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Big Bank Failures Leave Hole in Tech Spending

The failure and consolidation among big banks will leave a long-term deficit in industry technology spending.

See Related Article: Many Bank IT Vendors Won't Survive 2009

"It's funny," says Jeanne Capachin, research VP for Financial Insights' banking and insurance practices, "we're one of the only [research/consultancy] firms that's saying technology spending will decrease. A lot are saying banks will automate processes and get rid of people, but most of that [already] has happened."

According to Financial Insights, bank technology spending will fall 3.2 percent in 2009. But others, including Jerry Luftman, lead researcher for the Society for Information Management (SIM), predict a brighter outlook. Interpreting the results of SIM's cross-industry survey of its CIO/CTO members in June, Luftman says, "This is a very different downturn. ... In the past, IT was the first to be cut. Now people are looking to leverage IT to reduce costs."

Celent predicts modest growth (1.7 percent) in 2009 IT spending among North American banks.

In addition to the fact that the SIM's survey was conducted before the worst of the financial crisis, "The SIM study misses a key point," says Leon Majors, president of the payments systems practice for Phoenix Marketing International, a Rhinebeck, N.Y.-based research firm. "Some major tech spenders are gone." Echoing Financial Insight's Capachin, he continues, "Enough will be gone completely -- Lehman, Bear [Sterns], WaMu -- or impaired -- Merrill [Lynch], AIG, etc. -- that the total spend numbers will have to drop even as individual survivor budgets may not." Previously a top 10 U.S. bank, Seattle-based Washington Mutual, for example, had $327 billion in assets in Sept. 2008 when it became the biggest U.S. bank to fail.

As a result, a hole remains in industry spending, Majors suggests, despite the fact that most of the 300 banks Phoenix surveyed in October 2008 indicated that their individual budgets were "steady or slightly increasing." Pointing out that even back in October some survey participants "feared [budget] revisions were coming," Majors notes that he embarked on a follow-up study in mid-January to address the impact of the crisis on banks' budgets, among other things. "We'll see whether they're still optimistic," he says.

Financial Insights' Capachin acknowledges that industry consolidation is fueling some current technology spending. Referring to reports that Charlotte, N.C.-based Bank of America ($2.72 trillion in assets) will spend more to integrate Countrywide Financial, purchased in July 2008, than the bank spent overall on IT in 2007, she says, "It's once only and [then] that spend's gone."

In contrast with Financial Insight's bearish outlook, Boston-based research firm Celent in January forecast modest growth in 2009 IT spending (1.7 percent) among North American banks. One possible explanation for Celent's higher estimate is that its outlook is for all of North America, not just the U.S., so it factors in Canadian banks, which recently were rated by The World Economic Forum as currently the world's strongest.

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