The financial services technology market faces declining budgets and only offshore providers will benefit, according to new research from Pierre Audoin Consultants (PAC). Increased uncertainty in the UK economy is driving banks to reign back on IT spend, leading a market analyst to revise its growth forecast for this year. PAC said it is now expecting UK banks core software and IT services expenditure to drop to 4.6 per cent in 2008, from 8.4 per cent in 2007.

Out of the winners and losers, PAC predicted that project based services including consulting services, systems integration, IT contract staff and IT training will feel the negative impact of shrinking IT budgets.

But the analyst also said outsourcing is expected to see increased uptake as banks perceive this as an opportunity to enhance cost efficiency as they seek to do more with the same or less resources.

Within the outsourcing segment, business process outsourcing BPO and offshoring activity is expected to rise, with a focus on closing some parts of existing UK operations and shifting these to locations like India.

For instance, HSBC recently announced that it will be shutting down its Scottish payments processing centre, while credit card firm Capital One is axing 750 jobs at its operations in Nottingham and shifting most of the roles around account servicing to offshore locations.

While in the past UK banks have slightly lagged in their adoption of BPO, PAC said it expected to see more activity in this space. Horizontal processing services such as payroll will be increasingly outsourced, with strategic business processes e.g. mortgage and loans processing being more seriously considered, it said.

In response, it added that offshore players recognise the opportunities in this marketplace and are trying to penetrate and establish presence onshore to meet local needs. For example, it pointed to BPO vendor Cognizant opening an IT development facility in Canary Wharf this year.

With BPO booming in the Insurance industry, IT services players are hoping that the banking sector will follow suit particularly as they become increasingly vulnerable to market pressures, PAC said, adding that increased competition will put pressure on prices, making outsourcing ever more attractive for businesses who need to address cost issues and focus on maintaining business in an evermore volatile market.