The tumultuous state of the banking industry raises many challenging questions about the state of IT spending at North American banks. What will total IT spending be in 2008 and 2009? Will IT spending fall if the industry is suffering? Without diving into the figures, it is easy to assume that total IT spending will fall as the industry suffers. That is simply not the case.
While there is a decline in North American IT spending growth (3.1% in 2008, falling to 1.7% in 2009), absolute spending figures continue to rise. There are several reasons why overall spending figures are still in the black:
- Maintenance spending makes up the lion's share of the budget. About three-quarters (76%) of the total IT budget is dedicated to maintenance. As such, there is only so much fat that can be trimmed. Whereas many banks are undergoing multiyear projects to become more efficient, and have invested in SOA, these efficiencies have yet to be fully realized.
- Spending on post-merger integration work is on the rise. There was no shortage of deals in 2008. Those involved will be paying dearly over several years to integrate systems and migrate users to new systems.
- Small and midsize banks will invest in IT to gain market share. Although there have been several casualties, many small and midsize banks are enjoying newfound growth in deposits. These banks recognize that they now have customers they can sell additional products do. Small and midsize banks will use these new customers as a jumping-off point to gain market share and woo customers away from other institutions. Banks will invest in marketing campaigns, product bundles and online offerings in an attempt to develop these newfound relationships.
With that said, it's not all fine and dandy on the IT spending front. There are several areas of concern:
- Spending on new investments is slashed. US banks are slashing spending on new investments (Canadian banks are more or less staying the course). Banks are challenged to come up with additional funds once compliance/regulatory spending, post-merger integration and maintenance have been spoken for. Not to mention that the financial crisis has made it extremely difficult to get new projects funded. While spending will increase in 2009, it will be at lower growth levels than prior years and will mark the start of the decline. Spending on new investments at US banks will reach US$8.7 billion in 2009, a 14.4% decline over 2008. Projects that were supposed to take place during 2008 that have been deferred to 2009 are being canceled or pushed out further.
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Spending on external services is declining; internal spending is experiencing modest cuts. External services spending in the US will slow down through 2010 as banks tighten their spending belts and limit their use of costly services. External services spending growth will decline by 1.4% to US$12.3 billion in 2009. Canadian banks will experience a more modest slowdown in their external services spending. Spending growth in 2009 will remain positive but at lower levels than prior years. External services spending will grow by a comfortable 5.1% to US$2 billion in 2009.
The net result is positive (in absolute dollar figures), but growth percentages are on the decline. Bank IT spending growth will slow down for the second consecutive year. US bank IT spending will climb by a mere 1.4% in 2009, a significant 1.5% drop from the growth experienced in 2008.
The financial crisis and economic uncertainty have US banks tightening their belts. Large banks in particular are slashing budgets and placing significant emphasis on keeping costs under control. This contraction will push numerous IT projects out of the picture and will make internal competition for IT resources that much greater. IT dollars will be hard to come by after compliance/regulatory spending and maintenance expenditures. Banks will be forced to be creative with their funds in order to make investments go as far as possible.
While a few of the large Canadian banks have some exposure to the financial crisis, it will have little impact on IT spending. Spending will continue to flow as most Canadian banks weather the storm and take advantage of their strong position in the North American banking market.
North American bank IT spending will grow from US$47.9 billion in 2007 to US$49.4 billion in 2008. Even with unfavorable market conditions, 2009 spending levels will continue to rise. Total North American bank IT spending is expected to reach US$50.3 billion in 2009.
While there are many ways to split the spending pie, the most telling indicator of future spending, innovation and growth relates to investments in new IT projects. Of the total investment in IT in 2008, a whopping 76% still goes to maintenance. Whereas banks have invested in system modernization and are attempting to become more efficient, they are unable to escape the maintenance conundrum.
In fact, what will hurt most over the next several years is a serious cut to new investments spending in the US. New investments spending in North America will fall to 21.8% of the total in 2010, compared to 24% of the total in 2008. New investments that do get funded over the next few years will be highly scrutinized, taken through an arduous selection process and will likely face significant delays and push back. This will unfortunately stifle innovation in the US banking space. Significant investments in innovation will be limited in 2009 and 2010 as banks focus on the basics and work on weathering the storm.
There are, however, two bright beacons that will shine during this period - small to midsize US banks that will invest in innovation to grab a larger slice of the pie and Canadian banks that will continue to fund new investments and focus on innovation.
Read part 2, which analyzes IT spending through 2010.
Jacob Jegher, based in Montreal, Canada, is a senior analyst within Celent's banking group, a research and consulting firm focused on the application of information technology in the global financial services industry. For the full report by Mr. Jegher, please contact info@celent.com or jjegher@celent.com. | 
