After three lean years, bankers are mustering a modest technology spending spree.
According to the American Banker/Ernst & Young 1993 Survey of Technology in Banking, financial institutions are expected to consume $15.3 billion worth of information technology in 1993, an increase of more than 6% over 1992.
The increase marks the first time since 1990 that technology spending growth outpaces the inflation rate.
In addition, the employment decline in this sector of the industry has abated, with the number of technology jobs expected to increase slightly over the next three years, according to the study, which was conducted by the Tower Group, a Dover, Mass.-based consulting firm. Total employment should rise from 86,000 this year to nearly 87,000 by 1996, still down from a high of 90,000 in 1991.
More robust spending coincides with the end of the industry's extended convalescence in the wake of the recession and credit problems.
Spending allocations look much the same as they did in 1992. Roughly 63% of banks' technology dollars fund centralized data processing applications, 28% information technology in other departments, and 9% outsourcing of one or more business lines.
But the bulk of the additional dollars included in this year's budgets are not being spent on the maintenance of existing mainframe-based applications.
Instead of spending more on these so-called legacy systems, bankers are betting on the development and installation of new types of technology, using improved telecommunications, personal computer networks, and imaging systems.
There is also a flip side to the restructurings and reorganizations that many banks have undergone. For example, Fred Gronbacher, senior vice president of operations at PNC Bank Corp., Pittsburgh, said that many of the development projects he oversees are a direct result of a change in the bank's operational philosophy since the late 1980s.
The $51.1 billion-asset bank consolidated its independent banking units on a single, identical product set. The change allowed the bank to consolidate eight data centers in a new 90,000-square-foot facility, said Mr. Gronbacher.
"Data processing led the process of change within the corporation to centralized lines of business and a local sales force," he added.
The savings incurred through the consolidation, along with the company's continued merger and acquisition activity, provided some justification for the new data center, which was recently completed at a cost of $30 million.
PNC's nerve center is equipped with the latest support systems and fiber-optic telecommunications facilities, which maximize system availability, according to Mr. Gronbacher.
"Now that we have created something new, we can build from that, rather than try to support the old infrastructure," Mr. Gronbacher said.
He also said that PNC's 1993 spending on hardware and software will be about 15% higher than in 1992. He attributed the jump to the data center project and a number of other systems development efforts, including branch automation, "file folder" imaging systems, and the implementation of artificial intelligence in the lending area.
"All expenses other than equipment are flat to down," said Mr. Gronbacher. "The investment in automation pushed us beyond our normal growth pattern."
Still, personnel remains the single biggest line item in most technology departments. According to the study, 37% of the typical bank technology budget pays employee salaries and benefits, 28% is allocated to hardware, 11% goes to voice and data communications, 10% to software, and 7% to external services.
However, consolidation within the industry may soon change those ratios. That is occuring at Banc One Corp., the Columbus, Ohio-based holding company that is often viewed as the model of the acquisitive institution, taking over banks and converting them to common products and systems.
"Our central computing resources, CPUs and related storage, are growing at a 20% to 30% annual rate. But there is less staff required as we convert to common systems," said Dale Terrell, senior vice president of information services at Banc One Services Corp., the technology arm of the $70 billion-asset bank.
The demand for both mainframe and desktop computing power continues to grow at financially sound larger banks such as PNC and Banc One. It seems that reports of the demise of the mainframe, if not greatly exaggerated, were at least premature. "Our legacy systems will be around for quite some time," said Mr. Gronbacher of PNC.
Mainframe costs are being mitigated somewhat by changes in the fees that International Business Machines Corp. charges for its mainframe operating systems. Previously, the annual cost of a given operating system license was based on the size of the computer on which it ran.
"IBM has reversed that trend. The pricing is much less onerous and has resulted in a substantial cost reduction," said Mr. Gronbacher.
Personal computers are another story. Prices on PCs, software, and peripherals continue to drop, and banks are adding such equipment at a substantial rate. PNC, with about 7,000 PCs installed, will probably add 2,000 or 3,000 PCs this year, according to Mr. Gronbacher.
At Banc One, the deployment of PCs is often driven by projects within the various business units. Mr. Terrell said PCs and local area networks are currently being added in lending operations, finance operations, and mortgage origination.
"Personal computers and local area networks are almost a hidden cost, because they are not as centrally controlled," said Mr. Terrell of Banc One. He estimates the PC and LAN count within Banc One is growing at a 25% annual clip.
"There is a realization that we need to manage and control that growth," Mr. Terrell added.
As part of that effort, Banc One has begun negotiating enterprise licenses for PC software. Instead of buying hundreds of individual copies of Microsoft Windows or Lotus 1-2-3 through retail channels, the bank pays a single fee directly to the vendor for the use of a given software program.
"You're going to see a lot more of those," predicts Mr. Terrell.
Even with tighter controls, the industry has a problem identifying exactly where its dollars are being spent. The study shows that on a line-of-business basis, 21% of the technology dollars fund retail deposit gathering and accounting.
This year's survey added a new line item, "shared infrastructure/unallocatable." That was the second-most-popular response to the spending by line-of-business question, at 16%, followed by consumer lending, trust, capital markets/ treasury, corporate lending, and cash management.
"That figure shows how difficult it is to allocate expenses accurately," noted Greg Schmergel, a Tower Group vice president who worked on the study.
"On a given project, of course, there is an effort to determine who is the sponsor, where the ownership lies," said Mr. Terrell. "In situations where that isn't possible, those expenditures have to be approved by the executive committee and the CEO."
Bankers are also trying to get a better handle on product profitability. More than 40% of all banks surveyed can measure profitability by line of business, 37% measure branch profitability, 32% measure by product, and 24% can measure customer profits.
PNC, for example, has been involved in a joint development effort with one of its applications software vendors, Hogan Systems Inc. of Addison, Tex., to develop a profitability analysis system.
"We can analyze the data in a number of ways - by product, by market, by customer - moving it around like a Rubik's Cube," said Mr. Gronbacher. "We can move around our markets and look at them differently."
Another new technology attracting attention is file-folder imaging. Bankers have been discussing the use of imaging for more than a decade, and there are a handful of banks using image-based check processing systems.
But file-folder imaging takes another step closer to the mythical "paperless office." PNC plans to test the concept in one or more lending applications.
"With file-folder imaging, the thinking is, don't create it [paper] in the first place, do everything electronically," said Mr. Gronbacher. "If paper is created, it should only be handled once, to be scanned into the system."
With all signs pointing to a resurgence in bank technology spending and development projects, there are some who feel banks might have loosened the purse strings a bit too quickly.
"I think the crux of the issue is that the pace of change within the industry has been slowed by the narcotic effect of the highest net interest margins in recent history," said Z. Christopher Mercer, president of Mercer Capital Management, a Memphis-based firm that specializes in valuing financial institutions and an author of a book on the subject.
Mr. Mercer recently published an analysis of the financial results of all commercial banks. His findings: Personnel expenses and noninterest operating expenses continue to rise within the industry, meaning that expected gains in efficiency from mergers and "re-engineering" projects have not yet been realized. In addition, most banks have failed to implement what Mr. Mercer calls "an across-the-board focus on profitability."
As a result, he concludes, the fundamental position of the industry has not improved markedly since 1989.
"When I put it all together, I was really surprised at the state of the industry," Mr. Mercer concluded. "I thought it had made more progress."
With spending and employment back on the rise, the bank technologists may be feeling more sanguine after the back-office bloodletting that marked the early part of the 1990s. But it may also be a brief respite if the industry is whacked again by a slumping economy.