• silicon.com
• Management
• CIO Insights

By Tim Ferguson, 2 April 2009 16:54

NEWS

Technology spending by financial services companies has been trimmed back - but there are a number of areas of investment that are likely to avoid the chop, experts have predicted.

Although Confederation of British Industry has found IT investment in the financial services sector has declined for the fourth quarter in a row experts expect some IT initiatives to suffer less in terms of a drop off in investment than other areas.

One reason for this according to director of analysis for financial services technology at Datamonitor, Daniel Mayo, is that the "low hanging fruits" in terms of cost reduction were "harvested" following the overspending between 1999 and 2001.

He said: "I think banks are fairly advanced in terms of getting to a good grip of their IT costs."

And Isabelle Jenkins, financial services technology partner at PricewaterhouseCoopers (PwC) added: "It's interesting because we're still seeing a reasonable level of activity but it is very focused," she told silicon.com.

One reason why IT investment is likely to continue according to Jenkins is that many financial organisations urgently need to overhaul and simplify core banking systems that have grown increasingly complex and outdated over the years. "They're just creaking at the edges," Jenkins said.

"The business need is so strong in that area that to really support the retail business [banks have] got to continue with those investments. They've waited so long to do it they can't actually wait - those old core banking systems are falling over so they've got to replace them", Jenkins explained.

Another area that is likely to continue attract investment is the integration of IT systems from organisations that have been acquired, and this is likely to be fuelled by further consolidation within the financial industry.

Another area PwC's Jenkins said will continue to be important is around regulation and compliance. She said: "You may not want to spend your money on it but you haven't really got a choice, particularly in the current regulatory environment. Anything that has a regulatory requirement, the banks are going to have to spend on."

Business continuity planning is one of the areas in which continued tech investment will be important as organisations will need to demonstrate their ability to survive if they're hit by insolvency.

Datamonitor's Mayo added: "I think banks are being more careful around compliance and risk management spend. What they're focusing on there is, rather than doing every piece of compliance in a piecemeal basis, to try to do that more effectively," he said.

Mayo added that the reduction in headcount in many bank branches in order to cut costs could actually fuel IT investment.

He said: "As banks have been reducing their headcount, what I think we've seen is investment in technology that increases employee productivity. So if you're reducing the number of people in the branch, if you can make the remaining people more effective through technology, obviously that is a worthwhile investment of IT."

But Mayo and Jenkins acknowledged that investment in other areas is more likely to suffer due to the difficult economic conditions - for example spending on technology aimed at expanding the business as business demand is no longer here.

When asked what areas are likely to see budget cuts PwC's Jenkins said: "Anything that was looking at increasing capacity – so particularly investment banking people were very worried about the capacity levels and the volumes of trade: well, the volumes of trades have just plummeted."

Mayo added: "What banks have realised is there has almost been a structural shift in operating income expectations and future growth. I think banks have realised that requires a complete readjustment on the cost base."