After a year of tightening their belts, North American financial institutions will be opening their wallets once again to invest in information technology in the next couple of years.
That's according to Celent, which said in a new report that it expects IT spending in the sector to grow by 2.2% in 2010 and 3.1% in 2011, which will follow a weak period of growth in 2009-just 1.7%.
According to the report, "IT Spending in Banking: A North American Perspective," executives recognize the importance of cutting-edge technology in today's marketplace.
However, of particular note, the Celent researchers found that much of the investment is on technology to serve corporate customers, with cutbacks or flat focus on expanding retail services.
"Technology's radical implications have grown exponentially," said the firm's Jacob Jegher said. "Although information technology has played a significant role for some time, today it is a major competitive requirement for financial institutions. This explains why North American banks are investing a sizeable chunk of their revenues in IT."
Celent researchers label IT spending as investments made in hardware, software and technology-related services. The firm splits IT spending into four categories: internal IT spending, which encompasses all costs related to internal IT use, including data center operations and IT personnel management; external IT spending, which consists of all money spent on external hardware, software and services; new investments, which involves costs related to application software development and significant enhancements to existing software applications; and maintenance, which points to the costs of maintaining current IT infrastructure.
Beating out the others in the 2010 IT spending growth forecast is the new investments category-after an 11% decline in 2009, spending in this particular category will grow by 7.1%, the report said, and the majority of these expenditures will be made in wholesale banking. Retail banking will not see as much spending-IT spending growth in the retail arena was just 1.2% in 2009, and it's expected to fall to half a percentage point in 2010.
Banks of all sizes will make upgrades to their existing IT platforms with the goal of attracting new business-mainly from corporate clients but from small business clients as well, Celent researchers said. Setting an example are big banks such as Citibank, which recently announced the launch of its corporate online banking platform CitiDirect BE, and small and medium-sized banks are expected to follow suit with initiatives of their own.
"Wholesale banking will see increased focus on the corporate cash management space as banks look to upgrade their aging platforms to woo additional business," Jegher said. "This will trickle down to the smallest of businesses as banks also work on targeting additional small business customers."
Fueling banks' interest in new IT investments targeted at corporate clients is the emerging trend of corporate relationship building. The desire to form and nurture relationships with corporate clients will spur innovation in wholesale IT development, the report states.
"Wholesale banking will take the innovation crown as banks push out new cash management portals and functionality for corporate clients," Jegher said. "Relationship building with corporate clients and the yearning for profits will drive innovation in this space."
While new investments show the highest potential for growth in 2010, it's the maintenance category that will cost financial institutions the most, the report said. Three quarters of banks' budgets will be spent on maintenance necessities such as software and hardware upgrades and small system enhancements, and Celent researchers say while the expense of maintenance is a burden to banks, it's unavoidable for now.
"There is only so much fat that can be trimmed [from maintenance spending]," Jegher said. "Whereas banks have invested in system modernization and are attempting to become more efficient, they are unable to escape the maintenance conundrum."
Celent's report said there is one area of banking in which IT spending is not expected to grow this year-retail. Behind this conclusion are two factors: The growing trend of self-service and the fact that retail banking operations are being eliminated. Both banks and their customers desire cutting edge self-service banking (which includes mobile banking, online bill pay and online customer service), but most retail banks don't have the funds for such expenses, the report states.
"Many [banks] want to offer next-generation consumer online banking sites full of rich Web 2.0 elements," Jegher said. "The fact is, however, that the majority of retail banks can't afford to take on these hefty investments at this time. Cost-cutting is still a major theme at banks."
Additionally, just as in 2009, new IT investments in the retail banking realm will decline this year. Celent researchers blame this trend on a lack of available funds and new project funding challenges faced by retail banks.
"Particularly in the retail banking space, new investments that do get funded over the next few years will be highly scrutinized, taken through an arduous selection process, and likely face significant delays and push back," Jegher said. "This will unfortunately stifle innovation in the U.S. retail banking space."
This negative trend in retail banking won't last long-the beginning of an uptick is expected in 2011, the report said.
Overall IT spending won't be at its highest growth rate ever this year, but the start of an uphill climb has been indicated, and that, Celent researchers said, is good news.
"There is still plenty of uncertainty in the industry," Jegher said, "and we are not completely out of the woods, but 2010 has the potential to be the start of a turnaround."