institutions are expected to stunt their investments in technology, according to a new survey.

Technology spending spiked 16% last year over 1997, according to Ernst & Young LLP's eighth annual survey on technology in financial services, released this week. The 1997 level was an 11% increase over 1996, which in turn had enjoyed a 10% uptick from 1995.

But percentage increases are expected to plummet to 8% this year and fall again to only 4% in 2000. They would remain relatively flat for the next two years, the 125 financial institutions surveyed predicted, increasing 5% in 2001 and 6% in 2002.

The pulling back appears to be a reaction to overspending last year. Respondents overshot the percentage increase for 1998 they had predicted a year earlier by 2%.

The unexpected increase was "probably due to the continuing expenditures on Y2K and European monetary union projects, combined with the rapid development of electronic commerce initiatives," said the report.

Slowing growth in technology spending is coinciding with an increasing need to invest in electronic commerce initiatives, and the apparent contradiction likely will create significant challenges.

"What we see is a collision course between the decreasing rate of spending growth and the ever-increasing demand for spending in the area of e-commerce," said Jim Scurlock, senior manager in the financial services industry group at Ernst & Young.

The part of the information technology budget devoted to discretionary projects -- as opposed to spending on ongoing maintenance and support -- dropped from 29% in 1996 to 26% in 1997, and plunged to 20% in 1998, the survey showed.

"E-commerce is still mostly considered discretionary spending," Mr. Scurlock said. Ernst & Young analysts attributed the discretionary-spending drop to the increase in total technology spending in 1998, which resulted from pumped-up non-discretionary programs like year-2000 remediation.

Respondents said they expected the percentage devoted to discretionary spending to rise to only 22% in 2002, well below the traditional figure of around 30%.

Deflated discretionary funding, combined with the expected slower growth in overall technology spending, "really limits the latitude (information technology) directors have to go out and fund discretionary projects," Mr. Scurlock said.

Still, financial executives expect to devote a larger percentage of their overall technology budgets to electronic commerce -- 10% in 1999, 12% in 2001, and 14% in 2002 -- according to the survey.

"Are these institutions prepared to spend money on electronic commerce? Yes," Mr. Scurlock said. "Will it be difficult to allocate funds? Yes."

Resolving the contradiction will not be straightforward, he added. "It's complicated and involves both technology and business people, and it can involve alliances with other companies."

One way executives may drizzle money on electronic commerce projects is by rationing it for other delivery channels like automated teller machine networks. While still important, ATMs may be "mature" enough in their development to require less funding, Mr. Scurlock said.

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