Second in a series

Coming out of this crisis, banks are going to want to be as flexible as possible, with a nimble technology infrastructure that lets them respond quickly to every opportunity made available to them in the marketplace.

Good luck with that.

The complex maze of hardware and software lurking behind the curtain at the nation's biggest banks has grown even more treacherous since the start of the downturn and the advent of shotgun mergers between banking companies — and their information technology systems.

IT teams, overloaded with work even before the widespread layoffs that thinned their ranks, are scrambling to rewire, amid an increase in regulatory scrutiny and demands for better internal auditing.

Banks are being pressed to do more at a time when their bosses would prefer that they spend less, without sacrificing any of the attention paid to online banking sites, automated teller machine networks, transaction processing and other workaday systems that keep banks in business.

As a result, many banks are holding off on projects to make their IT infrastructure leaner and more efficient.

But the longer banks postpone addressing the complexity issue, the harder it will be to contain it as an IT problem — and the more likely it will become a full-fledged business risk, said Rudy Puryear, head of the global IT practice at the consulting firm Bain & Co.

"There is no such thing as a simple change anymore, because everything is so increasingly complex," Puryear said. "It drives up the cost of products, and drives down the business' responsiveness."

For now, that's a consequence banks can — or must — live with. But three to five years from now, addressing complexity will go from being an important matter to an urgent one, Puryear said. And that will be the inflection point where banks, if they want to remain competitive, will have to fund a significant streamlining of their IT, he said.

Until they do, many banks will remain beholden to inefficient, unwieldy and frequently outmoded systems, built in-house by and large and stitched together in hodgepodge fashion as companies expanded their product offerings or acquired competitors.

Maintaining those systems can easily eat up 80% of a bank's IT budget, leaving little for "discretionary" investments in more innovative types of technology.

"That's the albatross around their necks, in that these systems have to be up 24/7 to handle massive amounts of data, and yet they're not [able to help banks] to get new customers or to deepen relationships," said Alan Mattei, a managing director at the New York consulting firm Novantas LLC. "These systems are table stakes. They don't get you above your competitors."

So unless banks figure out how to run their central systems more efficiently, they cannot possibly devote more money or manpower to IT innovation without either paring back the activities currently supported by their infrastructure — a seemingly preposterous development — or expanding their IT budgets — certainly not a preposterous scenario, but an unlikely one in the current economic environment.

According to a new survey from Aite Group LLC, 73% of banks and credit unions kept their IT budgets this year at or below 2008 levels, and 72% of budgets in 2010 will be at or below 2009 levels.

But there are signs that banks are planning to make investments that will help free up their budgets in the future. In Aite's poll of top technology executives from 80 U.S. and Canadian institutions, one-third said that upgrading applications and infrastructure would be a focus for them over the next two years. Respondents from large institutions were more likely to consider the upgrades a "very important priority," with 40% saying as much, compared with 22% of their counterparts at smaller institutions.

Getting the upgrades done will make it less likely that banks will encounter the quirks and fragility of the systems Mattei recalls encountering a decade ago when he helped a large client expand its online banking capabilities.

"IT was running around in circles trying to figure out how they were going to build this online platform and connect it to these ancient systems and make the whole thing work," Mattei said.

Without significant infrastructure improvements, the next generation of business initiatives will heap more stress onto systems already running at or near capacity.

"Those willing to invest in becoming more flexible, with faster cycle times, will certainly gain from it," Mattei said.

The smartest banks will make sure that whatever their infrastructure, it gives them a high-level view of risk across all business lines, said Dana Wiklund, research director for Financial Insights' risk management advisory service. Case in point? JPMorgan Chase & Co., and the millions of dollars it spent building an enterprise risk management system that Wiklund credits with protecting the firm from the degree of harm suffered by many of its rivals.

"At any point in time, I think that bank had a better handle on exposures across the entire organization that were available to its most senior management to make strategic decisions," Wiklund said. "Institutions that either have the foresight or the management directive to make that a priority are going to be in a better position to look at market variances earlier and make better decisions."

The question now is how long it will take for banks to come up with a more elegant infrastructure to facilitate that.

"You've got a negative force in the form of budgetary capacity," Wiklund said. "But you've got a positive force in that there are some lessons learned from the financial crisis, in terms of establishing data, software and hardware to be coordinated across different business units to provide an enterprise view of risk."