Economic uncertainty notwithstanding, it's safe to make one blanket statement about U.S. banks' spending on information technology: It doesn't go down. Or at least it hasn't declined for the past 25 years or so, give or take a couple.
For nearly as long, one could say the same of large banks in Europe and the Asia/Pacific region. And while Latin American bankers came late to the game, their IT initiatives have been astute in recent years, especially in light of the region's diversity of markets and equally diverse infrastructure challenges.
Bank IT spending worldwide will keep growing-at a slower but far from anemic rate-this year and next.
For predictable economic reasons, the credit-quality issues banks continue working through in the final weeks of 2001's first quarter give prognosticators pause in estimating future IT spending by the world's financial institutions. (Manufacturing corporations may be hurting most just now, but banks lend to manufacturers.) Nonetheless, professional management consulting firms with major banking and bank-technology practices-industry watchers such as Cap, Gemini, Ernst & Young, TowerGroup, Meridien Research, Celent Communications and Boston Consulting Group-agree that banks' IT spending will continue growing for many years to come. No economic calamity is foreseen, and the consultants believe it would take a sustained downturn to make much of a dent in banks' commitment to information technology.
"I suppose what we would argue is that financial services is different from most other industries in this (IT investment) area,"
says Michael McEvoy, TowerGroup's director of strategic IT investments research. "For one thing, such a large portion of banks' technology spending is spoken for before the year begins. ... And yes, we do anticipate a slightly slower rate of growth than we would have projected six months or a year ago, but certainly not negative. In fact, a downturn would be unprecedented.
"We continue to believe that even the postponement of discretionary IT spending will be very limited-for banks, what you'd call discretionary spending is less than 20% of the total for IT. Financial institutions really are a special case with respect to technology."
The decades-long growth of U.S. banks' IT spending stems in part, of course, from financial services' inherent demand for computational muscle. Indeed, it's the not-so-sexy technologies-mainframe transaction processing and back-office systems-that still command the greatest share of aggregate spending. That share is shrinking, however, and analysts cite the steadily growing proportion of total IT investment devoted to Internet-related projects (software, of course, but often hardware too) as a key trend-that is, a trend they consider of strategic importance to bankers. The message this statistic delivers isn't rocket science, but it does contain a touch of irony: Banks' unrelenting commitment to the Internet is seen as particularly significant not because previous efforts have met expectations but precisely because they haven't.
The proportion of Net-driven spending is growing so fast that some analysts, including researchers at Celent Communications, believe it will comprise nearly half of all IT spending by U.S. banks by 2005. The consulting firms such as CGE&Y believe past disappointments with Internet efforts-whether wholesale or retail, transactional applications or customer-service offerings-have made banks more determined than ever to hone their Internet strategies more effectively.
Bankers recognize, too, that disappointments on the Internet can be attributed, especially on the retail side, to customers' taking their sweet time-as most of us are wont to do while in "customer" mode-in tapping the channel. But few U.S. bank executives seriously question that their customers eventually will be conducting much of their financial business through Internet-enabled channels, tapping the Web's convenience while lowering bankers' cost of serving them.
Providers of financial services technology interviewed in early February were mindful of the short-term vulnerability of discretionary IT spending in a slowing economy, but they voiced confidence that 2001, and especially 2002, would be years of continued growth.
Metavante Corp.'s chief executive officer, Joseph Delgadillo, believes U.S. banks' IT investment will grow at high single-digit rates this year and next-an only slightly more optimistic view than the 2001 projections of consulting firms contacted for this story. Their respective takes suggest a consensus estimate closer to 6% growth this year.
"I've been with this company in multiple roles for 15 years now, and I can't remember a more exciting time or a more dynamic time," says Delgadillo, who has been president of the Marshall & Ilsley Corp. subsidiary (formerly known as M&I Data Services) since 1993 and CEO since January 1998. "You can read into that both significant opportunities and significant challenges." Among the latter, he adds, "from a very macro, industry-wide, view," is the consolidation of the banking industry in both the United States and abroad. The "synergies" banks achieve through consolidation will cut into aggregate IT spending, Delgadillo observes. But he is quick to note that banks brought Metavante (nee M&I) to the dance, and this leading provider of e-banking, bill presentment and payment, and customer relationship management solutions, among other bank technology and services, expects to "remain wedded" to serving banks of all sizes.
