The sluggish economy has forced many banks to put their planned IT developments on hold and focus on cost-cutting and improved system integration. Many investment banks have replaced their pricey workstations running proprietary versions of the Unix operating system with Intel-based PCs running the free Linux operating system. Some financial-services firms have become more aggressive about out-sourcing parts or all of their IT operations, others have moved their software development projects offshore. All this is bad news for the IT industry, heavily dependent on the financial-services sector for growth.

While American financial-services firms spend more on IT than anyone else in the world, they are no longer the innovators they once were. Wireless finance has not yet taken off in America, which still lags behind the rest of the world in mobile telephony. The move towards electronic funds-transfer has been slow, as still 60% of all financial transactions in America were paid by checks in 2001. While identity theft created $4 billion in fraud losses in the United States in 2002, Europe, where banks typically spend two to three times more on electronic security than their American counterparts, has avoided much of America's growing problem with identity theft.

Instead, U.S. banks are busy upgrading the IT systems in their branch networks, which have not been touched for more than a decade. (Many of them still run OS/2.) Banks have heavily invested in CRM software, but it is estimated that four out of five such projects fail.

But IT spending is likely to pick up again. Advice services (Such as personalized portfolio recommendations based on their investing preferences) are being worked on at a number of financial institutions. A number of IT firms are working on systems to stop identity theft. Finally, mainframes, the core of most financial-services firms, will soon have to be replaced, not because they are unreliable, but because it will be too expensive to revamp them to handle the coming changes in corporate strategy.