One common question for banks is how much to spend on innovation and technology. We are not sure that is the right question as it all depends on your vision for your bank and what you are trying to get accomplished. Some banks are sacrificing material current year earnings in order to transform their bank while some banks are spending the bare minimum. For 2018, bank spending on technology is expected to grow 4% over 2017 spending. In this section, we will take a look at some common benchmarks broken down in different ways to give every banker a feel for what the average bank spends its technology dollars on.
For starters, banks are split on how they benchmark their technology spend with some banks looking at a percentage of revenue while others look at a percentage of expense. On average, banks spend about 7% of revenue on technology or about 9% of total expenses. Here are the averages by asset size broken down by both dimensions:
While this data gives bankers a feel for how much they spend, the next question is how is that technology investment deployed? Banks normally spend 70% of their budget keeping their current operation going and about 30% in investment in new technology infrastructure and new application development.
Looking at bank’s technology spending from another perspective, about 65% of their budget just keeping the lights on. That is, this money goes to the basic infrastructure of banking such as investment in core application, servers, desktop/laptops, security and other basic business applications. These expenditures are not associated with revenue producing activities but are the foundation of the banking entity.
About 23% of a bank’s budget is targeted at existing and new technology to grow existing business lines such as lending, cash management, and other lines. That leaves about 12% of a bank’s budget slated for new products, new processes and major business transformations such as automating small business lending.
No surprise most of the banks' IT spend is on personnel followed by software and outsourcing. Spending on hardware and then cloud infrastructure follow up the other major categories.
While each bank must set their own spending level in alignment with their strategic objectives, this data can serve as a mirror for banks to reflect if their direction is true. As technology becomes more important to the banking business model, successful banks will have intent with their technology spending. These indicative reference points can be used to help communicate alignment and as a basis for discussions to ensure your bank is heading in the right direction. To the extent your bank is high or low from these averages, bank management, and the board, should make sure the bank is different by intent and not by mistake.
Submitted by Chris Nichols on January 03, 2018