Facing the double whammy of recession and industry consolidation, bank technology managers put a lid on spending last year, according to the annual technology survey by the American Banker and Ernst & Young.
Automation expenditures rose a mere 2.3% - less than the 4% inflation rate and well under the 13% average increase in the 1980s.
The slower growth was in line with predictions made in the survey last year, when managers expected annual increases of just 2.25% through 1993.
(This article, the first of three, is excerpted from the survey report, which has been mailed to American Banker subscribers.)
But bankers and consultants, reacting to the 1992 American Banker/Ernst & Young report, say the numbers do not mean the industry is deemphasizing technology, or relegating it to a lower long-term priority.
"Many banks are seeing that through consolidation and downsizing, they can hold the line on systems spending and still invest in technologies that will have big payoffs in the future," said Louise Firth, vice president in charge of the financial industry practice at Arthur D. Little Inc., Cambridge, Mass.
Spending Still Huge
Despite slow growth in budgets, the amount of money banks spend on automation and the people to support it is still huge. The survey report, which was based on responses from chief technology officers at 68 of the top 300 banks, estimated that U.S. banks spent $14.1 billion on technology in 1991.
"While cost-cutting is going on with respect to technology, it appears to be much less severe than in other areas of banks," said Diogo Teixeira, a partner at Ernst & Young.
Some Budgets Climbing
In fact, for those institutions that are in an acquisition mode, technology budgets are ballooning.
"Since we charge out everything when we acquire another bank, [our technology spending] is growing faster than the average," said Jay Ward, president of Key Services Corp., the automation arm of KeyCorp in Albany.
KeyCorp has made a string of acquisitions over the pat three years. Its more recent agreement was with Puget Sound Bancorp, Tacoma, Wash.
Although he sees greater outlays for automation, Mr. Ward said that on a unit-cost basis, he is making considerable savings by integrating acquired banks' data processing into KeyCorp's two data centers.
Another active acquirer, Banc One Corp. of Columbus, Ohio, is also bucking the slow-growth trend. Ed Winnick, chief financial officer at Banc One Services Corp., the bank's technology subsidiary, said the industry-wide growth figure did not surprise him, "but our increase is much more than that."
Innovations a Factor
Mr. Winnick said that, in addition to the added cost of running acquired banks, spending is also affected by a number of forward-looking automation initiatives, including the installation of new core processing software called the Strategic Banking System that Banc One has developed with Electronic Data Systems Corp. and Norwest Corp.
The Columbus, Ohio-based Banc One is also installing new branch automation equipment and is in the final phases of a development project with Andersen Consulting for credit-card processing software.
Most banks plan to continue their modest spending plans into next year: respondents to the survey see technology budgets rising by an average of 2.3% again. Although more banks are planning bigger increases in 1993 over 1992 levels, others see bigger cuts, offsetting the increases.
Where are savings coming from? The mainframe-dominated data center, according to bankers and consultants.
"You can get the same amount of [mainframe data storage] for a lot less money than five years ago," Mr. Ward said. "Also, if you can live with two-to three-year-old mainframes, the savings are great compared to brand-new machines."
He added that the glut of used machines on the market because of industry consolidation "gives midsize banks a tremendous opportunity that money-center banks don't have" because the money-centers require the largest, newest equipment.
Some financial companies are saving money by downsizing - moving mainframe-based processing tasks to networks of personal computers.
The process has allowed "one insurance company we work with [to reduce] mainframe operating costs by one-third," said Arthur D. Little's Ms. Firth.
A Skeptic on Savings
Mr. Ward of Key Services Corp., however, is skeptical of true savings obtained by using networks of smaller, cheaper computers.
"A lot of it is funny money because most PC acquisitions are made by departments and are not found in the traditional data processing budget," he said.
Mr. Ward does see more efficiencies being gained at the data center, and this year's survey confirms his belief. Data center operations and administration staff are projected to shrink from 19,834 in 1992 to just under 19,000 by 1995. Mr. Ward said this is because of industry consolidation and better software that requires fewer people.
Mr. Winnick also sees technology helping reduce data-center expenses.
"Mainframes are not our biggest cost component; people are," he said, noting that Banc One recently installed a robotic system for retrieving the thousands of magnetic-tape cartridges that store historical data. These tapes once had to be delivered to the mainframe by hand.
Although data-center personnel are being hit hard by consolidation and new technology, overall reductions of technology staffs are not expected to be as great as in other areas of bank employment, where experts predict cuts as high as 20% over the next few years.
Slight Drop in Personnel
The American Banker/Ernst & Young survey estimates there are 86,000 technology personnel in the top 300 banks, and by 1995 there will be 84,000, a drop of only 2.4%.
Part of the reason for the small decline is that certain types of skills remain in high demand at banks, particularly technicians to run networks and software developers with knowledge of PCs and distributed computing.
The number of network managers at banks is expected to increase from 3,453 this year to more than 4,400 by 1995, while the number of developers of distributed-computing applications will more than double, from 3,731 in 1992 to nearly 8,000.
"Networking is becoming more and more complex, and our geographical growth is driving that," Mr. Winnick said. "People with data communications skills are in high demand."
"Next week: Bankers are increasingly building technology strategies around smaller computers well suited for responding to client needs.