Temenos (SIX: TEMN), the market-leading provider of mission-critical solutions to the financial services industry, today announces the results of its eighth annual customer survey. This year’s report, entitled “Shifting Sands: Banking in the Digital Era”, highlights significant change in the industry’s priorities as the regulatory burden has eased and the pace of digitisation has increased.

For the third consecutive year, the survey found that the industry’s biggest challenge is satisfying the demands of better-informed and less-loyal customers. Interestingly, the number of respondents citing regulation dropped significantly, suggesting that banks believe the brunt of re-regulation is now in the past. Instead, a growing number of bankers are concerned about their ability to hire top talent (cited by 14% of respondents compared to 7% in the previous year), their capacity to capitalise on their data assets (15%) and their ability to boost profitability, which remains subdued seven years after the banking crisis.

Only 26% of respondents cited incumbent banking players as their biggest rivals. Banks see a significant threat coming from banking players not operating in their market today, such as overseas banks and challenger banks. But banks are most worried about the threat from non-traditional players, especially technology companies, such as Google, which were cited by 27% of respondents.

Banks are responding to their structural challenges by investing in IT systems and innovation, their top two priorities in this year’s survey. The focus on IT systems is up significantly year on year, going from fourth priority last year to top priority this year, as banks begin to grasp what it will take to be successful in the digital age. Correspondingly, IT budgets are forecast to be up strongly again in 2016, with 64% of respondents anticipating higher spend over the next 12 months. The delta between the number of institutions expecting higher IT budgets compared to those expecting lower budgets is at its highest level since we began the survey.

Michael Leyva, Vice President & Global Banking Practice Lead at Capgemini Financial Services, commented: “The findings from this study are consistent with what we observe in our conversations with banks and similar research we’ve conducted in the market. Banks are well aware of competitive threats, especially from the challenger banks and “branchless” direct banks. They understand the customer loyalty landscape is changing (e.g. linked to social media and collaborative loyalty programs) and are changing their strategic priorities accordingly, with more emphasis on fostering innovation, enabled by renewing technology and hiring the right talent.   This is consistent with increases in IT budget spend we see, as banks recognise more focus needs to be on digital and supporting data/insights to provide greater customer value which in turn helps to protect the customer base in a highly competitive environment.”

While still very few banks run mission-critical applications in the cloud, almost every bank we surveyed (89%) is running at least one application in the cloud, compared to just over half in 2009. Regulation and data security are considered to be diminishing barriers to cloud deployment; instead internal factors – especially lack of internal expertise – are increasingly being identified as impediments.

Broadly speaking, our respondents see open banking as an opportunity for their business (52%) and essential to deal with the threat from non-traditional competitors (60%), but it is not yet on the radar of the C-suite, as evidenced, for example, by the fact that only 5% of innovation spend is being directed towards it.

Ben Robinson. Chief Strategy & Marketing Officer at Temenos, commented: “This year’s survey shows significant change in banks’ challenges and priorities. As the burden of new regulation diminishes, banks are concentrating on readying themselves for a more digital world, characterised by lower customer loyalty and new, multiform competitors. What is encouraging is the extent to which banks are making the right moves, investing in acquiring the right talent, upgrading their distribution channels and replacing their ageing IT infrastructure. Technology modernisation, especially in areas like core banking and analytics, is essential to delivering richer and more personalised banking experiences. And only through increasing customer value-add can banks protect themselves against a more competitive environment.”