Bank IT spend to grow 20% in four years and hit $150bn mark, analysts predict

Ovum said the near-20% increase in retail banks' IT expenditure in 2018, compared to 2014, would be driven by a number of factors, including the need for product innovation.

"There are many reasons that drive IT investment in banks, which will vary based on the institution, its strategy, and the market in which it operates," Kieran Hines, practice leader at Ovum, said. "However, the desire to drive revenue growth, deliver product innovation, reduce operating costs, and increasingly meeting regulatory requirements are the principal drivers. What we’re seeing at the moment is a renewed focus on innovation and revenue growth, particularly as developed markets start to look towards a more stable economic environment."

Most of the growth in spending will relate to banks' efforts to improve their online and other digital channels, Hines said. However, most of bank's total IT spending will be on replacing underlying, core systems as well as on "payment processing" technology, he said. "The latter very much reflects the huge innovation in the payment space at the moment," Hines said.

A report by Deloitte earlier this summer found that banks are facing increasing competition from alternative lenders and technology providers and that they need to adapt how they use IT themselves if they want to maintain their position in the market.

At the time expert in technology law in the financial services sector Yvonne Dunn of Pinsent Masons, the law firm behind Out-Law.com, said that banks need to balance cost constraints against the need to provide great customer service and the risk of reputation damage if systems fail when weighing up whether to introduce new technology into their business.

"In the financial services sector a raft of new providers have entered the market and been able to deploy new technology from more modern IT infrastructure in a bid to steal elements of traditional banking business," Dunn said. "In addressing this challenge posed by technology, many traditional banks face cost constraints that make a large scale overhaul of their legacy IT infrastructure, some of which it may have been operating for 40 years, impractical."

"However, changes to the regulatory environment and the increased focus on the customer means that banks are having to increase their IT expenditure to ensure the resilience of their systems and avoid the damage to their reputation that can be associated with outages," she said.