tesco, Virgin and Metro Bank do have some advantages over the top five. Developments in IT over the past decade mean new entrants won't face the same costs and barriers which affected the last generation who attempted to challenge the top five. In particular, Tesco has become a market leader in data mining so is far better placed than the traditional players, to offer what customers want. A good reputation for customer service and an extremely successful loyalty scheme combine to help give them an edge. Similarly Virgin has a history of strong branding across several consumer sectors and as such has created brand warmth. Established banks can learn from these practices and, in the coming fight, should prioritise: Rewarding customer loyalty; enhancing data mining to position themselves better so they know what the customer wants and can then deliver it; and finally traditional players need to convince customers they are on their side, via better branding, etc.

Barbara Ridpath, CEO, International Centre for Financial Regulation (ICFR) trade body
There are still two major challenges in the year to come. The first appears on the macroeconomic front: how to turn off the tap of extraordinary support measures and contain fiscal deficits without choking off the nascent recovery. The second challenge will be to achieve consensus on some of the thorniest regulatory areas still outstanding post-crisis, while getting the hard graft of the regulatory details right. I intend here to provide an overview of the regulatory highlights of 2009 and an outlook for financial regulation in 2010.

At first the policy response last year was concentrated on efforts to stabilise financial markets and prevent an economic meltdown of epic proportions. Hence, policy was often made on-the-hoof, with many decisions being taken at a time when the legal and institutional framework for such decisions were themselves in a state of flux. Conflicting aims were sometime apparent - for instance, encouraging the banks to rebuild capital ratios often seemed at odds with the stated desire to support economic activity by increasing available bank credit. As we moved through the first quarter, we began to get a more measured regulatory response. In Europe we had the landmark de Larosière Report, in the UK the influential FSA Turner Review, and the US Treasury proposals of Timothy Geithner. By April, the G20 gave a signal that there was a broad consensus over the need to act decisively and jointly on a number of fronts. With immediate effect, the G20 created the Financial Stability Board (FSB) from the former Financial Stability Forum, which is now working hard on recommendations ahead of the June 2010 G20 meeting. Membership of both the FSB and the Basel Committee on Banking Supervision was also expanded to include all G20 members, increasing their legitimacy and authority. A review of the Basel II capital adequacy rules will also be forthcoming. Further national and regional initiatives began to pour forth in Q1 09. As an example, in the UK alone these included: legislation on a new Special Resolution Regime, the Foot Review on offshore financial centres, the Walker Review of corporate governance, and the FSA review of liquidity (see HERE for more and refer to our feature on page 44 of the Jan-Feb2010 print edition, for more on this).

European legislators were also extremely active with new legislative proposals to reform the regulatory architecture, in particular creating a European Systemic Risk Board (ESRB) with a core role for the European Central Bank, and transforming the three existing regulatory coordination bodies into European regulatory agencies: the European Banking Authority, the European Securities Market Authority and the European Operational Pensions and Insurance Authority. This was groundbreaking in that it gave some authority for these bodies to question decisions at the national level, although significant constraints were added to this before its approval at the most recent European finance ministers meeting. Political haggling and philosophical differences remain potential barriers to sensible cross-border rules for the sector in Europe, and indeed globally, but hopefully these obstacles can be avoided in the year ahead.

2010 will remain a challenging time as we start to iron out detailed proposals. The regulatory initiatives fall into three broad categories: efforts to address the early identification of systemic risks, often called macro-prudential regulation; efforts to improve regulation and supervision so that individual institutions are less likely to need public funds in future (this includes the current discussion over separating retail deposits from 'risky' investment banking - see HERE for more on Obama's ideas); and structural reforms of the regulatory architecture. The latter involves both where responsibility for systemic risk monitoring should rest, and whether changes need to be made to unify or separate regulation and supervision of banks, insurers and markets. It should make for an interesting year ahead.

Fred Bär, Managing Director for Euro Services and Channels, VocaLink
The payments field has two major challenges in 2010 - the Single Euro Payments Area (SEPA) Direct Debit (SDD), due to become mandatory in November 2010, and the Payment Services Directive (PSD). In regard to SEPA it is continuously anticipated, but with no clear end date it is not happening. In my view, the regulators have to set a completion date, in order to end the uncertainty in the market. The market needs to know when they can expect to start to earn some money with SEPA. At the moment it is difficult to justify investment in double infrastructures. One bank on its own cannot do this. The industry as a whole should move at the same time and become compliant.

According to the European Payments Council (EPC) some 2,500-3,000 banks adhere to SDD now. This is approx 50% of all banks in Europe and an important first step in getting SDD off the ground, but more needs to be done and big billers, such as telco and utilities firms need to come on board. As a provider VocaLink is seeing slower growth in SEPA transaction volumes than expected, but we are still confident that SEPA will be achieved, be it three to four years later than originally envisioned.

In regard to the PSD, there has been a lot of speculation about the consequences for competition. Although inevitably some countries are late with the implementation, we should expect to see the first effects this year. It is relatively easy to set up a payment institution and we envisage dozens of new entrants in Europe. You should be prepared for some surprises with new entrants showing up in unexpected places. They might take away some of the payment business from banks or there might be alliances between banks and newcomers. Things are certainly in flux.

Parth Desai, CEO, ACE Software Solutions (more comment on payments)
Legacy payment processing technology hasn't been designed to cope with globalisation and multi-channel cross-border payment options, or new standards and regulations such the Single Euro Payments Area (SEPA) and it is starting to buckle under these new demands. This is why I believe we'll see the emergence of second generation payment processing technology in 2010, which utilises intelligent automation to meet the needs of a rapidly evolving market.

