Technology budgets at U.S. commercial banks are expected to grow by 6.7% in 1995, the third consecutive year of increases exceeding the inflation rate.

But results of a new survey show that while banks' investment in critical newer technologies, like client/server and imaging systems, is on the rise, the portion of systems budgets earmarked for such new development has only marginally offset spending on the maintenance of mainframe-based computers and applications, which continues to eat up more than three- fifths of all bank technology dollars.

Spending on four highly touted technologies - client/server, imaging, data warehousing, and so-called "groupware" systems - accounted for just 7.1% of the $17.4 billion budgeted by banks for information technology this year, according to the American Banker/Tower Group 1995 Survey of Technology in Banking.

The study, based on information supplied by 23 of the top 100 U.S. bank holding companies, also found that spending on those four emerging technologies account for only 28% of all money budgeted for developing new application systems and software.

But banks say they will spend more on such systems in the future. Industry spending on client/server, or distributed computing systems using networks of personal computers, is expected to grow 22% a year through 1998.

Investments in groupware, sophisticated electronic mail and project coordination software like Lotus Development Corp.'s Notes program, is expected to grow 44% a year during the same period, to $1.4 billion.

"The good news is banks'... spending on new development is going up both in terms of total percent and in the amount spent on these new technologies," said David Medeiros, a technology analyst with the Wellesley, Mass.-based Tower Group, which conducted the research. "The bad news is banks are still only going to be spending about a quarter to a third of their total spending on new development."

In 1995, banks budgeted 25% of their technology dollars, or $4.35 billion, for new development spending, up from 23% last year. By 1998, investments in new software development is expected to rise to 28% of the total.

The bulk of technology dollars (63%) continues to flow to the maintenance of existing mainframe-based systems. While that number is expected to creep downward through 1998 - to 59% of the total - the actual dollars spent on maintenance will rise, because the overall spending pie is growing at a faster clip than the rate of decline in that one area.

"Maintaining the big status quo back office is truly a dry sponge-in- water sort of problem," said David M. Partridge, director of the financial institutions practice at Towers Perrin in San Francisco. "The technology base, particularly on maintenance of the old legacy systems, truly is the 800-pound gorilla. It squeezes out the money that might otherwise be spent on trying to leverage the actual customer relationship handlers with client/server."

Overall bank technology spending, the survey found, is expected to grow from $17.4 billion this year to $21.1 billion in 1998, an annual growth rate of 6.6% - about the rate posted for the last three years.

Those increases are occurring at a time when banks are working feverishly to reduce overhead in the face of competition from nonbanks, which enjoy a lower cost base.

"If the technology spending is going up 6.7%, can you imagine what (banks) must be trying to do elsewhere in their cost base so their overall cost structure can actually come down?" said Mr. Partridge.

Still, some industry observers say bank technology budgets aren't growing fast enough, and survey results support that view.

The study asked chief information officers to rate their banks' capability to extract meaningful information from transaction processing systems - the kind of benefits expected from client/server and data warehousing systems, for example. Some 65% said their capability was good. But just 2% of banks rated that ability as either "outstanding" or "excellent." And one-third responded "mediocre," "poor," or "terrible."

Further, 81% of chief technologists rated getting faster, more accurate decision support their top strategic priority, suggesting a widespread need for such information. (In contrast, just 22% said data center consolidations and processing overcapacity was an important or very important priority.)

But in interviews, bankers say they are keenly aware of the importance of new technologies.

"You can't play anymore in this world in many technologies unless you are there," said Craig Goldman, chief information officer at Chase Manhattan Corp. in New York, which agreed to merge with Chemical Banking Corp. last month. "The money and the market is going to the distributed world. That's where all of the development money is going. If you want to play at all, you don't have a choice any more. You have to be there."

Mr. Goldman said Chase's spending on maintenance is "in the ballpark" of the 63% found in the survey. But he said that number has been declining at Chase in part because of the bank's use of so-called middleware. "For a lot of our older production systems, we find that we have to go into them less frequently because we have means to access those systems and information, and still provide things in a client/server world."

