Why IT spending will not decrease in the finance sector

Finance industry being a huge contributor in the IT spending is in spotlight in this recession period. There are contradictory views in the sector on whether the IT spending will increase or not, which eventually contributes to outsourcing. Given the tight IT budget, let's see what is in the plate for the CIOs to deal with their IT division.

The biggest contributor in bank's IT spending propels from the new products, services and upgrading the IT systems to a newer technology. Considering the low consumer activity, the spending on services are now ruled out. Banks are reluctant in introducing new products, as they cannot a failure outcome. Ofcourse at this time, no bank would like to invest in the new technology or would prefer architectural change. Already, many projects which were initiated in the past year were put on hold or canceled.

All the traditional rooms of IT spending is almost closed now, but this tricky economic situation has opened up new avenues. After the housing market collapse, many banks were forced to merge with the larger banks and have contributed to consecutive mergers. Mergers would definitely require the integration of IT systems. Even if banks try to post-pone their integration plan to mitigate the cost, they cannot drag it beyond a point. Separate IT systems translate to more cost and also will reflect in their operational cost of bank centers. Apart from the expenditures on mergers, another new area is 'regulation'. Lack of regulation in the banks has been identified as the reason behind the current economic mess. The new government will definitely ensure that 'Regulation' plays a crucial role in the banks' operations. In order to comply with the new regulatory system, banks would need to alter their operating style and will definitely reflect in their IT systems. The new regulatory system may demand more transparency and interaction between the Banks and the federal regulatory agencies, which is possible only through new IT systems.

One other area which resulted in many bankruptcies is, the failure of the bank's management in foreseeing the current situation. Proper systems were not in place to analyze the available data and to forecast (or) to understand the trends in the money flow. This will require more detailed data from the banks divisions, which means more interactions between the various IT systems present in a bank. Having understood the crucial need of such systems, banks would definitely require investment in such systems or would require to change the model of the current functionality. These investments are inevitable and should be immediate to avoid another crisis. Another important area is, Risk management. It is clearly evident that the Risk management has failed and it badly requires a new direction. Considerable spending can be expected to revamp the system.

Not to forget the mid-sized banks, they will definitely try to grab its piece when the biggies failed. They will try to lure the customers with new services and innovative products which will trigger some IT spending. Though many of the above scenarios apply to banks in US and Europe, the relatively unaffected Asian banks are expected to increase their IT spending to tune their systems in this economic downturn.

Given the tight budget to implement the above changes, CIO has to make prudent decisions in their IT investment. There are banks which will spend more in IT to reduce the overall bank's operation cost. They will identify and remove the cost incurred by dead and redundant systems. Options will be explored to merge the system's functionality, thereby reducing the cost. But it requires more innovative approach in order to reduce the cost. But in innovations, there is always a risk of failure. The question is, whether the banks will take the new route despite the risk associated with it?

Given the amount of technology activity involved and layoffs that are underway, one could also expect more work to be outsourced. But banks which are yet to explore the outsourcing option may become reluctant to try this option at this juncture. But for sure, once can expect more IT activity in the finance sector.

Tags: Banking industry, Bank IT spending, Technology spending, Outsourcing