If consolidation does ultimately enable banks to spend less on technology, another fundamental and now-familiar trend-the one usually labeled "convergence"-is the opportunity side of the equation for Delgadillo, as well as for Metavante's competitors. Here again, though, the obvious benefits for technology providers as new, non-traditional customers for bank technology emerge (the recent move by the auto owners' organization AAA to begin offering bank-type products and services is a ready example) are coupled with a few more subtle reasons for optimism. Banks are managing convergence by "becoming very definitive in their statements, actions and strategies about the business lines they will pursue," Delgadillo says, "and there will be an exceptional reliance on technology to execute very, very well in those business lines they've picked."
In any case, some financial services IT vendors may take less of a hit from bank consolidation than they anticipate. Those serving the largest U.S. banks can take comfort in another finding tied to recently published research on domestic IT spending: TowerGroup reports that the 10 leading U.S. banks in terms of annual technology investments will account for more than 60% of industry-wide IT spending this year. Even before the merger of J.P. Morgan and Chase Manhattan, TowerGroup was estimating that Citigroup, Bank of America and Chase would spend a total of $11.8 billion on technology this year, or close to 40% of the U.S. banking industry total of $31.4 billion.
TowerGroup's McEvoy notes that this concentration of IT spending among the largest banks represents a disproportionately large share of total spending even when one adjusts for asset size. With as many as 150 lines of business-many of them extremely complex and IT intensive-and with far more business customers (again, even in relative terms) than smaller institutions, the money-center banks can be expected to continue spending disproportionately more on IT than their smaller counterparts for years to come. Consequently, says McEvoy, industry consolidation may actually be good news for solutions providers, or at least those vendors marketing their wares to the United States' largest banks.
At Newton, MA-based Meridien Research, banking expert Bill Bradway says the U.S. economy's documented slowdown in the fourth quarter of last year apparently is lasting into the current quarter. "But we're not economists," Bradway adds, stressing that Meridien's projections about, and analyses of, bank IT spending in 2001 and beyond are informed more by the industry's structural challenges than short-term economic blips.
Without question, says Bradway, an economic slowdown "can have the effect of stretching out-or postponing the timing, if you will-of IT spending waves, and that ripples out to technology suppliers. But, we're not seeing a wholesale jettisoning of IT spending but rather a fine tuning." Bankers will be more strict in their assessments of discretionary technology spending, he predicts.
Absent the bad economic news of fourth-quarter 2000, Meridien Research probably would have arrived at an estimate of about 8% growth in financial IT spending this year; instead, the firm is predicting 6.5% growth. Bradway says the projections include non-bank financial services companies, but banks will continue to dominate "strategic technology spending" (vs. spending on ongoing systems maintenance and the like), accounting for 55% of the total in 2001.
With a practice devoted exclusively to financial services and a longtime focus on banking, Meridien Research considers a variety of organizational, and indeed structural, issues confronting all commercial banks in shaping its annual reports on projected technology spending. Bradway pulls no punches, yet sounds much like a banker, in outlining the battles ahead.
"The growth rate of the U.S. population is about 1% a year ... so if you have to achieve 15% (growth) in order to attract investment, then it goes to the question of wallet share. How much will consumers spend on financial services this year versus last year? Thinking of yourself or your family and friends, are any of them spending 15% more on financial services this year ... and if they're a first-time homebuyer or first-time car buyer who needs auto insurance, then the answer is yes. Otherwise, it's not even close to that (15% growth rate)."
And if that weren't sobering enough, the Meridien Research analyst explains: "The pot of money that the 112 to 114 million (U.S.) households spends on financial services is growing, year over year, at about 5% to 6%." Most of that margin is captured in the form of interest payments on mortgages and automobile insurance premiums; the next biggest contributor is investment income from stocks and bonds; and last-and unfortunately not least important in the business model of traditional commercial banks-is deposit products and transaction services.
"So the opportunity we're defining is not one that is going to allow all boats to rise," Bradway says. "We have to figure out ... banks have to figure out ... how to attract new customers and a higher share of existing customers' wallets." Like a number of his peers at other research and consulting firms that serve the banking industry, Bradway points to customer relationship management, or CRM, as one area of technology in which banks will continue to invest for strategic reasons-and for years to come. (See sidebar)
Not surprisingly, technologies that promise cost savings through process automation, as well as software enhancements to banks' risk- management tools, also are expected to remain high on the list of IT spending that bankers will fund rain or shine. The competitive world in which commercial banks find themselves is not an arena for the faint of heart. The Internet is releasing lions at every gate, in the form of the incumbent telephone giants around the globe, automakers, and let's not forget AAA. Or Charles Schwab. Or GE. Or ... tomorrow's entrant.
