Optimism about business growth and a rising sense of alarm at security breaches are shaping U.S. banks' tech spending plans for 2015.
Top spending initiatives are planned in the areas of security, analytics and digital banking (an umbrella term for online and mobile), according to research and anecdotal evidence. Meanwhile, the basic costs of keeping the lights on and running the IT infrastructure are dropping, thanks to hardware and software commoditization.
"We're being laser-focused on areas where we're willing to invest and holding off on other areas," said Bruce Livesay, the chief information officer and executive vice president for technology and operations at First Horizon in Memphis. Compliance, digital banking and analytics are the bank's top three IT spending categories for the coming year.
Overall, research firm Ovum expects U.S. banks to spend 4.3% more on IT in 2015 than they did in 2014.
The firm recently surveyed 500 CIOs and IT decisionmakers in the U.S. banking industry about their budgets and project priorities. The research has not yet been published, but Kieran Hines, practice leader of the financial services technology practice at Ovum, shared some findings with American Banker.
"We see a big uptick in investment in the retail banking side. That's partly due to the economic picture, which looked rosy in the middle of the year; it looks less positive now," Hines said. "What we're hearing from vendors and banks is there's more optimism about the immediate future and there's a shift from compliance-based spending to projects that will drive growth." Projects to simplify and streamline processes in the front and back ends of banking are becoming a high priority.
However, at some banks, compliance still consumes a large chunk of the tech budget. At First Horizon, for instance, "the amount of time being spent on regulatory/compliance changes is increasing," said Livesay. "It is eating into our capacity to do other business changes." This year, compliance grew to 25% of the bank's tech investment.
Overall, IT spending as a percentage of assets decreased in 2014, according to a report from the consulting firm Cornerstone Advisors that benchmarked 80 mid-size U.S. banks. This mainly reflects the fact that hardware costs have dropped and cloud services are cheaper.
"Banks have done a good job taking advantage of commoditized pricing, things like cloud services that have a cheaper cost," said Terry Roche, a partner at the Scottsdale, Ariz., consulting firm. "When you're in a mature, commoditized business, that's what you have to do."
This leaves some funds for more strategic IT spending.
The two biggest centers of IT spending growth among North American banks for the coming year, according to Ovum, are mobile banking, which is expected to grow 7.5% next year, and online banking, which expected to rise 7%.
"Digital is an ever-important channel," said Livesay. "This includes retail and commercial online banking, mobile banking, ATM banking, and new payments capabilities such as Apple Pay. As banks work to provide a differentiated customer experience, we are working hard on omnichannel solutions and consistent experiences across platforms."
Jacob Jegher, a research director at Celent, is seeing many banks build responsive design websites, develop tablet apps and enhance their online banking systems. "That's consistent with what we've seen in past years and there's no sign of a slowdown."
He cites Capital One's recent purchase of the digital marketing firm Adaptive Path and BBVA's purchase of the "neobank" Simple and its partnership with OnDeck (in which it will refer small-business customers who might not qualify for a bank loan to the online lender) as examples of banks making radical changes to their digital channels. Banks will continue to seek new partners and acquire and create venture arms, accelerators and innovation labs in 2015, Jegher said.
"These alternative methods of doing business change the way dollars are spent on IT," he said.
Wealth management is an area of interest for digital banking initiatives. "Increasingly in the wealth space, the younger affluent customer tends to be more interested in self directing their investments," Hines said. "That industry is moving from the traditional pinstripe suit, braces, country club kind of thing to high-net-worth individuals becoming more interested in being involved, in being given a range of options" for digital self-service, he said.
The next-highest area of bank's tech spending for the coming year is expected to be customer analytics. Ovum's researchers expect U.S. banks to spend 5.8% more on analytics in 2015 than they did this year. "There's a lot of interest in solutions that can help banks drive up cross-selling and the average product holdings per customer," Hines said.
"If you know what a customer is doing in real time, you can be quite precise about knowing the next product that customer is likely to be interested in," he said. "The challenge a lot of banks have at the moment is getting that single view of the customer. To do that in real time or near real time is the next level beyond that." The next challenge is turning that information into product improvements.