IT Spending: A Strategic Push Toward New Technology Investments

IT spending in the North American banking industry will continue to rise at a moderate rate in 2005.

The U.S. and Canadian banking industries have evolved greatly over the last several years. While economic conditions, regulatory issues, competitive pressures and customer needs have all contributed to the changes, a more fundamental area has truly revolutionized the industry -- technology.

Technology's radical implications in the North American banking industry have grown exponentially. Although information technology has played a significant role in the banking industry for sometime, IT is a major operating and competitive requirement for banks today. This explains why North American banks are investing a sizeable chunk of their revenues in IT.

IT budgets are a crucial and determining factor in the pursuit of both new and existing technology projects. Technology investments are not simply about maintaining existing equipment -- banks can capitalize on their strategic IT investments to position and differentiate themselves competitively. Targeted technology investments with measurable ROI can enable financial institutions to realize effective strategies.

IT spending in the North American banking industry will continue to rise at a moderate rate as we enter 2005. North American banks will spend $44.3 billion on information technology in 2005. This spending level is approximately 3.9 percent higher than that of 2004, a trend that will continue through 2007. Celent believes that IT spending by North American banks will reach $47.9 billion by 2007.

U.S. banks will be responsible for the larger part of these expenses, with investments in information technology reaching $38.5 billion in 2005 and growing to $41.7 billion by 2007. Canadian banks are seeing their fair share of IT investment as well. IT spending by Canadian banks in 2005 is expected to reach $5.8 billion and grow to $6.2 billion by 2007. Overall growth rates vary between Canada and the U.S.-Canadian bank -- IT spending will be up 3.2 percent over 2004, compared to 4 percent for the United States. While Canadian banks often are regarded as innovators and early adopters of technology, the figures stated above indicate that Canadian bank spending growth is slightly below that of US banks. While this could be interpreted as a lag on the part of the Canadian banking industry, the growth figures are, in fact, roughly representative of and comparable to GDP growth in each country.

In aggregate, North American banks divide their IT budget among the various operating segments. In 2005, retail banking will represent 63.7 percent of spending, wholesale banking will snap up 25.9 percent and other banking services, such as investment management and brokerage, will grab 10.4 percent. It is clear that retail banking dominates the overwhelming majority of the banking business: Retail accounts for 80 percent of total net revenues. Given the focus on retail, the technology spending figures for retail are far from surprising. North American banks are expected to spend $28.2 billion on retail banking technology in 2005, a 4.7 percent increase over 2004.

Spending on new technology investments in North America is on the rise. This year, U.S. and Canadian banks will spend $8.2 billion on new technology -- a 14.3 percent increase over 2004. Spending on maintenance will grow to $36.1 billion in 2005, a 1.8 percent increase over the previous year. Maintenance spending will remain relatively constant in the upcoming years as banks funnel funds away from this segment and increase investments in new technology. Banks that successfully work toward and achieve the shift from maintenance to new investments will come out winners. New investments in areas such as security, payments, multichannel integration, and branch automation will be top of mind in 2005.

Harnessing technology to realize business goals is one of the most critical success factors for a bank today. This crucial link, along with inputs from both the management team and the external environment, is what defines the strategic and competitive direction of a financial institution. Well-managed strategic technology decisions are made by a diverse team of seasoned managers with a solid CIO at the helm.

Jacob Jegher is a senior analyst in the banking group at Celent Communications, a financial services research and advisory company headquartered in Boston.