celent report
TRANSCRIPT
32 B A N K I N G F R O N T I E R S F E B R U A R Y 2 0 1 1
he global IT spending by financial services institutions is expected to go up by 3.7% in 2011 compared with
2011 reaching figure of $363.8 billion. This is the projection made by global consultancy Celent in a recent research report. The report also forecast a global spending on IT products and services to grow to $393 billion by 2013, which is a 3.9% CAGR from 2011 to 2013.
“We are not completely out of the woods, but the good news is that the turnaround has begun. European institutions are still being hit particularly hard, and many of these challenges will continue in 2011. The good news is that growth projections are indicating a positive trend,” the report, which covered banking, insurance and securities and investments and authored by Jacob Jegher, said.
While firms in the financial services sector in North America and Europe account for 34.2% and 33.6%, respectively, of the global IT investments, those in Asia-Pacific account for 26.4% and Latin America and Africa for the remaining 5.8%. However, the report reveals that the fastest growth will be seen in financial services institutions in Asia-Pacific region “with IT spending increasing at 6.2% in 2011 and a CAGR of 6.2% from 2011 to 2013.” The report also predicts that growth will continue to rise in this region, and the total spending is expected to reach $108.2 billion in 2013. North America will see IT spending climbing to $135.1 billion in 2013, a CAGR of 4.3% from 2011 to 2013 and Europe to $126.7 billion, a CAGR of 1.7%. Latin America and Africa are expected to grow at a relatively modest rate (3.7%) with spending reaching $21.2 billion in 2011.
BANKING SECTOR TOPSIT spending by the banking sub sector accounted for
nearly 50% of the total IT spending by the sector, which the report estimated, will reach $169.6 billion in 2011. In each region, IT spending by the banking sub sector represents the highest percentage of spending, which trend will continue
through 2013. European banks make up the lion’s share of bank IT spending at $60.2 billion.
IT spending on insurance and securities and investments activities are expected to reach $97.9 billion and $75.2 billion, respectively. In the medium term, securities and investments firms are expected to increase their spending on IT at a faster rate than the other verticals - 5.9% - compared with banks at 2.6% and insurance at 1.3%.
The report finds that “although there are many ways to split the spending pie, the most telling indicator of future spending and growth relates to investments in new IT projects. Of the total investment in IT in 2011, a whopping 72.8% goes to maintenance. The percentage of funds dedicated to maintenance activities is still astronomical but is slowly coming down; this figure should drop to 70% in 2013. Unfortunately, economic conditions and the financial crisis have resulted in a slow moving shift to increased spending on new investments. This will change as financial services firms put greater emphasis on innovation. It will, however, take several years before it has a material impact.”
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Global consultancy firm Celent finds banks in Asia-Pacific having a growth trajectory in IT spending:
RESEARCh REPORT
APAC Banks on IT
Total Global IT Spending Snapshot
$115.0 $118.5 $124.3 $135.1
$121.9 $121.7 $122.4 $123.6 $126.7
$85.9 $90.3 $95.9 $101.9 $108.2
$129.4
$23.0$22.1
$21.2$20.4$19.8
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SPENDING OUTLAYSThe report distributes IT spending to outlays on hardware,
software and technology-related services. The spending encompasses fully loaded expenses for both internal and external technology activities. Internal IT spending denotes expenses associated with the internal management, analysis, development, maintenance, support and operation of IT. It also includes all internal spending on data center operations and management of technology personnel. External IT spending relates to spending on externally provided hardware, software and services and includes expenses associated with the purchase or lease of hardware, software, and services for the analysis, development, maintenance, support, and operation of information technology. This consists of three categories: spending on hardware, software, and services. It includes all IT expenditures that are in addition to fully loaded internal technology staffing costs.
Coming specifically to banks, the report says the sum of bank IT spending across North America, Europe, and Asia-Pacific will grow to $169.6 billion in 2011, which is approximately 4.1% higher than $163 billion in 2010. “The majority of the growth is coming from Asia-Pacific banks; spending by banks in this region will grow by 5.9% in 2011 to $56 billion. This growth will continue in 2012, which will be 6% to reach $59.4 billion. North American bank spending will grow by a solid 4% in 2011 to $53.4 billion. This figure will accelerate to 4.6% in 2012 to $55.9 billion. European banks will grow 2.5% in 2011 to $60.2 billion and this growth will remain constant in 2012 as spending increases by 2.4% to $61.6 billion,” says the report.
TRENDS IN ASIA-PACThe report lists the following top trends in retail and
corporate banking in the Asia-Pac region:• Bankscatchinguptothesmartphone• Mobilecontactlesspaymentsbecomingareality• Socialmediaemergingasanewmarketingtool• Regionalbankscontinuinginternational
expansion initiatives• Expansionofforeignbanksintoemerging
Asian markets• Puttingtheplowtoruralbanking• AcceleratingshifttoSMEbanking• Recoveryinthewealthmanagementmarket• MakingITslimmerandsmarter• SmallerbanksturntooutsourcingandBPO
Statingthattheeffectofthefinancialcrisisonbanksin the region has not been as serious as for the American or European banks, the report cites growth in profits in Chinese banks at 14.6% year-on-year in 2009, which is estimated to rise to around 20% in 2010, while Indian banks clocked a profit of 25.7% in 2009, while Taiwanese banks had a 147.4% growth in profits.
