IT Spending Rising at U.S. Financial Institutions

By Allen Bernard

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In 2005, the U.S. financial services industry will again spend more on information technology (IT) than any other country in the world.

As an industry, America's financial institutions will invest $118 billion in IT, representing growth of approximately $5 billion in spending over 2004.

New research released Tuesday from the TowerGroup, 2005 IT Spending Crossroads in the U.S. Financial Services Industry: Plotting Roadmaps for Growth, finds that these institutions are making both organic growth and operational efficiency top management priorities, with IT serving as a critical link between the two.

But, with so many financial institution's back office systems still legacy-based, this growth may be hampered by outdated and overburdened systems, said Virginia Garcia, senior analyst in the Financial Services Strategies & IT Investments research service at TowerGroup and author of the research.

"They really have a museum of legacy and what they've done over the decades is innovated around the legacy core systems because to replace them has historically very expensive," said Garcia. "It's been associated with risk and, at the very basic level, these systems have continued to function and perform although, of course, every year, less and less efficiently and effectively."

Not every institution falls into this category but much of the innovation over the past decade has been customer facing and employee facing and not focused on shoring up the aging infrastructure these updates rely on.

And, as customers come to depend on electronic means of accessing accounts, moving money, and making transactions, if these systems are perceived as faulty, the marketplace simply won't tolerate poor performance on the back end, said Garcia.

"There is a perception in the marketplace that any type of sys. outage part. pervasive sys. outages simply are not tolerable," she said.

Other highlights of the research include:

  • Having reached the boundaries of innovation with aging, siloed and poorly integrated IT architectures, some financial institutions are now addressing the major "plumbing" issues that hinder growth.

    In 2005, TowerGroup expects the predominant theme in financial services IT spending to be enterprise investments at the architectural level in data, content and business process management as well as integration technologies.

  • Financial institutions have traditionally viewed organic growth and operational efficiency as separate, and often incompatible, business strategies. Yet TowerGroup believes that a number of executives are recognizing that organic growth and operational efficiency are closely linked pursuits that can work hand in hand.
  • Many U.S. financial institutions are abandoning pure IT cost-cutting tactics as a way of driving short-term operational efficiency. Instead, they are looking to opportunities for sustainable operational efficiency as a strategic objective of the total business.
  • Survey Methodology

    TowerGroup's IT spending estimates are derived from ongoing, non-sponsored surveys with senior IT and business managers in the financial services industry; analysis of technology vendors and consultants' revenues and prices; insight into relevant industry dynamics that may either accelerate or decelerate investments (e.g., fraud); and our proprietary models for estimating IT spending by individual financial services institution.