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Tech Spending in 2009 to Be Trimmed, Not Slashed

Bank technology executives acknowledge that 2009 will be lean, but they're hopeful that it won't be too mean.

No doubt it's a time of greater budget scrutiny in the banking industry. But while the sky may be falling, the world hasn't stopped turning. Banks need to keep going, and technology may help them conserve scarce resources, so none of the bankers BS&T spoke with expect radical IT budget cuts in 2009.

"Our budget will remain the same for 2009," according to a spokesperson for San Francisco-based Wells Fargo ($1.4 trillion in assets), a top-five U.S. bank. A source at Bank of America, the top U.S. bank by assets with $2.72 trillion in assets, notes that the Charlotte, N.C.-based institution's technology cost to integrate Countrywide Financial, acquired in July 2008, will exceed Bank of America's total technology budget for 2007. The BofA banker requested anonymity, and both Wells Fargo and Bank of America declined interview requests for this story.

IT spending trends toward maintenance, says Celent research.Considering both the 80:20 rule (in this case, that 20 percent of banks account for 80 percent of bank technology spending) and the likely rise in mergers and acquisitions in the industry as weak banks go to the wall, a reasonable level of technology spending seems guaranteed for 2009. Meanwhile, at the bottom of the banking pyramid, many community banks are relatively better capitalized than their bigger brethren that have been hit hard by soured subprime loans, and many are in the market for technology to help them win market share now.

On the international front, several banks are strongly situated and may also be shopping for technology. For example, London-based Barclays Bank (US$2.027 trillion in assets) -- one of the top U.K. banks not to receive a government bailout -- is expanding, especially overseas (see related offshoring article). Barclays' top technology executive, Stephen Bonner, head of information risk management, was not available to detail the bank's technology spending plans, but Sean Gilchrist, Barclays' digital banking director, tells BS&T, "We're still investing in the development of online banking."

Given the likely budget scrutiny faced by bank IT organizations, the best-positioned vendors are those that can clearly demonstrate how their technology can help banks cut costs or win new business, particularly coveted deposits. "It's difficult to overstate the importance of deposits and deposit-related technologies," noted Tom Brown, CEO of New York-based hedge fund Second Curve Capital, at BAI's Retail Delivery show in November. "When budgets are put to bed, banks will give funding to anyone who helps them cut costs or add deposits."

Deep Discounts

And just as consumers are seeing at the malls, vendors are discounting their offerings to entice investments from banks, such as First California Bank ($1.2 billion in assets). The West Lake Village, Calif.-based bank is moving to a new online banking system with additional functionality for "at least a 30 percent reduction in cost," according to SVP and CIO Sara Pelaez. The new system, from Q2 Software (Austin, Texas), will replace two legacy systems -- Calabasas, Calif.-based Digital Insight's online banking platform and a telephone banking system from Monett, Mo.-based MEA Financial. The Q2 system also will support mobile banking, which FCB plans to introduce in the second half of next year, Pelaez notes.

Q2 is a less-established vendor, "and they are aggressively pricing the product," adds Pelaez, who was recognized by BS&T as one of Banking's Elite 8 2008. The "very generous" deal, she says, includes some free hardware and free integration with the bank's core processing system.

Nonetheless, Pelaez, whose 2008 tech budget was "at least 10 percent of net income," is prepared for some budget cuts. "I'm hopeful the cuts won't be really drastic," she says, noting that she plans to introduce a host of new technologies in 2009, including a new CRM system and an expansion of the bank's use of remote deposit capture as part of First California's push to attract new deposits. Phased PC and phone upgrades are also planned, Pelaez adds, noting that the driver is reducing costs. The IT organization's mantra, she says, is: "Cut out anything you could live without."

According to Dave McLeod, EVP and chief technology officer of Jackson, Miss.-based BankPlus ($2.1 billion in assets), also an Elite 8 2008 honoree, "[Budget] fine-tuning will certainly be in play, but rampant budget cuts don't seem to make much sense. IT is so embedded in so many organizational processes, and that compounded with the fact many of the costs are already spread over multiple years makes it difficult for me to see any dramatic spending shifts."

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