IT Spend Will Be Slow and Spotty in 'O9

It would not seem to bode well for IT spending in 2009 that State Street, one of the biggest purchasers with a $1.3 billion budget, announced last month it will "materially" limit the budget through cost cuts. But, as is so often the case, there is a silver lining. Speaking at a Merrill Lynch conference, CEO Ron Logue said State Street would achieve some of that savings through greater reliance on contractors. So internal IT jobs are looking less secure, but vendor prospects are looking up.

State Street's situation is emblematic for the industry. All estimates for IT spending are down for 2009, which is not surprising. But the discretionary spending most banks can cut is a very small slice of the overall pie. TowerGroup's Virginia Garcia, a senior research director, estimates that 90 percent of most IT budgets go to simply "keeping the lights on." She estimates that total IT spending by banks in 2009 will eke out 0.1 percent growth, down from 0.6 percent in 2008.

Still, just remaining in positive territory is something of victory, she says, and that's driven by two factors. First, core systems must be maintained, and second is the escalating transaction volume that is forcing banks to invest in delivery channels. She predicts spending on delivery channels to grow 1.4 percent in 2009. Internet banking (for consumers and businesses), IVR, call centers, ATMs, and mobile banking are "still pretty hot." On the other hand, spending on consumer finance, such as mortgages and lending is under "considerable pressure."

Larry Calabro and Larry Albin, principals of Deloitte Consulting, expect that risk management, deposit gathering, and regulatory compliance will help to drive IT spending at banks even through the 2009 economic downturn. "The middle-market banks are under extreme pressure to service customers better, to lower costs and increase scale advantages," Albin says.

Financial Insights' outlook is a bit more bearish. Jeanne Capachin, vp in the global banking and insurance practice, says that IT spending will decline in 2009 by four percent and will be negative for the next five years. "Some of the drivers are contraction in the industry (M&A), continued data center consolidation, and pressure on bank profits through late 2009....Expenses will be lowered by reducing IT staff, continuing virtualization projects, delaying planned hardware purchases, and stalling projects already under way."

However, Capachin does see some bright spots. The merger activity we see today, while removing some big IT spending institutions from the scene, will require some spend on integration. Elsewhere, she notes there is a competitive opportunity for smaller, well-capitalized banks. "A few banks interviewed with planned strategic investments in core and universal banking are proceeding ahead. For these banks, the time is better than ever to make this kind of investment. Large banks are focused inwardly and are not able to go forward with innovative projects." This gives the smaller banks a chance to implement systems for a better view of customers, to understand what products and services they want, and market to them better than larger competitors.

Finally, Aite Group, while not releasing an actual forecast, reports that the 2008 Association of Financial Professionals conference was surprisingly upbeat, particularly when it comes to treasury services. Treasury services aid companies in speeding collections, reconciling payments with invoices, and obtaining the data to manage their cash positions; all critical components of liquidity management.

Clearly, IT spending will be under pressure in 2009, but the outlook is far from universally bad. As Garcia puts it, "There's a lot of activity in the market, it's just not across the board."

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