After a few tumultuous years following the banking crisis, IT tech spending in the financial markets is set to rise, according to new research from Ovum.
There is a consensus across the capital markets, corporate banking, and asset management that tech spending will grow between now and 2018, with overall financial markets spending exceeding $100 billion in 2018. This is attributed mainly to investment in IT driving cost-savings elsewhere in the business.
After a weak 3.7% IT spend growth in 2013 in capital markets, this year will see an increase across the sector, with 4.8% global growth. Last year’s slump was on the currency and commodity side of the capital markets, and with quantitative easing starting to drop off, there is a return to focusing on the equities market. This will drive spending back to IT, due to the more intensive load on technology needed.
“Banks are currently in the process of renewing their platforms and are investing in IT for the future. This investment will be mostly focused on the front office in order to improve order management systems, but we will also see a continuation of significant investment in the back office to improve automation and scalability levels,” says Daniel Mayo, practice leader, financial services technology, Ovum.
With financial institutions wanting to move toward a central banking function, they too will be consolidating and improving their systems in order to make them more efficient. Currently, the capital market segment is very product-siloed and, like banks, are looking to transform their trading platforms. IT spending will pick up over the long term, with overall IT spend growing with a 6.4% compound annual growth rate between 2014 and 2018.
While the capital markets are picking up slowly, corporate banking IT spending is heading toward a year of outright growth in 2014. In 2013, the IT spending growth rate was just over 3%, and in 2014 this is set to rise to 5% as banks invest in their systems to provide liquidity management.
Corporate banking is looking to utilize cash effectively in investments, in a change from the financial crisis pattern of using it to fulfill cash flows and collateral management. The lending side of corporate banking is the primary driver of growth, but the transactional side of the business is also on the upswing, driven mainly by IT spending.
“While capital strengthening still remains an important aspect of corporate banking, the focus is shifting to revenue growth,” says Mayo. “Lending is picking up and banks are looking to IT to analyze and understand lending decisions in order to minimize the risk of another financial crisis. This increase in responsible lending suggests that the end of the credit crunch is in sight.”
Asset management IT spending is also on the rise. Having recovered from the financial crisis, it has reached precrisis credit levels and looks healthy overall. It is not all good news though: this masks a polarization of the industry. The IT load of asset management is being squeezed between passive tracker funds on one side and more specialist hedge funds on the other. Most asset managers are looking to diversify and increase the number of funds that they offer. This is driving IT investment, to cope with the diversification of services, driving an increase in spending from 2% growth in 2013 to a 5.1% CAGR between 2014 and 2018.
Mayo says: “The element that is driving most of IT spending revolves around appeasing investors. With a current trend of account holders desiring visibility and control, particularly in the digital channels, client-servicing systems are having more money placed into them. On another note, with the continuing focus on cost control in asset management, much of the investment marked to improve IT infrastructure has been put on hold.”
In the Ovum’s ICT Enterprise Insights survey, 50% of respondents said they were increasing investment in client servicing systems, with 20% significantly increasing investment. The whole industry is beginning to pick up, but the areas of IT investment focus vary depending on the sector.