The U.S. subprime mortgage crisis has forced banks to enter 2008 in a reactive mode. New research from TowerGroup examining the top retail banking trends for 2008 finds that bankers are anxious on two fronts. First, they worry about unseen threats that may not yet have surfaced in their credit portfolios. Second, they fret over how their institutions can compete rationally during the volatile days ahead.

Retail banks will return to proactively approaching their markets only when the extent and expected duration of the credit crisis is understood. Although the credit crunch has undoubtedly resulted in the reallocation of management and technical resources, TowerGroup does find banks continuing to focus efforts on a number of business drivers and technology investments that will provide longer-term benefits. For example, banks will continue their efforts around the reengineering of payments processing - offering new product and pricing packages to targeted customers, and developing a more flexible payments IT environment.

“2008 promises to be a year of adversity for some retail bankers and opportunity for others,” said Kathleen Khirallah, TowerGroup managing director and practice leader of Retail Banking. “The key issue for retail banks will be managing growth and profitability while adapting to an ever-changing economic climate. Opportunity can be found in adversity, and retail bankers that pursue cautious forward movement will be rewarded.”

In 2008, banks will focus IT spending on initiatives that reduce risks, including those not related to consumer lending. As one example, concerns over disclosure of customers’ financial information and attempted fraud have forced bank boards and management to pay more attention to information security and fraud prevention. These concerns will lead to greater organizational responsibility and visibility for risk management and information security experts. IT departments will be required to respond to targeted efforts to identify and mitigate financial and reputation risk.

“Many banks have embarked on multi-year strategic technology initiatives that are already well under way,” said Robert Hunt, research director of TowerGroup’s Retail Banking practice and co-author of the report. “In many cases, it would simply not be economical or strategically sound to put these large-scale projects on hiatus. Progress on the IT front may slow substantially, but it must be sustained.”