With an end to year-2000 spending in sight, banks are getting ready to invest in revenue-generating technology.
Tower Group predicts that technology spending by banks around the world will increase by $20 billion between 1998 and 2002, to $95 billion.
The spending would go toward initiatives that had been put on back burners while banks grappled with pressing projects like merger integrations and year-2000 conversions.
The new concerns include improving customer sales and service, expanding financial planning services, and enhancing data warehouses, said Diogo Teixeira, president of Tower Group.
Tower research analyst Regan Wong, speaking along with Mr. Teixeira at a recent Tower-sponsored teleconference, said: "We believe after the second quarter of 1999 there will be a lull in the intensified Y2K remediation effort."
By 2001, U.S. commercial banks will funnel 45% of their technology money into hardware, Tower Group said. It said services will account for 35% of tech spending and software for 20%. Also by 2001, 60% of accounts are expected to be processed at service bureaus, up from 45% in 1996.
Bigger chunks of spending would be concentrated among fewer banking companies, Tower predicted, with Citigroup spending $3.3 billion to $3.5 billion annually. Next would come Bank One Corp. ($2.5 billion to $3.5 billion ) and Wells Fargo & Co. ($1.5 billion to $2 billion).
Banking companies not among the leaders are already under pressure to increase their spending, Mr. Teixeira said. The Tower experts are discouraging banks from building proprietary systems. Instead, they recommend limiting the number of vendor-supplied packages they use and enforcing commonality in systems.
They said a major challenge facing banks is to make home banking profitable.
"Many banks are worrying significantly about the fact that e-commerce has not proven to be a profitable activity," Mr. Teixeira said.
But he offered encouragement about trimming delivery costs of home banking. As the number of users rises, costs should decrease by 2002 to $6.20 per customer per month, from the current $12.75.
The fees that banks will be able to generate would also fall, but only to $4.75, from $6.50. In addition, bill presentment by then may significantly boost revenue.
Tower Group predicted that transactions through expensive branch channels will decline from 22.8 billion in 1996 to 21 billion in 2001. Transactions in new and alternative channels should grow from 9.2 billion in 1996 to 17.8 billion by 2001.
In the fourth quarter this year, as 2000 closes in, Mr. Teixeira said, he expects the volume of requests to customer service representatives to double. Problems related to the year-2000 switch may be felt mostly at branches because they have the oldest technology, Mr. Teixeira said, adding, "The Internet may shine."
Among the Tower Group's predictions about what could go wrong in the millennium weekend, the executives said, are posting and settlement delays, failures of certain system applications, or the inability to use certain consumer products.
The research group also said there could be corrupted data, greater incidence of fraud, slowdowns in processing, and fewer loans originated.