For Community Banks, Tech Outlook is More Optimistic

For the first time, a major U.S. bank has asked Microgen, a London-based accounting-system vendor, to incorporate ATM activity into the bottom-line financial summary Microgen provides. Microgen's Aptitude application -- an overarching accounting system that takes financial information feeds from thousands of subsystems within a bank -- has been around for 10 years. So why the request for a change now?

"To see if there is a run on the bank? To know if they have cash flow at any moment?" asked BS&T. "Yes," replies Martin Redington, Microgen's director of product management, understandably declining to name the bank.

Many of the country's largest institutions are in similar situations, scrambling for IT solutions that can help them navigate the altered financial services landscape and the compliance and reporting requirements of the new regulatory environment. But not all banks are reeling. In fact a very divergent picture of financial health and, therefore, future technology spending is emerging, between big banks that suffered subprime losses and community banks not directly involved in the space (although no one will be immune from a recession). Tech spending by big banks involved in the securities business collectively will decline by 15 percent between 2007 and 2009, according to research just completed by Westborough, Mass.-based TABB Group.

"Banks are still trying to get to the bottom of, 'What's my exposure?'" says David Sherriff, COO of Microgen, referring to some of the challenges large banks are facing. Both experience and client feedback, he adds, suggest that the first cuts will be letting go of consultants and contractors, or at least cutting their rates; suspending new programs; and making maintenance of existing systems a priority.

By contrast, community banks say they will increase their technology spending by 10 percent next year, according to the latest annual survey of the sector by Computer Based Solutions. Art Gillis, president of the Dallas-based firm (and a regular guest blogger on BS&T's Web site), stresses that the prevalent picture in the media is New York-centric.

Not only is the difference about size, he says -- most of his respondents are community banks and all have less than $8 billion in assets -- it's also about region. Almost half the banks Gillis polled are in the Midwest, he notes. Gillis declines to say how many of his 361 financial consulting clients responded to the survey, but in categorizing the overall response, he says, "It's business as usual."

TABB Group CEO Larry Tabb says his firm's projected tech spending declines are "a lot" about lowered tech staff spending from layoffs. "It includes Bear and Lehman being fairly decimated, a significant decline in IT spending at Merrill/BofA, as well as 7 percent to 9 percent declines at firms without a governance change," he says.

For example, forget core system replacements by international banks, says Microgen's Sherriff. "Banks won't have time to change their legacy systems and adopt new regulations -- there could be new regulations within three months," he says.

On the other hand, First National Bank of Bosque County, a $97 million-asset community bank, is more free to spend on technology thanks to an influx of depositors defecting from brokerages and big banks, and is about to change its core system, says Brent Rickels, SVP and CIO of the Valley Mills, Texas-based bank.

Outsourcing: In or Out?

One cyclical trend when funds are tight is the increased popularity of outsourcing. One example of this is Citi's recent decision to sell a business-processing unit it owns for $505 billion now, although it will pay a steep $2.5 billion over the next decade for services from the firm's new owner. In announcing the sale of its Indian unit, Citigroup Global Services Limited (CGSL), to Mumbai-based Tata Consultancy Services (TCS), Citi said it was making the move "to reduce operating expenses." The bank declined further comment.

Mike Golebiowski, president of IBT, an Austin, Texas-based service bureau, contends that he hasn't seen much change in outsourcing demand in his sector -- community banks form the majority of his 150 corporate clients. The Citi-Tata sale, Golebiowski contends, might be akin to a high-level trip to a pawnbroker. But, he speculates, Citi's Indian unit may have needed a tech upgrade "and [Citi] didn't want the burden of that."

There is one unexpected "silver lining" in the U.S. to the current economic crisis, according to Financial Times research unit Mergermarket of London: Some U.K. firms recently surveyed are looking to the U.S. for their outsourcing now that the dollar is cheap (as, presumably, are many now unemployed tech professionals).