Technology Spending Tracks with Economy

CU360
January 21, 2009 | COMMENTS

With subprime woes in play this year, initial projections for annual technology budgeting and spending may be accurate. Smaller financial institutions, including credit unions, are more likely to have maintained spending on critical projects, while banks affected by credit and investment write-downs are adjusting plans accordingly.

Overall, financial institutions are expected to pull back on technology spending this year, according to CUNA's 2008 Technology & Spending Survey Report. IT spending among North American financial services firms is estimated at $122 billion in 2008--up approximately 6% from 2007, reports a survey by research firm Celent. The survey projects spending of almost $128 billion in 2009, again about a 6% increase. These increases as a percentage are both smaller than the nearly 9% spending growth rates reported in 2005 and 2006.

The average overall technology budget for credit unions in 2008 is $298,047, according to the CUNA report. But the average technology budget varies widely from less than $3,000 among credit unions with less than $2 million in assets to nearly $5 million among credit unions with $1 billion or more in assets.

Banks are closely watching both corporate and consumer activity—and the consequent demand for credit—because any prolonged downward trend will affect spending plans, according to TowerGroup research reported in Bank Systems & Technology.

Among banks, TowerGroup's research notes two particular themes. The first is plans to increase IT staff levels in the short term. The second is a move to spend more on maintenance activities associated with existing applications infrastructure than on new technology.

Pushing for efficiency

Research also suggests specific areas of interest for technology investment at both the corporate and line-of-business level. Despite some variations observed in projections of overall IT budgets, bankers surveyed were fairly clear in their desire for investment in areas that will drive efficiency first, but also growth for their business lines.

Of primary interest at the corporate level are investments in three areas: modernization and/or replacement of legacy core technologies to reduce maintenance costs; enhanced pursuit of sourcing relationships to free resources to focus on differentiating activities; and improved fraud prevention and management solutions to reduce losses.

With the continuing momentum of the credit crisis, TowerGroup finds it not surprising that those surveyed expressed a clear need to improve their lending practices and technologies. Technology investments are thought to include spending on mortgage core technologies in particular, and lending process improvements in general.

Another focus is the use of analytics to better target customers to drive organic growth. Examples include applied uses of analytics for the purpose of relationship-based pricing of lending and deposit products as well as for targeting offerings to clients through self-service channels, such as consumer online banking and ATMs.

At the branch, enthusiasm remains high for investments to make customer/member interactions in this delivery channel more relevant and efficient. From improved selling and servicing technologies to continued rollout of check image capture and proof of deposits, the branch will continue to drive spending. The contact center will be another area of growth, particularly for agent desktop consolidation and productivity solutions.

An economy in flux

The financial services industry is facing serious challenges. Planning for technology investments is difficult while the business environment is in a state of flux. As economic trends broaden from the specifics associated with securities and credit write-downs in the mortgage industry to broader challenges in the economy, IT budgets likely will evolve accordingly.

The research findings, however, show that not all institutions are taking a pessimistic view with regard to technology plans. They indicate continuing demand at a reasonably high level for technologies that drive improved client engagement, security and fraud management, and efficiency and integration. The findings suggest a much more optimistic stance for 2009 and that technology spending will return to "business as usual" at some point.