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Financial Institutions to Increase Spending Modestly On IT In 2008

Technology spending by banks, capital market firms and insurers will be tempered by compliance and other market factors.

Banks and other financial services companies plan to spend a little more cash in 2008 when it comes to their IT. Amidst the doom and gloom of the credit crunch, a down housing market and talk of an impending recession, financial institutions still see the need for investing in technology to stay competitive and compliant, according to a joint survey of nearly 140 banks, capital markets firms and insurance companies conducted by Bank Systems & Technology and its sibling publications, Wall Street & Technology and Insurance & Technology.

Of course, not all of financial institutions' budget dollars will go toward developing or buying the latest and greatest technology. As always, the specters of maintenance and compliance loom large over IT managers' heads. Still, they somehow find ways to squeeze their budgets to allow for at least some innovation.

Banking on Moderate Budget Increases

At banks, for instance, IT spending will see an overall increase at institutions of all sizes. The largest spending increases appear to be at midsize banks -- 60 percent of survey respondents in that category said they would increase their IT budgets by at least 11 percent to 30 percent, compared with a minimum of 1 percent to 10 percent at small and large banks.

This modest increase in spending among banks is in keeping with recent trends, according to Celent (Boston) senior analyst Jacob Jegher. "Spending will be similar to trends over the last two or three years where we saw an average growth rate of about 4 percent," he comments. "But it is moderate. My one concern with this moderate growth is whether banks will have much to invest in innovation since they'll have to invest more in regulatory/compliance and maintenance." This compliance and maintenance burden, Jegher adds, has been an ongoing problem for bank IT, particularly for small and midsize banks, and it might explain their slightly higher budget increases for 2008.

According to Fifth Third Bank (Cincinnati, $101 billion in assets) CIO Raymond Dury, often smaller financial institutions can't handle the high cost of security and compliance. "Although the larger banks have more compliance to worry about, there's not as much revenue to spread that spending over at the smaller banks, and they just can't innovate," Dury states.

When asked about the three areas of IT in which they expect to increase spending the most, security, by far, was at the top of the list for large (80 percent) and midsize (50 percent) banks. Other important areas of spending for large banks included network infrastructure, storage and outsourcing, all at 40 percent. For the midtier banks, enterprise applications and application development also factored into the top three (both at 50 percent).

Small banks, meanwhile, place emphasis on three very interconnected areas: 75 percent identified both network infrastructure and communications -- such as phone, E-mail and teleconferencing -- and 50 percent pointed to mobile computing. This could indicate that the little guys know they have to offer similar channels and services to the big guys in order to survive going forward.

Among the top three IT priorities at banks for 2008, cost cutting in IT only appeared on large banks' lists, though it was at the top, at 60 percent. This finding could just be a sign of prudence on the part of banks, if Fifth Third's Dury's response is any indication. Fifth Third's 2008 IT spending will "increase in real terms, but not percentagewise," he explains. "We've made several acquisitions and are investing in new products and services for our clients. But I am also challenged to find efficiencies."

Among midsize banks, improving risk management was most important (50 percent). Adopting mobile devices and applications was far and away the top IT priority for small banks (75 percent). But, similar to their larger counterparts, they also showed interest in improving security (25 percent) and risk management (25 percent).

When it comes to spending on specific banking applications, the results varied widely. For large banks, the online channel (60 percent) was tops, followed by core systems (40 percent). However, anti-fraud technology (20 percent) and branch optimization (20 percent) also were among the targeted applications. According to both Dury and Celent's Jegher, this prioritization makes sense.

"The mobile banking blitz by the big banks is an extension of their online channel," says Jegher. "They want to find ways to increase access to their online offerings."

Fifth Third's Dury explains that the large banks can realize good payback from investments in the online channel as they divert customers from the branch and call center. He notes that his bank is busy updating its Internet offering.

Meanwhile, for midsize banks, lending technology topped the list at 50 percent. The credit crunch aside, Jegher says midsize banks still can gain many efficiencies at both the front and back ends of the lending process. Core systems, payments, risk management and anti-fraud technology all tied for second place at 33.3 percent.

As for small banks, risk management technology and payments technology (both at 75 percent) appear to be the front-burner issues, followed by core systems (50 percent) and lending technology (50 percent). "There are a lot of niche players in payments," observes Jegher. The small banks have to find a way to compete with the 'anti-banks' that have great technology," he states. "Banks have to innovate to compete."

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