South African banks are committed to IT spending, despite a tougher economic environment, because they understand the value of IT as an advantage in a fiercely competitive environment and as a contributing factor to lower cost-to-income ratios, says BMI-TechKnowledge vertical programmes group director Mark Walker.
He says shareholders are focusing increasingly on cost-to-income ratios in their evaluation of investment options with regard to banking.
"The quest for higher levels of efficiency and customer service is a priority in the financial sector. Some analysis forecasts a cut in financial organisations' spend globally due to September 11 - only an 8,4% compound annual growth rate (CAGR) to 2005 from a global base of US$328bn. However, we estimate IT spend in SA banking to grow at a CAGR of 12% to about R10,16bn in 2007 from a current estimate of R5,7bn, up from an estimated R4,5bn in 2000 and R5,2bn in 2001."
This increase in spend - in rand terms - can mostly be attributed to currency depreciation and inflation, as most banks have indicated flat growth in expenditure on new development.
"By comparison, SA banks spend approximately R5 on IT for every R1 000 held in assets while US banks spend about R24 on IT per R1 000 held in assets. Many SA banks see this as an indicator of sound investments made previously, as well as solid architecture, which allows them to do more with technology and address risk management requirements, the Basel 2 Accord and other issues. "
He says demand from bank customers and fierce rivalry has until recently led banks to focus mostly on improving their front-end capabilities.
"However, the demand for multi-channel offerings, as well as new risk requirements, have now necessitated a focus on the integration of core processes. Further front-office development will be restricted until full integration with back-office systems is achieved, so banks can better utilise the data they have on customers.
"As a consequence, we expect increasing investments in improving back-office systems as well as front-to-back integration. This vital requirement to streamline internal processes and integrate the various silos of data is driving the demand for IT services and in particular for IT consulting and operation management," he says.
"We therefore expect services-related IT spend to grow from a current base of R2,7bn to more than R5bn in 2007. Looking at functional areas, delivery channels and back-office processes will be the dominant areas of growth from 2002 to 2007. Back office is estimated to grow at a CAGR of 13% and delivery channels at 14%. Together these areas will make up the bulk of spend in 2007. Though spending will therefore continue in the banking arena, we expect banks will become smarter in their IT spending and evaluate expenditure more closely, by spending on simplification and cost reduction - things that make true business sense.
"To enable banks to use technology to maximise productivity and strategic gains, most of the opportunity will come from the areas of technology investment related to integration. This is due to the need for back-end information to fulfil front-end requirements, get a single view of the customer and fulfil various risk-related requirements."
Deloitte & Touche IT strategy senior manager Peter Allwright says despite stock market turbulence, fallout from corporate accounting scandals and focus on cost reduction, the financial services industry continues to invest in technology.
According to a recent survey by the company and IDG Research, almost 47% of financial services chief information officers (CIOs) say their technology budgets will increase in 2003.
"Smart financial services companies are using technology as a strategic tool, integral to business," says Allwright.
"There are three main IT trends being revealed in the financial services industry. Large financial institutions are increasingly engaging in selective outsourcing. In fact some international companies are even transferring certain activities, such as call centres, to countries such as SA."
Companies are also standardising technologies and renegotiating contracts to centralise some aspects of their IT to reduce costs.
"There is an ever-growing awareness of the strategic role which IT has to play in achieving business objectives. CIOs are learning to align IT with business goals, effectively communicating the value of IT in this respect to leadership and decision makers.
"As CIOs learn to quantify, measure and communicate the value of IT in achieving business objectives, so IT plays an increasingly strategic role in financial services companies," he says.
Comparex Africa business applications group executive John Lagaay says it is important SA banks invest the money saved through online delivery to the banked, towards helping subsidise entry for the unbanked.
He says the new disclosure and data retention requirements for Basel 2 will add to the cost of banking, which may make it prohibitively expensive for the unbanked sector.
"Online delivery reduces costs to the banked sector, but not to the unbanked sector. Therefore it is possible that reduced costs to the banked could be used to subsidise entry for the unbanked."
He says though the increased reporting and data retention requirements will be costly, the benefits through increased confidence in the financial sector's disclosure and improved practices will benefit society as a whole.
"Our major banks are individually large enough to have the economy of scale to compete with overseas competition, both from a cost base and a cost of new requirements perspective."
