The financial services industry has long been a hotbed of technology innovation, but as the sector struggles to recover from the credit crunch and budgets are tightened, the strategic imperatives for its IT leaders are changing.

Analyst IDC is predicting financial services IT spending across Europe, the Middle East and Africa this year will retreat to 2005-6 levels ­ – about $3bn (£2bn) ­ – so industry leaders will face challenges to remain competitive while juggling the threats and opportunities that come with new IT initiatives.

Modernisation in the sector is set to take place in an “incremental” fashion, according to IDC, as firms focus on rebuilding trust in risk management processes, compliance-led projects and doing more with fewer resources.

To some extent that is happening at Standard Life, where there is increased emphasis on using existing assets to create innovative solutions. According to group technology director Russell Irwin, Standard Life has initiated an “ideas jam” scheme, which collects an average of 400 suggestions a year from IT staff on how to better harness the firm’s technology.

“There is a risk that innovation [in financial services] could be stalled by the credit crunch, but you have to find creative ways of working with what is available ­ – new ideas don’t have to be something no one has ever thought about,” said Irwin.

“Wiping out innovation completely is a dangerous position to be in. During times of pressure, successful companies plan for the upturn, think smartly and tread carefully,” he said.

Innovation may take a low priority at cash-strapped firms, but resourceful CIOs will take action and continue investing despite the recession, said Darin Brumby, former director of business transformation at Nationwide.

“For smart executive teams, this is the time to take intelligent risks and move the savings from the downturn into innovation instead of just putting it aside for safekeeping and battening down the hatches,” Brumby said.

“It is not just about capturing good ideas, but looking at them quickly and in a way that will help push the business forward,” he added.

Integration and optimisation remain key focus areas for IT in financial services – ­ 61 per cent of banks worldwide polled by Capgemini said that acceleration of processes for bringing new products to market was a priority.

Firms will also need to improve client segmentation and retention, said Brumby, so investment in efficient customer relationship management systems will move up the sector’s IT agenda.

With so many demands on IT, the delivery of business-improving projects will require careful control, he warned.

“The talent that financial services firms end up keeping will be very stretched, so investing in staff is essential to drive innovation. If you don’t have skilled teams and high morale, the business will struggle to move forward,” Brumby said.

“It is also important to remember that you can’t do everything ­ – you have to make choices backed by strong governance, otherwise decisions can’t be made quickly and opportunities are missed.”

Over the coming years, financial services firms are likely to look at innovations around open collaboration, driving internal efficiencies, said JP Rangaswami, managing director of strategy and innovation at BT Design.

Previously CIO at investment bank Dresdner Kleinwort and a champion of wikis and blogs to capture staff knowledge, Rangaswami believes cultural changes will dictate the use of technology in finance.

“People are realising that having multiple ways of communicating makes sense, as well as being able to draw on a collaboration capability inherent in our staff, because human capital is scarce,” he said.

Innovations such as cloud computing and mobile payments also present opportunities, but they are not without their challenges, argued Rangaswami, which include increasing awareness and ensuring security and scalability needed to transform investment strategies.

Rangaswami is optimistic about the future of IT in financial services ­ – and elsewhere. While budgets have been trimmed, project priorities have been realigned, but there is more willingness to adopt open innovation models, he said.

“People claim that there has been a reduction in innovation, but I would say that some of the work that is taking place is under the radar, because the word innovation appears to be more risky than the process itself,” he said.

“You can’t take innovation completely out of the financial institution’s bloodstream, as those businesses thrive on change ­ – you just have to find alternative ways to be able to achieve that change.”

Firms banking on innovation in 2009

Co-operative Financial Services is undertaking a £500m IT-driven transformation with a new core banking platform that will ease integration challenges and introduce a multichannel capability.

Barclays has issued contactless cards to three million customers and is investing in a multimillion-pound branch development programme that includes use of touch-screen technology at its flagship branch in Piccadilly Circus.

HSBC has added mobile banking to its managed payments service platform, aimed at third-party banks and corporate customers. The bank said the investment in the system comes as a response to increasing demand for its outsourced payment services.

Visa Europe has several proof-of-concept projects in areas such as m-payments, contactless and security. The firm said its board demands innovation, but such projects are long-term strategies as they require customer adoption.

Innovation winners and losers

Winners

• Mobile banking – for channel expansion.
• Customer networking – niche projects to foster community.
• “Un-sexy” innovation – efficiency projects that improve customer experience and don’t grab the headlines, but aim to deliver results.
  

Losers

• Twitter, Facebook and Second Life projects will increasingly look like products of the first internet boom.
• Peer-to-peer lending – will remain “niche at best” in 2009.
• Advanced biometrics – will not survive spending reviews.

Source: IDC