Banking mergers slash IT spending

Consolidation in the European banking sector will reduce IT spending in the region by $12.6bn over the next five years, according to a report by analyst Datamonitor.

IT has become a key area in the consolidation process, both from a cost savings point of view and in determining the success of the integration process itself, according to the 'Financial Services Technology in Europe: Perspective 2003' report out this month.

Datamonitor predicts that vendors will benefit from more integration contracts in the short term. But over the next five years many vendors will see large segments of their customer bases disappear, as a market the size of Spain is removed from the European banking sector.

"As far as vendors are concerned there will still be growth in the sector, but this will be much slower than if the sector was without mergers," said Daniel Mayo, senior analyst at Datamonitor. "IT systems are becoming an important consideration in due diligence procedures."

Mayo said differences in IT systems can have a substantial and long-term impact, and he cited the Lloyds TSB merger, where the banks continue to have separate ATM systems.

"There is a tendency to downplay how difficult it is to merge systems," he said.

The report paints a bleak future for the internal IT departments in merging banks who will be most heavily affected by the consolidation process.

Labour is a key area of focus for cost reductions, and differences in strategic IT directions often create political pressures in the institution, which can lead to the dominance of one of the original IT departments at the expense of the other.

In contrast, mergers and consolidation can create significant opportunities for systems integration and IT consultancy services, and typically IT expenditure will increase in the short-term after an acquisition.

Integration difficulties between different core systems can often make banks consider moving towards completely different platforms.

However, while expenditure on external vendors will continue to increase, consolidation will heighten the differences between the successful and unsuccessful vendors. Merged banks will typically choose only a few of the vendors that previously served the separate institutions and thus many vendors will see much of the customer base suddenly disappear.