Banks need to invest in a new IT infrastructure to support online services and help them to meet a "plague" of technology and compliance issues, according to a report by analyst firm Giga Information this week.
Technical challenges, such as the need to interact with customers 24 hours a day over multiple channels, coupled with new regulatory requirements like the Basel II Accord on risk management, mean that banks will have to spend more on technology than most other industries, the report predicts.
"Technology issues in multiple facets of daily operations are plaguing banks," it said. "Problems range from simply knowing and recognising customers to complying with continuously evolving industry regulations.
"Customers demand 24x7 access across multiple channels while regulators insist on complex disaster recovery plans."
Giga's report advised banks to develop an IT infrastructure that is based on open technical standards to link old, back-office systems with new electronic applications and help to create a single view of the customer across a business.
The internet data standard XML, along with object-oriented programming and middleware software, have emerged as the main planks of the modern IT infrastructure in the banking industry.
Giga also noted other sea changes that are occurring in banking IT, such as the increased use of Linux open source software. "A growing number of banks and financial services firms are adopting Linux, primarily in the areas of application integration and server consolidation.
"The cost savings between Sun Microsystems' Solaris [Sun's Unix operating system] Sparc [Sun processor] and Linux/x86 [Linux running on Intel hardware] can be significant.
"The ability to reduce software licensing fees is another driver of Linux migration."
The drive among financial firms for straight through processing - technology to automate the processing of financial transactions - plus the technical support demands of electronic payments, will also see banks continue to outsource swatches of their business, Giga said.
The next big compliance issue for the banks
The New Basel Capital Accord, dubbed Basel II, aims to make banks' assessments of their loans and investments more sensitive to risk, while reflecting technological developments in global markets. The accord, which is due to come into force by the end of 2006, has far-reaching implications for corporate IT systems. IT directors will have to link a maze of banking databases and reporting systems, update older applications and ensure information in systems is accurate. Analysts estimate that global banks will have to spend between £20m and £100m to comply with the requirements of Basel II.