The nation's largest banks are changing their technology spending habits, according to a study from BT Alex. Brown Inc.
The study, which was based on responses from 13 of the top 25 U.S. banks, showed a rise in the average percentage of operating expenses devoted to technology-11.1% this year, compared with 9.9% in 1995.
It also found that banks are investing relatively less in systems designed to cut costs or improve processes. Instead, they are buying technology that supports sales and other revenue-generating efforts.
In the report, George A. Bicher wrote that a bank with a strong sales culture can afford to be a little behind when it comes to the technology it uses. "However," the report said, "a bank with the latest technology and a poor sales culture is not likely to prosper."
Among the survey's respondents, the median annual technology budget for 1997 is $170 million, 28.4% more than 1995. A little more than two-thirds of this money goes toward hardware-related expenses.
The percentage of the technology budget spent on improving processes or cutting costs fell to 23%, from 27% in 1995; and the allocation for technical maintenance declined to 24%, from 27%.
Meanwhile the percentage of technology dollars spent on revenue- generating efforts rose to 26%, from 21% in 1995.
"With the likelihood that cost-cutting momentum is slowing, it now falls to revenue growth as the key driver for earnings performance and profitability," Mr. Bicher said.
Of the money allocated for increasing revenues, about 40% went to retail banking projects and about 21% to commercial banking projects.
The banks expect about 60% of revenues generated by technology spending to come from existing customers.
"It appears that banks are not simply casting a wider net for new business, but dedicating significant resources toward enhancing revenue production from the traditional customer base," the report stated.
"If successful, banks would not only add to revenues but increase the profitability of customer relationships."
In addition to surveying the banks' technical goals, the study addressed some nuts-and-bolts technical issues.
For instance, the surveyed institutions averaged 10.6 operating systems, and about 55% used an open architecture. Thirty-eight percent of those not using open systems had no plans to begin doing so.
About 92% of the banks surveyed had systems capable of communicating across regional or state boundaries. The other 8% planned to install such systems by the end of next year.
The surveyed banks said 18.7% of technology spending this year would go to fix the year-2000 problem, which involves lines of computer code that, left unfixed, would process date references incorrectly.
But only 38% of the banks plan to treat year-2000 projects as ordinary technology expenses. About 62% have set up supplementary funds to finance the fixes. The banks on average are setting aside $42 million to identify and fix the bad code.
Mr. Bicher noted that even when internal fixes are complete, a bank is not immune to the potential disastrous effects of the year-2000 problem.
Banks are "restricted in their ability to monitor their vendors, and therein lies the risk," said Mr. Bicher.
The survey confirmed that the largest single component of the technology budget-32%-is earmarked for upgrading or building systems. The next largest outlay-24%-deals with customer service applications.
The survey also indicated that technology managers are taking on more important roles. Those in nine of the 13 responding banks report directly to the chief executive officer.
