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2011 Spending Forecast

Spend Now to Save Later?

The tools of controlling expenses during the recession-scalpels and hatchets-have been put back in the drawer for the time being, but a bearish pall still constricts aggressive expansion, and looks to do so for the foreseeable future.

"Spending is picking up, but these are not the levels that we saw in 2006 and 2007," says Jaroslaw Knapik, senor analyst, Ovum, which is predicting global spending on IT vendors by financial institutions will expand 4.5 percent in 2011 after a rise of 0.3 percent in 2010 and a decline of 4.2 percent in 2009.

While overall growth will be tepid, there will be spending on technology that reduces long-term costs, a top priority given the compliance, data management and reporting requirements that will drill a hole in IT purses across the industry, making new customer-focused innovation difficult to pull off.

"Our tech spending is increasing, but a lot of it goes to keeping up with compliance needs," says Lee Ann Loucks , a real estate loan officer at Community First Bank, a small institution in Glendive, MT, that's looking to help manage its expense by investing in a new SaaS-enabled solution for real estate loan processing.

Gartner is forecasting $402 billion in bank and capital markets IT spending globally in 2011, up from $388 billion in 2010. That's a growth rate of only 3.6 percent, but it's higher than the 2.2 percent growth of 2010 and the decline of 6.2 percent in 2009.

But it's hardly a gold rush, and the growth is uneven. For example, Gartner says 54 percent of banks are forecasting no growth in IT spending for 2011, with 32 percent increasing and 14 percent decreasing spending. "You can't automatically assume that all budgets are increasing," says Kristine Pfleiler, research director for Gartner Financial Services in North America. "The majority of banks are flat."

Regionally, Asia Pacific-where a number of mobile banking initiatives have taken hold-is growing faster than the rest of the world, with spending increasing to $45.2 billion in 2011 from $42 billion in 2010, or about 7.4 percent. That compares to 4.2 percent in North America, where growth is expected to inch up to $157.4 billion in 2011 from $151 billion; and the Europe/Middle East/Africa region, where 2011 spending is forecasted to total $147 billion, compared to $137 billion in 2010, a growth rate of about 6.4 percent. "We're still making up for what we lost," says Pfleiler, who doesn't predict spending to reach pre-crisis levels until 2012.

In attempt to balance almost-mandatory GRC spending and maintenance-which are estimated to take up about 75 percent of most bank IT budgets-with a post-crisis need to get back to customer acquisition and product development, banks this year will turn to quick-to-deploy "customer experience" technology that leverages customers' data and self-reliance to expand share of wallet. Institutions will also turn to solutions that allow banks to re-imagine how tech resources are assigned across the enterprise, a move that can lower overall cost of ownership. "There will be more focus on cross selling, which benefits customer insight technologies, CRM, and business intelligence tools that provide a better view for banks on what to cross sell to existing clients," says Knapik.

There's also a sea change underway in how banks actually pay for technology, as five-and six-figure upfront deployment outlays give way to a pay-as-you-go model in an attempt to match cost of ownership to actual use. "We're seeing a switch from financing hardware to subscription-based technology," says Knapik, a trend that bodes well for outsourcers, service providers, SaaS, server virtualization and cloud computing. "Many banks don't have the [IT money] to make up front investments."

Nor do banks have the money to deploy or manage the technology. In its most recent bank IT spending report, Celent is projecting spending on external services in North America will surpass $10 billion by 2012, up from about $9 billion in 2010, as banks engage outside companies to manage and deploy tech projects.

"Banks are realizing now that they need to invest in more structural areas than they've done in the past few years, the need to be more nimble to react to changes," says Amit Chaudhary, a partner at Deloitte Consulting. "The top US banks have all grown through silos, now they need to figure out how to do better at shared infrastructure or shared applications to lower costs and produce better connections across the business."