Industry Environment.

IT expenditure shows further increase in banking and retail sectors.

Both banks and retailers invested more heavily in information technology during the period under review. This observation is underpinned by a study published by the market research firm Pierre Audoin Consultants (PAC) in August 2016. According to the data published by PAC, global expenditure within the banking sector rose by 3.8% in the course of 2015 to 2016, while the corresponding year-on-year increase for retailers was 3.5%. Investment spending by banks rose to €368.7 billion in absolute terms, while expenditure by retailers grew to €150.9 billion. In both industries, growth rates within the category of Software and Professional Services were significantly higher than those in the area of Hardware.

Global IT Expenditure in the Banking Segment.

€ billion

Global IT Expenditure in the Banking Segment (bar chart) Global IT Expenditure in the Banking Segment (bar chart)

Global IT Expenditure in the Retail Segment.

€ billion

Global IT Expenditure in the Retail Segment (bar chart) Global IT Expenditure in the Retail Segment (bar chart)

Banks: Change and investment driven by need for operational excellence and interface optimization.

Despite the current low interest rate environment around the world, the profitability of the global retail banking industry has improved compared with 2015. This was the conclusion reached by the Boston Consulting Group (BCG) following an assessment of its global banking pools, which are based on data from 2,100 banks in countries all over the world. These higher margins achieved by the industry are supported by consistently lower risk costs. However, the regional picture is very varied.

BCG's assessment shows that banks need above all to find solutions to concerns about the potential erosion of their customer relations in light of the trend towards digitalization, the emergence of new competitors within the industry, and the growing expectations of customers in terms of the service they receive.

Europe's retail banks continue to recover, albeit at only a moderate pace. Meanwhile, pressure on costs remains intense as a result of low interest rates, higher capital requirements, and regulation. These conclusions are based on the 2016 Banking Radar study produced by A.T. Kearney. One consequence of this situation is the ongoing contraction of branch networks. The number of branches is falling by around 2% per year. Overall, it has fallen by roughly 13% since 2008, and continues to decline.

The study highlights marked differences in regional performance, including among European banks. A.T. Kearney concludes that banks need to keep working on their cost position and that this would go about half way to delivering the required improvement in their overall performance. At the same time they need to increase the average income generated per customer.

A.T. Kearney recommends three basic strategies for European banks. The first of these is to transform their business model for the digital era, a challenge that involves maintaining a strict focus on innovation, breaking down silo mentalities, and cooperating with FinTechs and other external providers to prevent any further erosion in customer relations. The second step is to transform, simplify, and harmonise the structure of all banking processes at the interface with customers. Finally, the third strategy is to work towards an operating model that reflects best-in-class cost efficiency. Taken together, these measures would create a strong governance framework and provide an end-to-end perspective on actual costs. Crucially, in the view of A.T. Kearney, the banks also need to drive forward the digitalization of front-office systems into their middle- and back-office systems, and to centralize or nearshore/offshore (and where appropriate outsource) purely operational processes. Finally, the report stresses the vital importance of greater cooperation between retail banks and IT providers in light of the growing need to simplify IT systems and the challenge of dealing with legacy infrastructures and system integration.

Retailers: Linking online and offline sales channels.

International retailers face two key trends: the fact that today's consumers have permanent access to the internet through mobile devices, and the need to serve those customers across every potential sales channel. In a study entitled The Internationalization of Retail, Planet Retail expects retailers to focus on measures to link their online and offline services in order to coordinate the customer's physical and digital experience more effectively.

One example of the way in which physical and digital channels can be interwoven is the Click & Connect service. Consumers order goods from a retailer online and then pick them up from the store. This method also increases the frequency of customer visits to the branch.

Specialist retailers are increasingly turning to mobile tablet-based solutions that allow in-store sales assistants to retrieve information and offer comprehensive advice to customers. At the same time, the devices can be used as a mobile checkout.

Big data solutions and mobile technologies are emerging as key sales tools, above all in terms of the personalization of services.

Within the global retail market, regional players are currently achieving dynamic growth, while global retailers continue to drive ahead with their expansion strategies.

According to Planet Retail, the fastest-growing retail formats are discount and convenience stores.