Albeit a buzzword appropriated (and for good reason) by other industries worldwide, "convergence" is a stark reality in the banking business. "Financial services, by their very nature, can be very readily digitized and delivered electronically," observes Octavio Marenzi, managing director in Celent Communications' Boston headquarters. "Of all the industries out there, virtually no industry is as well suited for Internet delivery as banks and brokerages."
Because the Net is gnawing away at barriers to entry, financial services companies are essentially putting aside, or at least vastly liberalizing, ROI disciplines that would normally kick in at a time of slowing economic growth, related credit-quality concerns about their loan portfolios, and frustratingly low levels of customer participation. The sense of urgency banks feel to ensure their business models make sense in a digital economy not only is keeping the plug from being pulled on Net- related spending, it's one of the principal reasons no one is expecting serious cuts in banks' strategic IT spending in the next three to five years.
Recent research by Celent Communications, for instance, projects that between 1997 and 2003, the compound annual growth rate of bank spending on "traditional" IT will be about 14%. In the same period, the CAGR of spending on Internet-related IT is expected to reach 46%.
Cap, Gemini, Ernst & Young's senior manager, financial services/e- commerce, Jim Scurlock, says bankers are unambiguous in their commitment to Net technologies, whether in consumer banking or business-to-business offerings. "Our survey also asked bankers where they would like to spend more-not necessarily, for this particular question, where they actually intended to spend-and the 'PC/Internet' (category) was the biggest by far," Scurlock says.
CGE&Y's global sector leader for financial services, Keith Stock, notes that as financial services IT spending continues to grow at relatively strong rates, "the biggest question is how the mix of IT spending is changing." The movement today is clearly away from more traditional areas such as large storage silos and other database-related capabilities and toward "client-interaction and cost-reducing channels." This strategic shift reflects bankers' awareness of how many new competitors may come out of the woodwork.
Stock notes, too, that the specter of ever-expanding competition- disintermediation "enabled increasingly through technology"-is no worst- case scenario for banks. Its inevitability is "less quantifiable" by researchers than some trends, but declining growth rates in some other sectors of the world's industrial economy will motivate any number of non- financial corporations to begin eyeing technology's potential for "helping them figure out a way to get part of that (financial services) customer franchise."
Over the next two years, Stock says, "I think we're going to see many more (non-bank) players bundling their own products and capabilities with some financial services products and capabilities. And we may also see some movement in the other direction, with financial institutions examining what they can do to extend out from the cash-management or treasury businesses, for instance, to try to play other roles in the value chain for their corporate customers."
Is it any wonder then, asks his CGE&Y colleague, Scurlock, that bank spending on technology is expected to continue apace barring a major recession?
"IT spending is a given for banks," he says. "You have to do it. Do you focus on the development of new products and services-and that has led into a commodity trap-or do you target those expenditures toward systems and solutions that address customer needs and behaviors?" Scurlock agrees that banks are beginning to consider offering others' products and services along with their own, as Schwab began doing more than a year ago.
"This a fairly new discussion for them," he says. "I think it is an idea that is on many CEOs' agenda today; but, for financial institutions, this can be touchy."
The efforts of first movers to exploit the opportunities of convergence will be watched closely, of course, and may well be chronicled in this magazine for the next several years. Another key area of IT spending growth, however, is likely to be all but invisible. Eric Olson, a vice president in Boston Consulting Group's San Francisco offices and leader of BCG's financial services practice for the West Coast, says a significant amount of the growth in Internet-related IT spending will be devoted to refining and enhancing earlier investments.
"So much money has been spent in the past couple of years to get an offering up on the Web," Olson says. "There's been a great deal of work in that area, and there's some interesting stuff there. The fact is, though, very little of this work has been integrated with other systems in the bank. So, now is the time you're going to see a great deal of investment in integration. It's not technology with a name, per se, but we believe it will be an important area of focus for our bank clients in the next couple of years."
Olson adds: "It may be hard to get people excited about it, but it's one area of technology spending where it's not hard to show the ROI."