Financial services spend on IT outsourcing is set to grow by 27 per cent in Europe to $12.4bn (£7.7bn) by 2005, according to analyst Datamonitor.

The IT and Business Process Outsourcing in Financial Services study said that UK institutions will spend $3bn (£1.9bn) of that total, rising from $2.3bn (£1.4bn) last year.

The report comes hot on the heels of JP Morgan Chase's seven-year $5bn (£3.1bn) deal with IBM and EDS' $1.5bn (£935m) contract with ABN Amro last week.

Infrastructure outsourcing, which includes handing over desktops, networks, data centres or web hosting, represents 56 per cent of the market.

This will continue to be one of the strongest areas as the big financial institutions become more confident in handing over control to suppliers, according to Anders Maehre, financial services technology analyst at Datamonitor.

"Financial services have all been, relatively speaking, sceptical to outsourcing most things," he said.

"IT outsourcing has reached a level where the technology is more mature and expertise has been demonstrated. The financial services institutions have greater confidence in vendors."

Application outsourcing, which includes off-shore development and using application service providers, will remain a relatively niche area, but business process outsourcing will grow by $1.2bn (£747m), the study said.

Business process outsourcing specific to financial services includes mortgage and loan processing, policy administration and claims management. It can also involve outsourcing complete human resources and finance operations.

The insurance sector will spearhead the increase in outsourcing with 9.1 per cent growth, while retail banking will follow close behind at 8.4 per cent.

"In the UK, in the life and pensions sector you really have a lot of new momentum behind business processing outsourcing," explained Maehre.