Three market research firms agree that banks are increasing their technology spending this year, with the goal of improving their back-office systems and making their compliance efforts more cost-effective.
With spending expected to expand this year by about 4%, banks are hoping to consolidate the disparate systems that they have picked up through acquisitions. In addition, the analysts say banks are making room in their budgets for new security measures and for regulatory compliance projects. The result, they say, has been an increase in technology spending, reversing several years of relatively flat IT budgets as banks are now eager to consolidate and improve their systems.
Virginia Garcia, a senior analyst at the TowerGroup market research unit of MasterCard International, said that financial services companies worldwide would spend $360.9 billion this year, 3.9% more than last year. She said this is a significant increase, since spending increases averaged just 1.9% a year between 2000 and 2003 as banks recovered from the spending surge during the Internet boom years.
This spending will increase an average of 4.2% a year through 2008, and reach $409 billion that year, Ms. Garcia predicts.
Jacob Jegher, a senior analyst for Celent Communications LLC, said he expects spending at U.S. banks to increase 4% in 2005, to $38.5 billion.
He said post-merger systems integration will get a lot of attention, but so will account integration — “the ability to provide a single view to the client, regardless of what channel they’re using. In order to get the data across channels, it’s got to be collected and gathered and analyzed. A lot of the work is being done in the back office.”
Martin Davis, the chief information officer for Wachovia Corp., said the integration of SouthTrust Corp., which Wachovia acquired in November for $14.3 billion, is an important technology goal. He said the potential for further acquisitions will ratchet up the Charlotte company’s tech budget more, and that Wachovia plans to increase its overall IT budget by 3% to 5% this year.
Tom Cable, the chief information officer for NetBank Inc. of Alpharetta, Ga., said the online bank “had several small companies we acquired over the years that had their own systems and databases.” NetBank did not have a system that could tie all those technologies together, but it is now trying to develop one, he said.
Banks are also demonstrating a willingness to spend on systems to improve efficiency, Ms. Garcia said.
Mr. Davis said this is the approach Wachovia is taking. “Sometimes you have to spend a little to save,” he said.
Mr. Jegher noted that banks are more willing to allocate money to protect themselves against online fraud, such as phishing scams and identity theft. Heavier regulatory pressure is also driving some important spending decisions. “We expect to see a fair amount of growth in” security spending, Mr. Jegher said.
But some banks are taking their time with emerging security systems. Mr. Cable said NetBank, for example, is trying to offset its back-office investments by holding off on additional spending for applications such as biometrics and tangible tokens that can generate online banking passwords for customers. “We’re still waiting to see where the market goes,” he said.
Jeanne Capachin, a research director at International Data Group Inc.’s Financial Insights Inc., said banks’ focus on back-office spending will help cross-selling efforts.
“It’s about breaking down the silos in the back offices of the bank and building connectivity,” she said. Financial Insights projects a 4% increase in IT spending for 2005.
The higher spending partly reflects an awareness that “we’ve been focusing too much on cost-cutting and we need to look at top-line growth,” Ms. Capachin said.
She said regulatory compliance places demands on technology, but that banks have handled it one piece at a time. Frequently “the deadlines are so close and the demands are so specific that they can’t take a bankwide approach,” she said.
This strategy has created room for systems consolidation and cost savings on compliance projects. Bankers have identified this as a major category for 2005 spending, Ms. Capachin said, especially for “smaller-ticket projects of a million dollars or less.”
Under the Sarbanes-Oxley Act of 2002, starting this year public companies must have their internal controls evaluated by external auditors. The Patriot Act has made banks pay closer attention to their customers’ banking activities, and the Basel II accord, which takes effect in 2008, defines capital standards based on risk models for the banks’ different asset categories.
U.S. banks do not have to follow the Basel requirements, but most are following them “because they want to be on the same footing or seem as advanced as they can be in their risk management processes,” Ms. Capachin said.