Chase was also an early user of both client/server technology and groupware.

And while Mr. Goldman said that spending on new development has increased, Chase's overall technology budget has remained flat.

That is expected to change once the merger with Chemical is completed. Chase chairman Thomas Labrecque, who will be the No. 2 man at the combined institution, said when the deal was announced that it will allow "significant investments in technology to keep us on the leading edge of new product development and service capabilities."

At the time of the announcement, Chase had been in the midst of a cost- cutting effort and had been under pressure from activist shareholder Michael Price to increase the value of the stock.

Technology budgets are already rising at other banks. Firstar Corp. in Milwaukee has said it plans to boost technology spending by nearly 10% this year, above past increases of 6% to 7% a year. That includes resources devoted to improving customer profitability across all market segments.

At Union Planters Corp., a Memphis-based super community bank with $9.7 billion of assets, spending increased about 10% this year, about double the rate of growth last year.

"We were a little bit behind in technology. We have spent a lot of money this year and are going to spend a lot more," said Lloyd DeVaux, the executive vice president of corporate support services who joined the bank in January. "I came on board specifically to get us back, to catch us up with the Joneses, so to speak, to get our systems back up to speed."

Union Planters' initiatives include upgrading the automated voice- response unit, rolling out document imaging and platform automation, introducing a debit card product, and implementing a proof-of-deposit check imaging system.

The bank, which operates 40 affiliates in eight states, is also looking at alternative delivery channels such as the Internet or home banking via personal computer. "We don't see the brick and mortar as being the only or the best way to deliver to the customer," said Mr. DeVaux. "We are investigating whether we need to be out on the World Wide Web, or whether we need to be on an on-line service such as Prodigy or America Online, or work with Microsoft or one of the other vendors who are providing access through their system."

Other technology initiatives to catch up were less flashy - like upgrading the mainframe.

"In banking, the legacy system is still a lot better than other industries," said Mr. DeVaux. "We have saved a tremendous amount of money by centralizing the processing."

Union Planters, which has acquired more than two dozen community banks since 1991, has converted all of its affiliates to its core data processing system from Kirchman Corp. While assets have grown about a third since last year, employment at the bank is down about 10%.

Mr. DeVaux also expressed a not-uncommon view among bankers about the resilience and reliability of mainframe-based systems.

"It allows us to provide host access to eight states," noted Mr. DeVaux, adding that he is not surprised that client/server technology is advancing more slowly at banks than the hype would suggest.

Joseph Delgadillo, president of M&I Data Services, the outsourcing and software unit of Marshall & Ilsley Corp., said: "It's unfortunate that the marketplace perceives that one should stop investing in one and completely invest in another, because the legacy systems still provide value to the organization."

But the unit, which provides data processing services for 31 Marshall & Ilsley affiliates and 590 banks, is boosting its technology research and development budgets far faster than the industry average. This year, such spending has grown 33%, up from the 25% increase posted in 1994.

Much of the new development is in the client/server arena, particularly data warehousing and what M&I calls the financial desktop. Mr. Delgadillo explained that the desktop will allow bankers to improve application front ends without a major customization of back-office systems.

The financial desktop and data warehousing, Mr. Delgadillo said, "are tools to allow institutions to deal with this tremendous change they are about to go through, and to build systems to match how they deliver product to the marketplace."

While banks are moving to develop and deploy client/server and other newer technologies, the survey results raise the question: When will technology budgets industrywide noticeably reflect a relative decline in spending to maintain legacy systems?

Mr. Partridge of Towers Perrin noted that the 1995 numbers don't reflect the latest round of mergers and acquisitions, which are typically justified, in part, on a reduction in back-office expenses.

"What you should see as the industry consolidates is a shift from the legacy system spending over to alternative delivery and those kinds of things," he said.

And The Tower Group's Mr. Medeiros noted that banks will continue to face challenges when deploying newer technologies. "It's like trying to change the tracks while the trains are running. They have got to keep processing those transactions," he said. "It's tough to do."

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