Analyst Says IT Cost Controls Show Results As Investment Chugs Along

NEEDHAM, Mass. – The technology investment and deployment practices of big banks are often seen as leading indicators for what’s to happen in credit union land, and a new report by a leading think firm shows that while their spending will grow slowly, there is growth in strategic IT areas. That’s particularly true in “core pockets of technology” that will see increased investment as strategic cost management moves made beginning in 2001 after recession set in and the dot-com bubble burst begins “bearing fruit,” TowerGroup says. “While the banking industry will see only nominal increases in total IT spending through 2007, TowerGroup believes that the aggregate numbers don’t paint the full picture,” says Virginia Garcia, senior analyst in financial services and IT investment strategies at the research and advisory firm. Overall IT spending at U.S. commercial banks will grow 3.3% a year from $33.8 billion this year to $38.2 billion in 2007, Garcia estimates. “The nuances are in the interplay among the three core areas of bank IT investment: maintenance (the cost of maintaining existing IT infrastructures); replacement (the cost of replacing legacy and other systems); and new technology,” the analyst says. “The impact of many of the cost management projects put in place over the past few years will become visible in 2004, shifting the dynamic between these primary investment buckets,” she says. This year, U.S. banks are spending more than 81% of IT outlay on existing technology infrastructure, an area that will continue to account for the bulk of IT investment through 2007 that meanwhile will drop to about 75% of IT spending during that same period, Garcia predicts. That decrease in maintenance spending will “open the door for increased growth in both replacement and new technology spending,” she says. By 2007, replacement investments will have grown from 8% of total IT spending to nearly 11%. And by 2007, new technology investments will have grown from nearly 11% of total IT spending to just under 14%. And what kind of technology are we talking about? “Consumer banking technologies will still command the lion’s share of U.S. bank investment,” Garcia says. “In 2004, U.S. banks will invest $22.8 billion in consumer banking technology, versus $8.02 billion for wholesale banking and $3.88 billion for payments.” Meanwhile, IT staffing will remain flat through 2004 as banks increasingly invest in hardware, software, outsourcing and professional services, the TowerGroup analyst says. So, while the perception might be that technology spending has been slowing to a crawl, “the truth is that despite cost pressures, major banks don’t simply abandon IT projects mid-stream,” Garcia says. “Like a speeding train, they apply the brakes slowly, with an impact felt over several years.” She reiterates that 2004 will be the year when the industry will “begin to see the tangible results of a range of long-term cost management projects.” The senior financial services IT investments analyst concludes: “The heart of today’s IT spending story is strategic cost management. And the question all financial institutions should be asking is, `How can I save money in existing IT budgets, in order to spend money to innovate and compete?’ ” [email protected]