Retail banking companies are expected to account for the bulk of spending on financial technology outsourcing through 2002, according to a study by Datamonitor, a research company that tracks technology and consumer spending.
But, the study predicts, growth in spending by insurance companies and securities firms will outpace bank spending over that period.
"Because insurance and securities firms are not as saturated with outsourcing, there is more room for growth there," said Randy Gernaat, an analyst with New York-based Datamonitor.
"For competitive reasons, banks have outsourced a lot of the repetitive processes already," he said.
Spending on technology outsourcing by retail banks is expected to grow an average of 8.4% a year for the next five years. By contrast, securities firms' spending should grow 12.6% and insurance companies' by 12.9% annually over the same period.
Because of the increasingly complex nature of their products and services, insurance and securities companies are "being forced to focus on their core competencies and see where the areas are that they can add value," Mr. Gernaat said.
The Datamonitor study was based on interviews with technology executives from more than 50 financial companies and technology vendors. It defined outsourcing as expenditures for processing or technical management services provided by third parties.
Of the $24 billion retail banks spent on information technology in 1997, 12%, or $2.6 billion, went to outsourcing.
The insurance industry devoted about 7% of its $17 billion technology budget to outsourcing, and securities firms spent 6% of their $12.4 billion budget.
In total, financial services companies will spend $4.4 billion on outsourcing this year, the study found.
By 2002, the percentage of technology spending devoted to outsourcing by banks, insurance companies, and securities firms is expected to rise to 13%, 10%, and 9%, respectively, yielding $7.9 billion.
Though the bulk of outsourcing expenditures will be for processing services, spending on other technology functions, such as managing networks and corporate intranets, is on the rise, the Datamonitor study said.
Because of the increased spending, computer services giants like Electronic Data Systems Corp., International Business Machines Corp., and Computer Sciences Corp. are likely to expand their financial services presence, said Mr. Gernaat.
With insurance and brokerages turning to outsourcing, some advocates of bank outsourcing believe it is even more important for banks to focus their energies on preserving their natural constituency of depositors.
"I absolutely believe that the only way banks can compete with nonbanks is for bankers to come in to work every day with a single-minded and ferocious focus on customers or prospects," said Rick Lieb, president of SEI Corp.'s investment services and systems group, which provides outsourcing services to banks.
