Growth in the retail banking technology market will stagnate until 2012, when the sector will have spent $40bn (£29bn) less than expected before the downturn, according to research.

Analyst Datamonitor's report Impact of Financial Crisis on Technology Spending in Banking says European and North American markets will suffer due to stringent cost control measures - but the UK will be the hardest hit, with spend declining by almost seven per cent over a five-year period.

And firms across the sector will still be under pressure to reduce IT-related costs and deal with issues related to joining up disparate technologies in the event of mergers, despite the belt-tightening climate.

“For banks post-financial crisis, IT intensity is likely to increase; this is the ratio of IT cost to overall operating cost base,” says the report.

“Technology spend will reduce, but the need to obtain synergies from recent mergers and drive lower costs and higher productivity elsewhere will protect budgets to some degree,” it says.

According to the report, IT areas that will remain resilient include investment in branch technology as banks seek to maintain service levels with fewer staff; banking operation areas such as account administration and loans processing; as well as IT supporting risk management and compliance.

“However, banks will be looking to re-use existing systems as far as possible, so immediate technology vendor opportunity will be more subdued than many expect,” says the report.

The years ahead will be tough, but those who can be flexible will survive, said Datamonitor's financial services technology analysis director, Daniel Mayo.

“This is a major structural shift in banking and banks will need to adjust their operating cost bases accordingly,” said Mayo.

“Banks are more open than ever to alternative sourcing approaches and internal IT departments will likely bear a significant brunt of IT spend reduction pain,” he said.

“2009 and indeed 2010 are likely to be tough years for vendors, but medium and long-term opportunities remain significant for those who can adapt.”