Banks Projected to Boost IT Spending

The banking and financial services sectors are always looking to improve profits margins, and a new study says this will lead to a hike in IT spending over the next few years.

IDC said it expects the U.S. banking industry to reach $60 billion by 2007.

“Forward-thinking banks will turn to technology to meet their strategic priorities as well as to create greater operational efficiency,” said Jessica Goepfert, program manager, U.S. IT Opportunity: Financial Services at IDC, in a statement.

Earlier this year, IDC said it conducted a survey of 27 banks asking them what role IT will play in addressing their top strategic priorities. The research found that “meeting regulatory requirements, managing the customer relationship, managing risk, reducing costs and attracting new customers” were the most important factors to bank managers.

“With these priorities in mind, IDC expects overall IT spending by U.S. banks to grow by more than 5 percent between 2002 and 2007, reaching more than $60 billion in 2007. Delivery channels will continue to grab the largest share of IT spending, while back office functions will be the fastest growing area and will vie for the largest share of functional IT spending by 2007. IT spending on retail and wholesale products will remain balanced and grow at a slower rate throughout the forecast period,” IDC said.

The report looks at IT spending estimates by U.S. banks, and five specific areas: retail products, wholesale products, capital markets, back office and delivery channels.

The IDC research follows on similar trends observed by TowerGroup that said financial services firms continue to put a premium on technology spending. TowerGroup expects worldwide IT spending to top $337 billion in 2003, a 2.3 percent increase over 2002. The study found that the biggest increase will be in the United States where a 2.8 percent increase is expected, while a 1.1 percent decrease is expected in European IT spending.

As consolidation continues in the financial services industry, there are questions what impact the spate of deals is having on IT professionals. TowerGroup tracked 20 banking deals worth at least $1 billion over the past year, and found there was some outsourcing for network operations. The research also found that costly software development projects are being sent offshore to both India and China.

Of the $337 billion TowerGroup forecasts to be spent worldwide on IT, close to $250 billion will likely go towards maintenance and upgrades to existing hardware and software, including mainframe systems.

While there is some optimism for IT spending in the financial services sector, there are signs the overall IT picture is still somewhat bleak.

Gartner said its overall IT Demand Index retreated to 81 after holding steady at above 90 from May through July, perhaps signaling a pullback in investments in recent months. The index is compiled based on a polling of 20,000 IT decision-makers, a rating of 100 means that businesses are spending exactly what they had budgeted for the month.

Gartner also found that the demand index for large businesses fell to 85 in August 2003 from 89 in July. The research also found that the small business IT Demand Index dropped to 72 from 79. Mid-sized business showed the most promising signs, as spending remained strong over the past few months moving from 95 to 97 on the IT Demand Index.

And while there are some promising corners of the IT sector, there are concerns about the future of IT jobs in the U.S. The Commission on Professionals in Science and Technology (CPST) said it has found that unemployment in the U.S. IT sector has risen to an average of six percent in the first half of 2003.

One of the main factors behind the technology jobs slump is the move by many companies to move towards outsourced contracts and hiring IT staff overseas for lower labor rates than U.S. workers.

The CPST said that over the past decade, the share of foreign-born IT workers has doubled, while the outsourcing of IT work overseas quadrupled to more than $1.2 billion in 2001. Another factor putting pressure on the IT job market, the fact the number of computer science graduates has jumped over 40 percent in just the past few years.