21 st Century Capital Markets

1. Emerging technologies in retail banking • Technology as a provider of business value 21st Century Capital Markets Datamonitor Ed Blomquist, Lead Analyst FST

2. Agenda • Dramatic changes in retail banking • Future front office technology • Future middle ware technology • Future back office technology

3. Industry vision 1. Rapidly changing regulatory demands The next 5-10 years will be characterized by:

4. Industry vision The next 5-10 years will be characterized by: 2. More sophisticated consumers • Internet has forever changed: • Customer service model (internal – how banks view their customers) • Customer expectations (external) – real-time account management, origination, choice of electronic/face-to-face • Customers are more brand/ experiential focused • Branch renewal • Transactions give way to service-sales “The maturity of transactional banking services in the twenty-first century will place downward pressure on interest income and transaction fees, driving the need to understand customer profitability and risk more accurately, as well as raise customer satisfaction and loyalty.”

5. Industry vision The next 5-10 years will be characterized by: 3. Accelerated expansion of traditional retail banks Growth of “Allfinanz” or “supermarket” institutions New Business Lines: Direct banking Brokerage Cards/ Payments New Markets “Market deregulation will have the greatest impact on IT spending among Asian banks over the next five years.”

6. Industry vision The next 5-10 years will be characterized by: 4. Emergence of new competitors • Regulation in banking and customer demand for low–cost transaction services will increasingly driving retailers to acquire customer deposits and provide services • Postal services spreading to developing/third world as infrastructure costs relatively low • Deposit growth will continue, but shift to services ICICI looks overseas with UK Internet bank launch ICICI Bank, India's largest private bank, is launching an online account in the UK offering customers a 5.4% rate on savings.

7. The future vision of banking technology As banking technology begins undergoing another incarnation, banks are at last able to bridge the gap between business needs and IT delivery, rather than be subject to constraints due to the limitations of the technology. With the advent of the service oriented architecture (SOA), banks need to understand how to take advantage of the benefits it can provide and how to make the transition from their existing architecture with the minimum disruption. Digitalization of data Client/server network Internet/ Web services SOA? 1960/70s 1980s 1990s 2000s The future

8. The future vision of banking technology Banks are honing their future technology vision: operational excellence lies at the heart of ensuring future profitability

9. Agenda Future • Multi-channel delivery with employees focused on sales/ relationships, servicing/support through automated channels • Mobile and contactless payments • Access to payments 25/7 across all channels • 360 degree view of customer across all products • Profitability analysis and segmentation • Integrated • Customer-defined • Automated and dynamic taxonomy • Internal/Auto fraud/ claims, ID theft • Services Oriented Architecture • Reference/ Event driven (Underwriting) • Distributed/ grid computing • Establishment of an integrated back office and core systems, reusing data and processes • Dramatic changes in retail banking • Future front office technology • Future middle ware technology • Future back office technology

10. Multi Channel integration Single view of customer across the enterprise Channel presentation Email Branch ATM Phone Internet Channel-specific process customization Change of details Statements Loan origination Bill payment Account opening Compliance Channel-agnostic processes Process integration platform Common channel services Application server platform Operational customer database

11. Datamonitor – Global Banking Survey

12. Banks progressing towards predictive customer approach FULL INTEGRATION ACROSS CHANNELS AND PRODUCTS Approximate position of visionaries ANALYTICAL/ DATA DRIVEN CUSTOMER SERVICE Retail Banking industry average MULTIPLE CHANNELS, SOME BASIC INTEGRATION PARALLEL CHANNELS BRANCH RENEWAL Channel Sophistication MULTIPLE, SILOED CHANNELS DIRECT BANKING TRADITIONAL/ TRANSACTIONAL BANKING SINGLE CHANNEL BANKING Bank to customer relationship PREDICTIVE REACTIVE ACTIVE 1990s FUTURE 2000s

13. Branch renewal execution A “component-based” approach to branch renewal will enable a tailored branch offering Remote advisors Retail services (coffee Shop) Self-service devices \ Tailored branch offering Greeters In-branch advisor Teller positions Product specialize

14. Thin Client or Hybrid Client Hybrid thin client Thin client Branch Client server Branch server/LAN Browser Browser Interface The internet / WAN Common services Application server platform Operational customer database Back office Credit cards Other processing Accounts Loans Product factory Maintaining and managing software stored on a host of individual desktops will rapidly eat through IT budget. Thin-client / Hybrid client offers an alternative for any company looking to reduce total cost of ownership and offer bespoke branches “I see thin client as one of the main disruptive technologies – in the future virtually all desktops will be thin client” CIO Tier 1 Euro bank

