2010 IT Spending Forecast Not All Bad for Banks

Banks' technology spending in the coming year will be defined by treasury services and M&A integration, according to Jacob Jegher, Senior Analyst, Celent.

The tumultuous state of the banking industry raises many questions about technology spending at North American banks. What will total IT spending be in 2010? Will IT spending fall if the industry continues to suffer? It is easy to assume that total IT spending will fall, but research shows that is not the case.

While there was a decline in North American IT spending growth in 2009 (1.7 percent growth in 2009 vs. 3.1 percent growth in 2008), absolute spending continues to rise. There are several reasons why overall spending figures are still in the black. First, maintenance spending makes up the lion's share of the budget. About three-quarters of the total IT budget is dedicated to maintenance. As such, there is only so much fat that can be trimmed. While many banks are undergoing multiyear projects to become more efficient and have invested in service-oriented architecture (SOA), these efficiencies have yet to be fully realized.

Another factor is M&A activity -- spending on post-merger integration work is on the rise. There was no shortage of deals in 2008, and those involved are still paying dearly to integrate systems and migrate users to new platforms.

Finally, small and midsize banks are investing in IT to gain market share. Although there have been several casualties during the economic downturn, many small and midsize banks have enjoyed growth in deposits. These banks recognize that they have new customers who can buy additional products. Small and midsize banks are using these new customers as a jumping-off point to gain market share. Banks will invest in marketing campaigns, product bundles and online offerings to develop these newfound relationships.

Corporate Banking's Rising Star

However, it's not all fine and dandy on the IT spending front. Spending on new technology investments by banks totaled US$8.7 billion in 2009, but this figure represents a 14.4 percent decline over 2008. The jury is still out as to whether spending growth on new investments will be back in the black in 2010. But while Celent is currently in the process of preparing its annual IT spending reports (available in January 2010), it has identified a shining star that should contribute handsomely to spending on new investments in 2010: IT spending on corporate banking is skyrocketing.

In July 2008 Celent predicted that it would be 12 to 18 months before the industry would begin to see cutting-edge corporate banking solutions complete with Web 2.0 elements. Our predictions were spot on. This past fall Citi unveiled CitiDirect BE, its next-generation corporate online banking platform. Bank of America also announced its next-generation offering of CashPro.

Cash management will continue to evolve. Analytics, social media (primarily closed groups for corporate clients), interactive online training/education, desktop and online widgets, and much more will start to peek out in 2010. Additionally other large banks will attempt to catch up to Bank of America and Citi. Midsize banks will also attempt to compete here as they recognize the importance and profit potential of corporate banking.

Innovation is necessary in order for banks to thrive. The spending tug-of-war between maintenance and new investments has stifled innovation at many banks and limited competitive possibilities. 2010 could be a defining year for many banks as they aim to transition into innovative, competitive forces. Banks that successfully work toward and achieve the shift from maintenance to new investments will come out winners.