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Management Strategies

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Celent Predicts an Increase in Bank IT Spending in 2010

Spending on IT by U.S. and Canadian banks will reach $50.9 billion by 2010, says Celent. And the increase will be lead by new investments in wholesale banking and a re-hiring trend.

Celent senior analyst Jacob Jegher discussed some of the trends of the past year and those of the year to come during a webinar Thursday. Although IT spending is on the decline (3.1 percent for 2008 versus 1.7 percent for 2009), the figures are still "in the black" as absolute spending continues to rise. The primary reason for this is maintenance of existing legacy systems, which comprise 76 percent of IT budgets.

"Legacy systems aren't going anywhere," he told attendees. "They need to be supported, and banks are moving to things like SOA to make them more efficient. But this is the reason we see the base of IT spending intact."

Another factor influencing IT spending in this year of crisis is post-merger integration work, which is on the rise, Jegher noted. He cited the Wells Fargo/Wachovia merger as just one example. "They have numerous complex systems. They have to look at the types of systems to keep, which to move, which to migrate," he said.

A third element of this continued spending on technology at banks is also due to the crisis—small and midsize banks are investing in IT to gain market share. "With the crisis, people moved their banking relationships around, so now these smaller banks are trying to woo new deposits. They're trying to become more competitive," Jegher said.

However, in terms of actual new investment, wholesale banking is leading the way, and will do so into 2010, Jegher asserted. While spending on the retail and brokerage areas at U.S. banks will remain flat, banks are turning their attention to business banking. This side of the bank will see a 5.2 percent increase in IT spending, as it jumps from $11 billion to $11.6 billion.

Meanwhile, Celent predicts a slight decrease on the retail side into next year, from $27.8 billion to $27.6 billion.

The trend on the Canadian side, however, is toward a bit more growth in both retail and wholesale. Retail banking spending will move from $4.2 billion this year to $4.4 billion in 2010. Wholesale banking IT spend will see an increase from $1.5 billion in 2009 to $1.6 billion in 2010.

Internal spending will dominate in the U.S. as banks seek to bulk up their IT staff. "There will be an increase [in internal IT spending] of 3.5 percent into 2010 because of re-hiring," said Jegher. "We think there will be rehiring in IT and a focus on new investments, especially in wholesale."

Look for spending here to go to $17.1 billion in 2010 from $16.5 billion this year.

In Canada, the area to keep an eye on is spending externally, as Canadian banks shift from working primarily in-house to working more with software vendors.

So although spending on new investments were slashed at banks this year (from $10.2 billion 2008 to $8.7 billion in 2009), Celent expects this to jump in 2010 to $9.2 billion for U.S. banks. Canadians banks were not hit as hard by the crisis and, therefore, did not see much of a cut to their IT spending. In fact, Celent figures show an increase in new investments from 2008 into 2009 and predicts this to continue into 2010.

What the firm sees as the hot trends of 2010 are varied. They include:

  • Transaction banking taking center stage;
  • Banks tackling the payment hub at the front and back end;
  • Leaps in next generation online corporate banking solutions as other try to catch up to leaders like Citi and Bank of America;
  • Mobile banking extending its reach to remote deposit and small business/corporate banking;
  • Banks getting serious about implementing personal financial management tools;
  • Transaction monitoring and behavior analysis tools becoming standard fare at banks.
Still, whether a bank spends a heap or very little on IT, Jegher reminded attendees that this doesn't mean anything. "There is no correlation between the level of IT spending and bank profitability. It all comes down to the strategic direction, the goals of the firm and its spending priorities," he said.

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