One question we always ask is if we are spending enough on technology? After that question, we get confused and mired in the quicksand of financial reporting, finance philosophy and technology strategy. “Technology” is so pervasive that it is difficult to determine what the difference is between spending on “digital” projects versus “analog” projects. For instance, if we upgrade our phone system from dedicated copper to fiber optics that is an analog project but if we convert over to a slower voice-over-IP system is that a digital project? In order to shed some light, we did some research to help banks set their IT budget for next year.
Technology Spending As A Percent of Non-Interest Income
As a starting point, we looked at nine banks that are, forward-thinking when it comes to technology, large enough to publically report and are granular enough to roughly group as having the same reporting philosophy over how to treat technology spending. The spending outlined below includes spending on both traditional technology infrastructure such as network investments and investment in innovation but not improvements to conventional infrastructure. Thus, upgrading a wifi system in a branch is not included, nor is improvements to a phone system.
On average, these bank spending about 18% of their non-interest expense budget (below graphic), or about 10% of revenue on technology.
These are the numbers that fintech companies and consultants love to scare us with. In four out of the last five conferences we attended, at least one presenter would throw out the fact that JP Morgan and Bank of America are spending more than “10 BILLION DOLLARS ON TECHNOLOGY!” That number is supposed to freak us out and push us to spend more. The reality is that community banks don’t invest enough, but $10B is a meaningless number. Bank of America and JP Morgan are over $2 trillion in assets. Community banks should be more worried about the US Banks and Key Banks of the world that are spending way less but relatively more of their revenue in technology.
The other factor is something we call the “Complexity Tax.” As your organization gets larger and goes across state and county lines, as it expands into different products and as it encompasses more legacy systems, your technology spend has to be more robust just to be able to handle the complexity and more substantial regulatory burden. As we look at this Complexity Tax, it takes up about 20% of the tech spend for these larger banks. Thus, that 18% number is really, about 14.4% of non-interest expense after adjusting for this complexity.
Infrastructure, Cybersecurity vs. Innovation
Of course, when we talk about technology spend what we want to know is how much our peer banks are devoting to new technology not how much we spend on existing infrastructure. This is where there is the most significant discrepancy between large banks with tech-forward budgets and community banks that tend to spend all most all of their IT budget on infrastructure. From the top banks, we derived that the average bank spends about 60% of their technology budget on core existing infrastructure to include network, work station, data, security, support, and other traditional line items. Thus, of that 14.4% of total technology spend, 8.6% of non-interest expense is usually spent on supporting existing infrastructure. To break this down further, because it is such a hot topic, we call out cybersecurity which tends to average about 1.5% of non-interest expense.
Outside of infrastructure, that leaves about 40% of a bank’s technology budget to go towards innovation. For the sake of analysis, we further break this down into two categories. There is the category that everyone talks about and thinks about when you bring up innovation, and that is new product development (both customer facing and cost savings tech). New technology such as payments, loan processing, account opening, and similar fall into this category. This group of projects usually makes up about 25% of technology spending based on 2018 full year data culled from interviews and financial reports.
Then there is the lesser appreciated “Functional Upgrades” that cut across various departments and are there to support multiple products. This includes projects like ID verification, electronic signatures, a CRM system or a customer educational platform. This cross-department, cross-purpose enhancement usually comprise about 15% of a bank’s total technology spend.
Putting This Into Action
Of course, what you spend on technology mainly depends on what your strategy and objectives are. Hopefully, if your goal is to keep up with the national and large regional banks, we have given you some benchmarks and data to help better guide your spending and focus. For 2019, it seems that technology-forward banks have increased their total tech budget by about 10% whereas the average community bank has been closer to 3%.
The benchmarks described above should help give you an indication of what you might want to consider investing in both your existing infrastructure and new process and product development.