15. Launching mobile banking services • Device consolidation will drive a change in customer’s interaction with banks - The Internet and the mobile phone are converging leading to mobile data services • SMS / WAP / Java – Banks have not focused on one common technology but there are success and failure across all channels – UK experience with WAP • Rapid Banking: People demand efficient / cost effective solutions – readily accessible 24/7 • SMS alerts • Payment ability • Balance checks • Portfolio aggregation • M Investing • M Marketing • Make banking cool: banks need to adopt a retail focus to make customers engage – Standard Bank in South Africa launches mobile bank with MTN “Most efficient banking service in SA”

16. Security is the main concern Which do you consider to be the most important inhibitors to implementing a mobility solution? First Direct is launching full mobile banking solution, Richard Kimber, chief of First Direct, said: "It is as secure as we can make it and, yes, I will use it when it is launched. We have had text banking for a while and this is a logical extension."

17. Fraud is on the rise • Losses from Web banking fraud - which are mainly the result of phishing scams where customers are duped into disclosing personal financial data - rose 90% to £23.2m in 2005, from £12.2m in 2004 • The introduction of chip and PIN technology has helped cut credit and debit card fraud for the first time in a decade, but organised gangs of fraudsters are now increasingly targeting the Web. • “Phishing” emails continue to abound, and despite intense publicity and media coverage of the subject, a small number of consumers are still falling into the trap of responding to them; • “Pharming” scams, fraudsters hijack domains and secretly redirect users to fake sites to gain their log-on and password information; • Trojan horse downloads embedded into emails or websites, which then collect log-on and password details across websites from online banking to other accounts such as Amazon and Paypal.

18. Banks embarking on anti-fraud initiatives • Lloyds TSB has declared pilot trials of a keyring-sized access code device for two stage authenticating Web banking customers an unqualified success; • Barclays in the UK is now offering discounted antivirus software in a bid to secure customers’ computers against spy-ware and to alert them to potential pharming websites; • Alliance & Leicester has set out plans to introduce two-factor authentication for all Internet banking users by 2007. • Dexia providing USB card readers – this is the future for online banking • Biometric technologies such as fingerprint or retina scans are still in their infancy, but present an interesting opportunity to reduce fraud to an extremely low level.

19. Contactless card payments = now MasterCard PayPass contactless payment The key fob is equipped with a RFID chip and will enable customers to make purchases at participating merchants by tapping a PayPass-enabled terminal. The purchase is then automatically debited from the cardholder's chequeing account. Wayne Malone, SVP of transaction innovation, Citibank, says: "With the Citibank MasterCard PayPass, there's no fishing around for your wallet or waiting for change. It's safe, fast and incredibly convenient." • This is already being used in the U.S. and in U.K. • Far faster than either cash or credit-card payments – think of those supermarket queues • Oyster card – used on the Tube network in the future accepted in shops and cafes – instantly creating one of the largest deposit banks – 10 million accounts. • Datamonitor expects this to be a significant development in banking payments.

20. eWallet Payment Solutions = future • Key Features • Wallet deployed on the handset/phone/PDA • Over the air download of applications – Java seems favorable • RFID in device • Enablers • Handsets with phone memory & processing power • PDA & Smart Phones • J2ME phones • Software Download, storage & execution on the phone • Colourful display enabling icon based execution • IR/ Bluetooth – proximity capability Issuer Server Multiple services eWallet payment HTTPS over wireless data data £

21. Already in practice in Japan DoCoMo has brought together online content and contactless payment functionalities into one handset The key behind DoCoMo’s i-mode FeliCa proposition is the bringing together of its own Internet software with a contactless payment facility from Sony.

