January 09, 2011

Don't you just cringe when the answer to a question like the one in the headline starts "it depends?" For many industry players, both institutions and bank technology firms, the answer will depend on their circumstances -- just like every year, when you think about it. But then there are other interested parties, like investors, who are also interested in some answers, such as:

-How much will U.S. bank and credit union IT spending increase? -Which solution categories are going to grow the fastest? -Which companies are going to do better than their peers and why?

In conversations with institutions, bank technology vendors, and investors, intractable differences in their objectives lead to a range of possible answers to the headline question. The rest of this column explores what 2011 will look like for these three groups.

Institutions. At the beginning and end of the day, banks and credit unions need IT solutions and spend the money on IT. As a senior bank executive responsible for IT and several lines of business, I spent a lot of time each year with the senior IT staff reviewing every significant spending category and major contracts during a very turbulent industry cycle. Since joining the analyst community, I have spent many years gathering data and forecasting total bank industry IT spending -- which is a blend of art and science. There are some obvious trends that will impact industry IT spending for a long time -- that will last well past 2015 at this point -- starting with industry consolidation. The largest 85 institutions really drive (assets greater than $10 billion) and control IT spending at the macro level since they control almost 80 percent of industry IT spending. Nevertheless, for most profitable institutions, or about 40 percent of the industry, 2011 will be a better year than 2010. Many are already announcing decisions to invest in a wide range of solutions from online, mobile, risk and compliance, and in a few cases, core banking replacements. Each institution's budget will vary based on its objectives and capacity to spend. Institutions that are still very unprofitable, about another 45 percent, will struggle and will only spend when they have to. The 15 percent that are at or near break even will look carefully at their future prospects before committing. This smaller group includes potential takeover candidates and may hold off on making meaningful IT decisions in 2011.

Bank technology vendors. The group of well-established, proven bank technology vendors continues to shrink and 2011 should sustain this trend. The big U.S. vendors (e.g., FIS, Fiserv, Jack Henry) should be able to crank out organic revenue growth in the low to mid single digits (1 to 5 percent), depending on their win rates in the most comprehensive core banking deals (i.e., upwards of 20 solutions in one deal). While these are few in number where it counts the most (e.g., more than $3 billion to $5 billion in assets), the revenue and reputation momentum is critical to sustaining the believability of a vendor's capacity to generate organic growth. Smaller, niche vendors, particularly in payments, will have compelling growth potential, but achieving efficient scale will be a challenge for most of them. Big deals inked by large technology firms (e.g., IBM, Oracle, Microsoft, Cisco) will stimulate growth in spending at the high end of the market. New technology players, such as social media firms like Facebook, will draw interest and coverage but will not add value for banks or credit unions in a meaningful way.

Investors. This group is quite diverse (e.g., asset management, private equity, hedge funds) and has varied interests, ranging from takeover-candidate vendors to investors interested in distressed investment opportunities. Almost all of them want to understand the broader landscape affecting bank technology vendors that translates down to the upside/downside opportunities for a small group of vendors. This group is looking at modestly better prospects for their investments in 2011, although the risk-reward analysis can swing quickly.

Bill Bradway, founder and managing director of Bradway Research LLC, analyzes the business strategies and IT investments of US banks and credit unions.