Magazine article American Banker

Investments: Not Just Bigger, but Smarter; as Technology Expenditures Continue to Grow, U.S. Financial Institutions Redirect Their Focus from Creating Efficiencies to Distinguishing Themselves from Competitors and Generating Revenue Streams

Magazine article American Banker

Investments: Not Just Bigger, but Smarter; as Technology Expenditures Continue to Grow, U.S. Financial Institutions Redirect Their Focus from Creating Efficiencies to Distinguishing Themselves from Competitors and Generating Revenue Streams

Article excerpt

As technology expenditures continue to grow, U.S. financial institutions redirect their focus from creating efficiencies to distinguishing themselves from competitors and generating revenue streams.

In 1996, U.S. financial institutions, including banks, securities firms and insurance companies, spent a staggering $45 billion on information technology. This amount continues to grow at about seven percent annually, and in 1998, IT spending in the financial services industry is set to exceed $50 billion for the first time. Since technology investments began to accelerate in the 1960s and 1970s, a total of over half a trillion dollars has been spent by U.S. financial institutions on developing, maintaining and enhancing their computer systems.

focus on efficiency

Historically, only a small portion of these massive investments has been geared toward projects that advance the bank's or financial institution's strategic goals. The vast majority of spending centered on the automation of manually intensive tasks, such as check or claims processing. These investments had a positive impact on the financial services industry, greatly raising the efficiency of banks and insurers. These firms can now handle greater transaction volumes with fewer employees. These technologies have created more automated and efficient financial institutions, but have not allowed these firms to distinguish themselves from their competitors. In areas that IT has shown itself to be effective in automating manual tasks and reducing operating expenses, these approaches have been quickly emulated by most players in the industry. Few institutions have been able to use IT in this way to distinguish themselves from competition in the marketplace. In other words, using IT for automating routine tasks does not give the financial institution a competitive advantage, but failing to do so confers a clear, competitive disadvantage.

Historically, these "routine" investments have accounted for 90 percent or more of overall IT spending. In recent years, however, spending on strategic technologies, on systems that allow the financial institution to gain competitive advantages and distinguish itself from others, has started to account for a more significant portion of IT budgets. While in the past strategic IT spending only accounted for about five or or 10 percent of the typical budget, in 1997 strategic projects accounted for about 17 percent of total IT spending. A total of $5.1 billion was spent on strategic IT projects in 1996. In 1997, the number is expected to grow to $7.6 billion, which is still dwarfed by routine IT spending of over $40 billion in 1997. While most IT spending still focuses on staffing and routine expenses, such as maintenance, hardware replacement, upgrades of operating systems and other software licenses and minor enhancements to legacy systems, the portion allocated to strategic IT spending is growing much more rapidly. …

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