22. Agenda Future • Multi-channel delivery with employees focused on sales/ relationships, servicing/support through automated channels • Mobile and contactless payments • Access to payments 25/7 across all channels • 360 degree view of customer across all products • Profitability analysis and segmentation • Integrated • Customer-defined • Automated and dynamic taxonomy • Internal/Auto fraud/ claims, ID theft • Services Oriented Architecture • Reference/ Event driven (Underwriting) • Distributed/ grid computing • Establishment of an integrated back office and core systems, reusing data and processes • Dramatic changes in retail banking • Future front office technology • Future middleware technology • Future back office technology

23. Business intelligence continuum Gathering, analysing and utilising data should be an automatic and continuous exercise

24. Intelligence flows through the bank Email Branch Wireless Phone Internet Intelligence Channel Server (XML portal – J2EE) BI Tools (Reporting, Data analytics) BPM Dashboard Customer Relationship Analytics Operations Analytics (HR, Finance, Risk) Supply Chain Analytics BI Application Development Platform Analysis Server and Rules Engine Data Warehouse Data Integration Server Channel presentation Email Branch Wireless Phone Internet Channel-specific process customization Change of details Loan origination Bill payment Statements Account opening Compliance Channel-agnostic processes Process integration platform Application server platform Process monitoring Process orchestration Process analysis Operational customer database Middle office product-agnostic processes Product definition Pricing Doc mgmt Commissions Workflow GL Process integration platform Process integration platform Product-specific processes with reusability potential Processing Loans Credit cards Accounts

25. Banks know BI is key to success In which of the following areas of your business will IT be most critical in 2010? Customer relationships: channel intelligence and sales and marketing are the areas where banks feel IT will make the most impact over the next five years. Customer Lifecycle: Tracking and recording every customer interaction to develop a lifecycle profile – this then facilitates intuitive marketing –right product to right customer at right time Command of information: The importance of accurate, timely and appropriate information is huge. Improving customer retention depends on it, maximising sales potential and customer satisfaction rely on it. Banks are sitting on a wealth of information about their customers, especially current account holders, yet most do little with this data.

26. Agenda Future • Multi-channel delivery with employees focused on sales/ relationships, servicing/support through automated channels • Mobile and contactless payments • Access to payments 25/7 across all channels • 360 degree view of customer across all products • Profitability analysis and segmentation • Integrated • Customer-defined • Automated and dynamic taxonomy • Internal/Auto fraud/ claims, ID theft • Services Oriented Architecture • Reference/ Event driven (Underwriting) • Distributed/ grid computing • Establishment of an integrated back office and core systems, reusing data and processes • Dramatic changes in retail banking • Future front office technology • Future middleware technology • Future back office technology

27. Replace some legacy core systems where required Re-engineering core systems for greater componentization No plans to upgrade existing systems Wrapping core systems for greater openness / integration Replace all existing coresystems with a vendorsolution Core systems Upper tier banks are beginning to consider core systems replacement over the next five years, although due to their size and complexity, they will be approaching replacement incrementally. Many lower tier banks are not seeing any need to upgrade their existing systems at the moment. Which of the following best describes your approach to core systems strategy for the next five years? Upper tier Lower tier 45% 40% 35% 30% 25% 20% Percentage of respondents 15% 10% 5% 0%

28. Core systems – real time core system • Banks must start moving towards real-time processing to meet customer demands and business requirements. This is being triggered by competitive pressures as a number of top-tier banks start to modernize their systems to realtime. • Regulatory demands around operational risk from batch failures will provide a decisive medium term kick-start to modernization. • Core system costs (platform and application maintenance) are the top technology drivers for core system renewal in top-tier banks, but real-time processing is a key enabler to meet top business drivers for renewal

29. Business intelligence technologies IT architecture The majority of upper tier banks are expecting SOA to impact their business next three years. However, they see web services as having the most significant impact. Lower tier banks see intelligence technologies as most significant. Which of the following technologies will have the most significant impact on your business in the next three years? Upper tier Lower tier 80% 70% 60% 50% 40% 30% 20% 10% 0% SOA Web Services BPM ECM

30. Architecture of the future - SOA Branch ATM Call center Internet Intermediary Distribution channel applications application application application application application Common channel services Common channel services STP Pricing Account opening Doc mgmt / Product Compliance Workflow imaging definition Commissions Product agnostic processes Application server platform Rules Mgmt Infrastructure Services BPM EAI Business information integration layer General Reporting Business integration platform ledger Product specific processes with reusability potential Deposits Deposits Processing applications Product specific processes Accounts Loans Mortgages Other Product Product Product Product processing processing processing processing ODS Product factory Product factory By defining enterprise services banks can align business processes across the banking landscapes, creating consistency / reuse / visibility / adaptability I see the future of servers being Intel or AMD – as servers become more and more a commodity – CIO Tier 1 bank