The report observed that while some markets in Asia-Pacific are enjoying significant growth, overall IT spending for Asia-Pacific banks will not be as spectacular, because different markets have their own problems to face. “For example, while signs of recovery emerged in the world economy and financial markets, Japan faced deflationary pressures. Despite growth, the Taiwanese banking sector remained one of the least profitable in Asia. In China, the government’s economic stimulus will gradually be withdrawn, sharply decreasing lending opportunities for banks. The growth rate of Japanese bank IT spending will continue declining from 2011 to 2013, and the
2011 IT Spending by Industry and Region
$53.4$35.7
$60.2
$37.4$24.8
$35.2
$56.0
$24.8
$15.1
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Banking Securi�es & Investments
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big Chinese banks will finish their large projects by 2012. As a result of these and other trends in major markets, Celent believes that total bank IT spending will grow somewhat more modestly than the headline-grabbing growth statistics for the region may lead one to expect.”
MAJOR DRIVERSThe report lists the major drivers of spending to include new
customer-centric core banking systems, more sophisticated risk management systems, multichannel capabilities and international expansion at the regional banks. The hot fields of investment include cash management systems, customer-centric core banking systems, remote channels (especially mobile banking and Internet banking), credit card and debit card systems, wealth management systems and risk management.
“Broken down by business line, IT spending on retailbanking initiatives will account for 57.8% of total bank IT spending in the region, or $32.4 billion, in 2011, for a CAGR of 6.4%over2010.Spendingwillgrowto$34.6billionin2012,a 6.9% year-on-year increase, and to $37.0 billion in 2013, a 5.8%CAGR.MajordriversofITspendingintheAsia-Pacific retail banking sector include international expansion, online banking, mobile banking, payments tools, and wealth and investment-related projects. At the same time, some banks in Asia-Pacific who focused on corporate banking before may enter the retail banking business, such as some foreign banks in China, including Japanese banks and Taiwanese banks,” says the report.
It adds: “Technology spending in the corporate banking sector is estimated to be $15.8 billion in 2011, a 4.8% increase over 2010. The spending on corporate banking technology will rise to $16.4 billion in 2012, a 4.0% year-on-year increase. A major driver of spending in corporate banking is the international expansion strategies of banks frommaturemarketssuchasAustralia,Japan,andSingaporeand, perhaps surprisingly, emerging markets of China and India.SMEbankingandtransactionbankingarealsomajorareas of focus. ‘Other’ spending consists of capital markets-
related business such as dealing, brokerage and investment management. The smallest of the three categories at 14.1% of total bank IT spending in the region, capital markets spending is estimated to reach $7.9 billion in 2011 for a 6.0% increase over 2010.”
SPENDING ON hARDWARECelent also says spending on hardware by Asia-Pacific
banks is relatively high, reflecting the emerging nature of much of the region and the need to build out essential infrastructure. Banks will spend $27.3 billion on hardwarein 2011, a 5.1% increase compared to 2010, driven by the recovery from the financial crisis. The proportion of hardware to total IT spending is decreasing, and should continue to decrease over the next few years. There are also some drivers for hardware spending, such as new business requirements including derivatives business and mobile banking, capacity expansion, international expansion, and the construction of new data centers.
It points out that banks in Asia-Pacific prefer to develop software in-house, especially the large banks, such as major Japanese banks and the big Chinese banks. As a result, internal spending should stay steady at the fairly large proportion of 28.9%, or $16.2 billion, in 2011, for a CAGR of 4.0%. This will expand to $16.6 billion in 2012 and $17.2 billion in 2013.
What could be the outcome of such development of technology? Celent believes that as technology develops, banking services and vendors become more modern, and medium-size and small banks mature, more banks begin to turn to external software and services providers, including global vendors. In addition, banks have started to rely on BPO during the last few years; for example, more than 70banks outsourced their credit card operations in China. As a result, spending on external software is expected to rise to $6.9 billion in 2011, to $8.1 billion in 2012, and to $9.4 billion in 2013. Similarly, competitive needs are creatinggreaterdemandforexternal services.Spendingonexternalservices by banks in Asia-Pacific is estimated at $5.7 billion in 2011, expanding to $6.7 billion in 2013.
What actually contributed to the growth of the Asia-Pac banks? The major drivers for this growth, adds the report, include economic growth, a trend that is expected to continue in the future; expansion by existing banks into new lines of business, including from corporate banking to retail banking in emerging regions, as well as new products and services such as mobile payments in mature markets; regional movement, including international expansion of Asian banks and foreign banks to Asia-Pacific, and new systems to support business and compliance requirements for such greenfield banking operations.
Bank IT Spending Snapshot
$50.3 $51.4 $53.4 $58.3
$58.0 $58.7 $60.2 $61.6 $63.6
$50.6 $52.9 $56.0 $59.4$62.8
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