North American bank IT spending climbs as firms invest in external services

North American banks are investing in IT – much of it external

Banks in North America are ramping up IT spending on retail banking services and digital channels this year, with total IT spend expected to reach $64.8 billion by 2016, according to a new report by analyst firm Celent. The figures represent a 4.5% increase this year, as financial institutions increasingly turn to external software provider and specialists to bolster their abilities.

The Celent report, IT Spending in Banking: A North American Perspective, predicts that US and Canadian bank IT spending will grow 4.5% from $59.5 billion in 2014 to $62.2 billion in 2015. These funds will mostly be directed to maintenance, but the portion set aside for new initiatives will be directed to retail banking services such as self-service machines, digital banking projects and branch transformation. Mobile banking is also tipped to continue as a major focus of bank attention, while analytics, omnichannel banking, compliance/regulatory, and IT security investments will also be priorities.

“The figures point to another strong year; 2015 is poised to build on the growth experienced last year,” said Jacob Jegher, a research director with Celent’s banking practice and author of the report. “Investment in technology will of course continue to be a critical requirement as banks work on maintaining their existing systems and work on incremental improvements and innovations.”

However, there are important caveats. Of the total investment in IT in 2015, fully 73% goes towards maintenance, costing $45.2 billion. Of these funds, £39.7 billion will be spent by US banks and $5.4 billion by Canadian banks. At best, new investment spending in North America will account for 27.4% of the total budget in 2015. On the positive side, maintenance is at least declining slightly as a proportion of the whole, and is expected to account for 2% less spending by 2017 than in 2015.

IT security is expected to prove quite a struggle for banks in the coming years, as banks are effectively locked in an endless battle with fraudsters. The conflict is not expected to abate any time soon, so banks will need to protect themselves and their customers with new tools, including authentication alternatives such as biometrics, as well as internal controls, education and training.

Spending across all areas is likely to take a different form to the past, as external spending increases relative to internal spending. Inexpensive storage and outsourcing can help banks to bring their costs down. At the same time, banks are trying to trim down their staff and focus on core competencies. The result is that external software spending is expected to rise by 8.1% in the US to $11.4 billion in 2015, while total external spending for US banks is expected to by $17.5 billion. To place that in context, the internal spending on bank IT by US banks will be $17.6 this year – indicating that total internal and external IT spending will be equally balanced.

Canadian banks are set to follow a similar course initially, increasing external software spending by 7.5% this year, but thereafter the growth rate is expected to diverge from the US path over the next few years, as large Canadian banks focus more on internal development while the US banks continue to ramp up spending on external services. In total, Canadian banks are expected to spend $3 billion on external services this year – an 8.1% overall increase.

Areas where external spending is particularly prominent are mobile banking, payments, branch banking and analytics, as well as IT security, risk management, regulatory and compliance. Software providers and specialists are targeting these areas quite hard, and even relatively conservative Canadian banks are starting to realise that they can’t or don’t need to build it all themselves, according to Celent.

Retail banking is expected to account for the lion’s share of bank spending this year (62.5%), reaching $38.9 billion. This number represents a 4.8% increase in spending. However, spending on corporate banking is also set to continue climbing. The full figure is $17.1 billion for this year, and Canadian corporate banking is particularly expected to experience strong growth this year, at 5.6%. A further $6.2 billion is estimated to be spent by North American banks on other areas of banking such as investment management.