The technology uses the latest innovations in software architecture and a development like service-oriented approach, responding to processing changes quickly, safely and cost-effectively via agile rule-based design. It can also provide greater visibility and control of all payments operations on a consolidated, end-to-end basis and better support enterprise governance, compliance and risk management initiatives.

Rule-based design combined with intelligent natural language processing offers significant value and possibilities like automatic repairs and context based routing and processing. We estimate that a second generation intelligent payment processing platform could save a mid-sized bank up to £2 million in operational costs while generating £6 million in revenue. In future, turning payments processing from a cost centre to a revenue generator will make the technology investment case more attractive.

Mark Bouchea, director of standard settlement instructions (SSI) product management at Omgeo (comments on data management & reference data in the trading environment)
The importance of effective data management is increasing with greater demand from investors for real-time information across different jurisdictions. In 2010, compliance with industry and local market practices and adhering to global market standards established by the Securities Markets Practice Group (SMPG) will continue to be paramount in ensuring the quality of trade data and integrity of settlement instructions.

Effective data management is crucial to ensuring the efficient running of the middle office and recently was named as the top priority for operations by fund managers who use our global standards and services. Our saying at Omgeo is: if you put rubbish in then you get rubbish out and therefore we believe that 2010 will see trade management service providers looking to tighten the validation rules around settlement instructions to initiate a more unified and streamlined process. This will create a trade processing environment with fewer fails. More traceability post-crunch will also be a key requirement.

Bad quality data is one of the most frequent causes of failed trades, along with other reasons such as insufficient stock. As a result, the more effectively fund managers can manage their trade data, the less likely they are to experience failed trades, which reduces risk and increases efficiency in the back and middle office.

Mark Akass, Chief Technology Officer, BT Global Banking & Financial Markets (comments on cloud commuting)
In spite of the stabilisation seen in markets and economies in the second half of last year, financial firms' IT budgets remain tight going into 2010. Many firms are exploring cloud-based services as an opportunity to consolidate resources and cut costs, while at the same time providing the business with capabilities that increase competitive advantage.

In simple terms, cloud services move the processing capabilities performed in an enterprise data centre to managed service-provider facilities accessed through a network. Cloud services can be implemented on a dedicated basis for a single enterprise or on a shared basis across an industry.

Cloud services have been shown to save money when they can be tailored to a firm's or industry's specific performance, security, and operational quality requirements. Quite simply, they can save you cash, which is why I believe we'll see further uptake in 2010.

Paul Johns, vp of global markets, Complinet (comments on when the next crisis will hit)
The next financial crisis will strike within the first half of this decade. That's according to three quarters of the world's senior banking and compliance officers polled recently as part of our Forgotten Crisis? survey, which questioned 232 global compliance offers, 34% of whom were from the banking sector, 9% from insurance; and 32% from securities. Our survey also found that the majority are predicting another significant economic downturn before 2015, with 77% saying recent regulatory reforms were insufficient to avoid another crash similar to the 2008 collapse. "The continuing lack of company transparency and accountability to the markets and the public makes the possibility of another crisis almost assured," said one of the people questioned.

The Complinet survey also showed that only 40% thought their firm had changed its approach to compensating employees based on a better understanding of risks associated with the business. And 91% recognised that the current bonus culture is resented by those outside the financial services industry. But the survey also showed that 62% of senior management believe they're putting the right controls in place. I believe the key message to take away from our survey is that financial institutions must ensure they have enough compliance resource to navigate a way through the regulatory maze and reduce the risk of falling foul of the new post-crunch rules.

Scott Herren, general manager and vp, EMEA, Citrix (comments on desktop virtualisation)
This year is likely to be the inflection point for desktop virtualisation. It has been estimated that desktop hardware and software acquisition expenditure typically accounts for only 20-30% of the total cost of the device, while the remaining 70-80% consists of ongoing IT management. Desktop virtualisation removes the need to repeat numerous, maintenance tasks to ensure all desktops within an organisation are up to date with the latest patches, updates and upgrades. 2010 will be the year for a little less conversation and more action.

The barriers to implementing desktop virtualisation have been cost and functionality, coupled with the recession and the wait for Windows 7. A growing realisation that desktop virtualisation can be used to extend the useful life of a device (ostensibly by turning it into a thin client) means that the jump to desktop virtualisation can be accommodated within most financial institutions' PC refresh cycle. Now that Windows 7 is available and economic recovery has started, I believe the tipping point for mass adoption of desktop virtualisation has arrived.

Dr John Bates, founder and general manager of the Apama division of Progress Software (gives his predictions on the future of capital markets)
In the aftermath of the economic crisis and with greater scrutiny placed on financial institutions, 2010 will see a dramatic uptake in the use of technology for regulatory compliance and enforcement. Market participants will be forced to deploy better trade monitoring systems particularly as the debate over the use of high frequency trading rumbles on. Dark pools will be forced to become more open and regulators will take a greater interest in examining everything from policing trading in real-time to the use of social media and IM within trading.

We will see more cloud-based Software as a Service (SaaS) moves and hosted services, particularly in the data centre, for algorithmic trading and risk management applications will become the major method of deployment. Hedge funds in particular will be key adopters of hosted trading systems as a way of dealing with the operational and cost challenges caused by the financial crisis. Additionally, 2010 will also be the year emerging markets such as Brazil, India and China become growing forces in global trading circles, with high growth rates as they begin to scale up adoption of algorithmic trading technology and increase interest in cross-border trading strategies. For example, the Brazilian exchange, BM&FBOVESPA, recently opened a London office as part of a push to encourage greater foreign participation in its rapidly-growing electronically-driven equities and derivatives markets.

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