Big Banks, Small Banks

Lee Kyriacou, head of bank industry research

Interesting piece by Meredith Whitney in American Banker today on bank stocks, basically saying that in the current weak revenue environment, large banks (which are precluded from M&A) must improve returns by getting smaller, while smaller banks must improve returns by getting bigger. I agree more or less, but there’s an additional layer of complexity. Let’s break the problem into industry issues, and then look at M&A specifically.

The industry issue is not weak revenue or even low net income – in fact, both are at or near record levels. Rather, the core issues are: (1) ROA and ROE remain well below par, (2) top-line revenue growth has been lacking, and (3) huge fixed branch costs are no longer sustainable.

The first is largely about low interest rates and high capital usage; the second about lack of loan demand and one-time regulatory “hits” to fees; the third about technology and customer behavior catching up to free checking.

These industry issues require banks – both large and small – to:
(1) out-compete for superior loan growth or fee revenue,
(2) dramatically restructure their branch costs while investing in e-channels, and
(3) reduce their excess capital.

Now let’s translate these issues to large and small banks, and then add M&A. Large banks can do all three: win lending, restructure branch cost, and reduce capital. In fact, without M&A the large banks must live or die on how well they can out-compete – some will thrive, others will suffer. The mid-sized banks that thrive will create shareholder value by turning to M&A. However, for many smaller banks, the hunt for loans and branch cost reduction may prove too difficult, and as a result the exodus of the smallest banks will likely continue.

I’ll be publishing more on the different challenges of large and small banks this quarter, and I look forward to discussing this on our free webinar Thursday at 2pm ET on trends and issues for 2013. You can pre-register online here.

The Multi-Channel Imperative

Matthew Josefowicz

Good discussion on today’s webinar about mutli-channel communication with Generali. One of the biggest challenges for insurers is that unfortunately, new channels don’t necessarily displace old ones across the board. As this chart from our multi-channel survey report shows, agents gravitate towards the most convenient channel for each task.

My key takeaways for webinar attendees today:

  • The nature of the insured/distributor/company relationship has changed due to the increased flow of information
  • Distributors and customers expect rich information, speed and convenience, choice of channels with consistent experience
  • There are no more acceptable excuses for delays, inaccurate, or inaccessible information.
  • Insurance companies are investing to keep up with these increased expectations.

Growth of IT-Enabled Capabilities and Impact on Claims

Matthew Josefowicz

Just wanted to share a slide from this week’s webinar on claims and customer experience. While modern and flexible core claims systems are at the root of improving claims experience and financial results, insurers are also benefiting from other IT-enabled capabilities when it comes to claims.

On the webinar, I presented a version of this chart from our report on the Growth of IT-Enabled Capabilities, with call-outs highlighting the impact of each of these areas on claims and customer claims experience (click the image to enlarge).

While claims systems are the critical element of improving the claims process, other data and communications investments are critical assets as well.

 

New Report and Webinar on Data Services for Insurers

Martina Conlon

Like many other industries, insurance is undergoing a paradigm shift, from operating in an age of information scarcity to one of information super-abundance. Old data is moving faster, new data is proliferating and internal data is more accessible. Insurers no longer need to devote significant resources to gathering data about prospective risks and claims. Instead more data than ever is now available on-demand, and at lower cost, from commercial sources. In addition to claims, credit, consumer and cost information, we can now collect information on buying behaviors, geospatial and location information, social media and internet usage, and more. Our electronic trails have been digitized, formatted, standardized, analyzed and modeled, and are up for sale. As intimidating as this may sound to the individual, it is a great opportunity for insurers to use this data and insight to make more informed and better business decisions.

In our new report, Novarica Market Navigator: Data Services for US Insurers 2012 (Q1), we profile 15 vendors that offers a broad range of data to US insurers. More and more frequently, the CIOs we work with are being challenged to incorporate this external data into core systems and BI environments. This report is designed to give them an overview of the types of data, cost models, and technical details of major services providers.

I’ll be presenting and discussing our research in this area on a webinar on Monday, March 26 at 1 pm ET. Pre-register here.

Insurer IT Spending Up Again in 2012, Policy Admin on the Menu for 1/3 of Insurers

Matthew Josefowicz

I’ve just published our most recent poll of our Insurance Technology Research Council, which surveyed 132 CIOs and equivalent executives about their budgets and projects for 2012. The full report is here.

Despite the recession, insurer IT spending will not slow in 2012. Insurers continue to focus on delivering badly-needed business capabilities to support growth, increase competitive parity, and improve operational effectiveness. Most CIOs have a clear-eyed self-assessment of the state of their internal systems — on average, most rate nearly half of their systems below ‘acceptable.’ It’s the need to improve these capabilities rather than external factors like the economic recession and compliance pressures that are the primary drivers for most insurers’ IT budgets and plans.

Among the other major findings of the report, more than one-third of insurers are either in the middle of a core policy administration system replacement, or planning one for 2012. Claims systems and billing systems have similar levels of activity. While agent and customer portals and business intelligence systems are less likely to be replaced, nearly half of insurers are planning replacements or major enhancements in these areas.

As for mobile, tablets, social media, and cloud, they are still primarily in limited deployment or pilot programs for most insurers, where they are deployed at all, and most insurers see these as ancillary to the major strategic projects that consume IT budgets and management bandwidth.

I’ll be will presenting and discuss the findings of the report on a 30-minute webinar on Tuesday, October 25 at 1pm ET. Click here to register.

Policy Admin Systems: Recent Work and Core Systems Summit

Matthew Josefowicz

For the third year in a row, policy administration systems continue to be the highest priority area for insurer CIOs. Speed to market, distributor service, business intelligence capability, and optimizing internal workflows all depend on the capabilities of these core systems. Over the past three years, Chad Hersh and the rest of our principals been involved in dozens of needs analysis, shortlisting, vendor evaluation, and project planning engagements with our insurer clients around this area.

On April 14 and 15, Chad and I and the rest of the team will be co-hosting a 2-day summit on Core Systems in Chicago. This is a co-production with CDM Media, who also partners with us on the CIO Insurance Summit in the fall. The Core Systems Summit will consist of a full days of panels and workshops with an opportunity to learn from us and your peers about embracing best practices and avoiding pitfalls in these critical projects.  One day will be for P&C, one day for life/annuity.

Registration is $395, but we have a limited number of free passes for our clients and contacts. If you’re interested in registering for this event, please let me know or contact Rob Simms at CDM Media directly at rob.simms@cdmmedia.com. We’re looking forward to a great event.

For some of our recent material on Core Systems, see:

Reports

Webinars

Columns

Novarica Banking Blog

Madi mantha

Madhavi (Madi) Mantha, Head of Banking Research

Since launching the banking practice in mid-October, we’ve spent time speaking with both former and current bank CIOs/technology execs as well as their business counterparts about the challenges and opportunities they face during 2011. You can learn more about the outcomes of these discussions by reading our newly published research report “Retail Bank Technology Trends for 2011”. The report also draws on the results of the Novantas Multichannel Preference Study, a proprietary survey of over 2,500 US banking consumers, conducted in Q4 2010. We’ve also just published an executive brief (“Consumer Usage of the Mobile Banking Channel”) that hones in on one of the trends from this report – namely the rapidly growing usage of the mobile channel and its role within a broader multichannel strategy.

I’ll be presenting key findings from this research during a free webinar on Tuesday, January 25th at 11 am EST. Register online at: https://www1.gotomeeting.com/register/740609265