Bank Tech Budgets: Making Sense of Up, Down or Sideways

By Bill Bradway, Founder and Managing Director, Bradway Research

The rock-and-roll developments of 2009 have achieved historic significance in many ways.At this time of year, institution management teams and the Bank Tech vendor community are all gazing into the IT budget crystal ball for 2010. Everybody knows the Bank Tech vendors are thinking about their clients' budgets and how they can squeeze out incremental new revenues without losing clients. Consolidation is also playing out with Bank Tech vendors (e.g., FIS and Metavante), and all established Bank Tech vendors are struggling to produce strong, consistent organic revenue growth. Perhaps some of you tuned into the half-day investor presentation Webcast on December 7th. What was said and not said will have some bearing on the combined company's 2010 results and is indicative of the up, down, or sideways nature of how bank IT budgets are likely to play out in 2010.

One fundamental fact remains -- banks cannot grow their business, improve service levels, lower operating costs, or innovate without better IT solutions. I continue to find that the best positioned banks and credit unions are moving forward with projects that improve their competitiveness. A year ago, I stated, "IT spending in 2009 will be flat to +2 percent, but that level disguises the opportunities." The year turned out to be essentially flat for the industry -- yet there were significant opportunities that individual institutions pursued.

In September, I published an analysis of two significant mid tier bank outsourcing selections. The two banks, with assets ranging between $2.5 billion and $6 billion, completed and announced the selection of a new outsourcing vendor relationship in 2Q2009. The ramifications of these two decisions illustrate that the value of a modern, comprehensive solution that extends well beyond a core bank processing solution is prescriptive for future vendor selections by mid-tier and community banks and credit unions. A second key factor for these banks was the vendor-client relationship and a vetting of client references. The combination of these two factors defines what I refer to as "the future of outsourcing." These two institutions made game-changing decisions for their future and are investing significant resources and budgets to transform their institutions.

The expectations for 2010 face a continued air of uncertainty for IT spending. The severity of the economic recession appears to have distinct regional and/or market consequences. For example, housing, commercial real estate and their related mortgage markets face ongoing delinquencies, foreclosures, and disposing of real estate owned properties. IT spending in these lines of business will be strongly influenced by individual institution pain points. The big core banking vendors are considered "bellwether" leaders of the Bank Tech industry. If this group fares well there is hope for strong growth in overall IT spending for banks and credit unions. If this group struggles, then future growth in Bank Tech IT spending will be lower and perhaps turn gloomy. During its investor Webcast, FIS projected a range of 6 percent to 9 percent for long-term organic revenue growth -- well above the rate of growth for the industry's IT spending in 2010.

There is no one universal answer (up, down or sideways) that works for all institutions for either operating IT or IT capital expenditures. What should bank and credit union execs think about when they plan for their 2010 IT budgets? Managers making innovation IT budget decisions should review my previous BS&T blog. Managers planning for a "business as usual" IT budget should contemplate the fixed and variable cost components for their operating IT budgets and review the levers that affect each type of cost. IT capital expenditures should be reviewed on timing (when to commit) and continuity (relationship to existing and co-dependent initiatives) objectives or needs.

Bill Bradway, founder and managing director of Bradway Research LLC (Framingham, Mass.), analyzes the business strategies and IT investments of US banks and credit unions.