March 05, 2002

Information technology spending at commercial banks, non-banks and finance companies in the United States will reach $34.2 billion in 2002, up 4 percent from 2001, according to a report by Celent Communications.

The largest commercial banks account for a disproportionately large share of this spending. The top four banks in terms of IT spending each are forecast to spend over $2 billion in their technological infrastructures. Citigroup, by itself, will account for over $5 billion in IT spending.

The reduction in the number of banks in the United States over the past 10 years has done nothing to reduce the level of IT investments. On the contrary, large banks tend to spend more than small banks on IT not just in absolute terms, but also as a percentage of their total expenses.

At many of the largest banks, IT spending accounts for over 20 percent of non-interest expense. At medium-sized institutions, the range is 12 to 15 percent.

Increased competition from non-banks, an increased emphasis on self-service, and an erosion in the importance of interest income and a corresponding increase in fee income are some of the drivers behind banks' IT spending plans, according to the Celent report.

Over the course of the next year, Celent expects to see banks invest considerable amounts of new funds in branches, the much maligned delivery channel whose demise has been long forecasted.

Due to the nature of bank IT, much of IT spending is etched in stone. "Most IT spending is pre-ordained, since most is maintenance-related and therefore unavoidable," wrote Octavio Marenzi, author of the report.

But new development efforts will capture an estimated $3.4 billion in 2002 and rise to $4 billion in 2003, pointing to a vibrant perception of the return on investment in new technologies.

However, an increasing amount of spending continues to occur outside of banks' IT departments. Whereas internal projects captured 43 percent of IT spending in 2001, Celent estimates that third-party providers and outsourcers will steadily increase their share of the IT budget at the rate of about 1 percent annually through 2005.

That's because credible vendor solutions exist across the banking universe as never before, built using new technologies that in-house programmers may not have had the opportunity to learn yet.

Furthermore, even the most successful in-house projects may fail when measured against the true objective of a strategic plan-a competitive advantage. "Technology developed in-house rarely offers a competitive advantage, much less a sustainable advantage, given how easily it can be replicated," wrote Marenzi.

Instead, competitive advantage may indeed stem from timely selection of the third-party providers that best meet a bank's strategic objectives. Software vendors now tend toward building integrated delivery channel architectures rather than point solutions, and most offer a choice between in-house installations and outsourced management as an application service provider (ASP).

Although new software allows better multichannel integration, not all retail channels will receive the same level of investment. Call centers stand to benefit by drawing upon speech recognition technology and better integration with other customer channels.

Banks will accelerate spending on call center technologies such as speech recognition and improved IVR technology. The effective handling of e-mail interactions with customers-e.g., automated routing, response, and escalation-will be a source of substantial new investment by banks, Celent reported.

Through the Internet channel, e-mail management seems to be a nascent growth area. "We believe that the effective handling of e-mail interactions with customers-e.g., automated routing, response, and escalation-will be a source of substantial new investment by banks over the coming years as banks increasingly turn to e-mail for more efficient and effective customer contact," wrote Marenzi.

Bank branches are also overdue for investment, according to Celent, due to the aging OS/2 platform commonly used to support existing branch applications. Yet ATMs, due to an already widescale, national deployment of new machines by banks and non-banks alike, will likely gain new capabilities rather than increased numbers.

On the wholesale side, the movement to Web-based systems for treasury management, foreign exchange and letters of credit will continue to draw technology dollars from the larger banks servicing those segments. Also, banks of all sizes are going after the lucrative small business customer and investing accordingly.

The threat of new entrants in the payments market has also made banks ready to spend. "Banks are fearful of being squeezed out of the payments business," wrote Marenzi. "Banks are scrambling to find ways of adding value by enhancing services or participating in new e-commerce ventures with non-banks."

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