Large Banks Blew the Lid off IT Expense in 2010

Large financial institutions account for more than 80 percent of IT spending; here's the reality behind their spending strategies.

There's a lot of buzz and noise about IT spending, more so these days, because of the apparent drought during the three-year banking crunch. But news of increased spending is like Friday night cheerleader hoopla at high school football games. Claims from the pundits give readers the impression that all is well again in banking. They even have it pinned down to a 4 percent increase in spending for 2011. In my opinion, no bank is yet on any kind of spending spree. IT spending is up, but only for the large FIs, and not for new tech capabilities, but for putting out fires and consolidating acquisitions.

When one asks how much spending is expected in the bank IT space, I prefer to answer with a question: "How many angels can dance on the head of a pin?" I really don't know the answer, nor does anyone else, so I'm obligated to provide the following as the basis for my take on bank IT spending in the U.S. May I once again remind every reader that my idea of "spend" is the annual aggregate of 15,219 spread sheets representing the IT budgets of all FIs.

Large FIs spend the lion's share of IT money, 81.5 percent of the total. There are 135 FIs in this group (105 commercial banks, 20 S&Ls, 5 credit unions, and 5 credit card, brokerage, and investment banks). I'm saying that an FI has to have $8 billion in assets to be considered a large bank. That arbitrary designation is a subjective one, but no one has challenged it so it must be OK. If you're the DOJ, the group of large banks included the top 50. That's what they used in examining the possibility of antitrust issues regarding the FIS/MV merger. If you're Accenture, the large group includes the top 20. If you're a too-big-to-fail protagonist, the large bank group includes the top four. I cut off the group at $8 billion because I play psychologist and assess their IT behavior.

That's not to say Bank of America and Northwest Savings (two ends of the spectrum and former clients) are exactly alike, but I'm looking for representation of characteristics in a group and 135 FIs provide it far better than 20 or 50 or even 100. For example, at #134, Boeing Employees Credit Union, needs to be represented in the group.

This is what I know about the top 135:

1. They run their own. They don't favor outsource. They don't want ready-made. They are now buying rather than building. They employ huge staffs. They call the shots. Heaven help any tech vendor who signs a contract with a large bank. It will be one-sided.

2. The large group spends on IT freely, like 20 percent of total bank operating expense.

3. The largest of the group spends more on IT than the top six vendors combined generate in revenue.

4. They all run on legacy systems, and it doesn't bother them enough to switch.

5. For at least 20 years, large banks were criticized for using legacy technology. Critics didn't move them. If they switch it's for reasons other than to adopt new infrastructure.

6. Citi North America switched to FIS but not to get out of legacy. They switched to join the family of other international Citis that were using FIS.

7. Compass just signed with Accenture but they didn't hire McKinsey to make that choice. Compass believes in family values and BBVA (their parent) showed them the way.

8. Large banks don't believe in conventional wisdom. If they need a correct answer they'll hire the right guy as long as he has a SSN. Dog and pony shows don't impress large banks. Large numbers don't impress large bank because they know what large means.

9. Large banks do the mergers, so they have huge IT labor costs.

10. Large banks put lots of emphasis on IT's first name. They rely heavily on the value of information. That's why they spend large sums of money on business intelligence solutions.

11. Spending large does not in itself mean spending smart. It's spending when that counts, so when large banks spent large in 2010 it was after the barn gate was closed. Not the best time to do that.