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GENEVA (Reuters) - Two-thirds of banks are planning to spend more on information technology this year, the highest proportion since before the start of the financial crisis, according to an annual survey published on Wednesday.
The survey of 198 senior bankers by banking software firm Temenos also found only 11 percent anticipated spending less on IT this year, the lowest since 2008.
"Historically, and even more in Switzerland, IT was considered as a necessary evil, something that needed to exist because it existed in the engine room," said Pietro Di Gregorio, head of business intelligence at Swiss private bank EFG Bank.
"But as of now, IT has to change its behavior," he said.
Survey respondents considered customer loyalty their biggest challenge, cited by 30 percent. This worried Asian banks more than their European counterparts and they were also keener to invest in IT-related innovations to help them retain clients.
Private banks were second only to retail banks in worrying about customer loyalty - and with good reason, said the survey's author, Temenos' chief strategy officer Ben Robinson.
Younger tech-savvy clients "have zero interest in banking the way their parents did", he said. But banks must spend wisely to avoid their IT infrastructure turning into a spaghetti-like mess.
"They need to clean that whole thing up if they are going to be successful in the digital age. But instead what they tend to do is they say 'Customers want access to the bank through their mobile phone', so they build specific applications for those without dealing with the underlying mess."
The top competitive threat, cited by 23 percent of respondents, was seen to be non-bank newcomers such as Google and Pay pal, part of EBay Inc.
"The new entrants are coming into an area that's not highly regulated but highly profitable, things like remittances, foreign exchange, unsecured lending, micro finance. But these are also the parts of the banking value chain that subsidize the rest of what banks do," said Robinson.
"So right now they're in danger of being pushed down into the heavily regulated, unsexy, unprofitable parts of banking. So really it is a choice between do they fight back or live with that reality."
In the search for a strategy, banks are increasingly turning to cloud computing to save money. Most now use some cloud-based email or collaboration tools, and 86 percent now run at least one application in the cloud, compared to 57 percent in 2009.
But they are also getting more worried about the safety of doing so . Some39 percent said data security was the biggest barrier to more cloud computing, a jump from 29 percent a year ago.
"I think it's a blip, it's an Edward Snowden related blip," said Robinson. "And I don't see any alternative for banks to adopt the cloud long term."
Only 1 percent of banks' core processing is cloud-based, since they are reluctant to entrust the most sensitive data to what Robinson described as "shared infrastructure".
But Temenos expects the situation to change quickly. The cloud could even present a selling point for Swiss banks that are struggling to reinvent themselves after the loss of Swiss banking secrecy, Robinson said.
"Switzerland could have an unbelievably successful business in cloud. The data regulations are more evolved that in most European countries, certainly more evolved than in the U.S., and secondly for all the reasons that multinationals come here - it's politically stable, it's got lots of renewable energy."
Reporting by Tom Miles; Editing by Tom Heneghan