US Banks Set to Spent More on External Software Providers

North American financial institutions are traditionally big spenders on outsourced services. That won’t change this year, according to a new report from Celent on IT spending by North American banks. Celent found North American banks will spend 4.5 percent more on IT in 2014 than they did in 2013, growing from $56.9 billion last year to $59.5 billion.

In both the U.S. and Canada, banks are allocating about 34 percent of their IT budgets to internal spending. Celent notes this is “on a slow and steady decline as banks push resources toward external software and services.” As in other industry verticals, spending on hardware is on a decline, while spending on software will see “solid and consistent growth” for the foreseeable future. Banks are turning to external software providers so they can focus on their core competencies, the report notes.

Spending on external services is also growing, with Celent projecting increases of 7 percent in the U.S. and 7.6 percent in Canada.  According to the report:  “The desire to engage external firms is increasingly apparent for areas such as digital banking, cash and treasury management, and payments solutions. This also extends to areas like IT security, risk management, regulatory, and compliance initiatives.”

Out with the Old, In with the New

Though just under three-quarters of current IT budgets are devoted to maintaining legacy systems, banks are boosting the percentage of investment devoted to new initiatives such as mobile banking. According to the report, new investment spending will jump 11.2 percent this year.

The report notes that while banks are keen to lower their spending on maintenance, “extremely tight budgets” are keeping banks reliant on what Celent calls “byzantine legacy systems.” Thus, the firm expects spending on maintenance to remain “relatively constant” in the near term.

Technology, more than overall economic conditions, regulatory issues or changing customer needs, is shaking up the financial services industry. Thus IT has become “a major competitive requirement” for North American banks, according to Celent. This need to leverage technology, along with a less volatile environment, is leading banks to step up their IT investments.

There will be a  turning point of sorts in 2016, when Celent expects U.S. banks to devote 26.8 percent of their budgets to new investments and Canadian banks will allocate 38.3 percent to new investments.

This article was originally published by NSAM sister publication Global Delivery Report