Financial Institutions Plan to Invest $362 Billion in Technology in 2005

Guillermo Kopp, vice president of the TowerGroup
January 14, 2005

Banking, securities, and insurance institutions will be united in their quest for organic growth, greater operational efficiency, and networked services in 2005.

Expect to see fundamental shifts in the way financial institutions manage their estimated $362 billion in IT investments in 2005, as technology affects the productivity of over $2 trillion in global operational expense. Financial institutions will implement process and technology changes in more manageable chunks, and employ business process management and networked services as pivotal elements for strategic transformation.

It will be increasingly critical for financial institutions to lay out a strategic road map to cut across organizational silos and fulfill their customers' needs more proactively. This is something the industry has talked about for years, but has been hard-pressed to implement effectively.

Sector-specific highlights covered in a recent Tower Group report include banking and payments and securities and investments.

Technology spending by the banking industry in 2005 will represent at least a 4.4% increase over 2004 levels. Of this amount, most of the spending (72%) will occur in Europe and North America, with consumer banking continuing to command the greatest share of overall IT spending across all regions of the world.

As we head into 2005, bankers will greet an environment supportive of continued growth in retail-oriented lines of business, while also witnessing a slow but broad-based recovery on the wholesale banking front.

As the global securities industry recovers from the after-effects of the technology bubble, it is resuming growth in IT spending at a more measured rate. Between 2001 and 2003, technology spending dropped at an annual growth rate of -7%. From now through 2008, IT spending will rise across the global securities industry at a 4% annual growth rate.

Regulatory intervention, market structure changes, and loss of investor confidence are the Bermuda Triangle of the securities industry. These trends are forcing some of the most vaunted firms to entirely rethink their revenue and profit models, drastically revamp their organizations, and realign their technology budgets. The good news is that investors have already begun to return to the markets, albeit cautiously.

Guillermo Kopp is vice president of the TowerGroup in Needham, Massachusetts. Contact him at 781-292-5200 or visit www.towergroup.com.