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Spending Moves from Compliance to Digital Transformation

By 2019, one third of IT budgets at U.S. banks will be dedicated to achieving digital transformation, says a report from IDC Financial Insights.

After years of focusing IT spending on regulatory and compliance matters, banks are starting to shift IT resources to digital transformation, according to the report, ‘The Cost of Digital Transformation in US Banking: The Critical Technology Investments in 2015 and Beyond‘ from IDC Financial Insights.

While IT spending on compliance and regulatory issues, along with cybersecurity, is still significant, as the financial crisis continues to recede, banks are now investing heavily in both digital transformation initiatives, as well as on customer-facing products and services.

“Coming out of the crisis, a lot of the spending went to regulatory compliance and risk management,” says Jerry Silva, Global Banking Research Director at IDC Financial Insights. “As time has gone on, we’ve seen a larger shift in spending. I think we’ve seen the peak of spending on compliance.”

“As time has gone on, we’ve seen a larger shift in spending. I think we’ve seen the peak of spending on compliance.”
— Jerry Silva, Global Banking Research Director at IDC Financial Insights

Silva says large banks especially, which lost a segment of customers who were disaffected with the banking system after the financial crisis to smaller banks and credit unions, are seeking to win those customers back by investing in things like digital channels, mobile and branch transformation.

“I’ve met with a lot of line of business heads and IT executives, and they are telling me they are focused on building infrastructures in digital transformation and virtualization,” says Silva.

And, he adds, this investment is happening from two opposite ends of the institution, with line of business executives buying consumer-facing solutions to improve customer engagement while the CIO and IT groups try to transform the bank’s infrastructure from the inside out.

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“It’s like two teams of diggers making their way through a mountain to build a tunnel. They’re hoping they’ll be aligned when they meet in the middle,” he adds.

However, Silva is confident for the most part that they will, in fact, successfully meet in the middle. That’s because as IT builds new enterprise-wide architecture, “they have to know where the business is going, so the line of business heads are involved in the talks about data architecture,” he says. “They’re also working together on risk management, and using the enterprise-wide risk management architecture to make better business decisions.”

Overall, retail banks (including thrifts and credit unions) in the U.S. will spend nearly $16.6 billion on hardware, software, services, and internal IT staff in order to develop and implement digital transformation initiatives in 2015, according to IDC research.

And the spending on digital transformation will grow at a compound annual growth rate of 10.4% into 2019, according to recent IDC Financial Insights spending models. This compares to a growth rate of 3.9% for an overall IT spending by U.S. banks.

As banks in the U.S. endeavor to stay relevant in the financial lives of their consumer, business, and corporate customers, the institutions are dedicating more and more of their scarce resources to initiatives that promise to transform the business. Because of the pressures coming from onerous regulatory burdens, the increased need to manage risk, and the constant attacks on the banks’ security systems, discretionary spending for important line-of-business projects that can accomplish digital transformation is at a premium, notes IDC Financial Insights.

The highest growth in digital transformation spending comes from software and internal IT. While internal IT is typically a large part of digital transformation for only the largest banks that can afford to have substantial IT groups, software spend is shared by all institutions, whether it is a bank in the top 10 in assets that develops its own bespoke software or a small mutual that relies on an integrated bank software provider for its technology needs.

According to the report, spending on IT services for digital transformation is forecast to grow at 8.5% year over year in 2016. Only hardware is keeping pace with total IT spending growth.

The growth of spending on digital transformation is outpacing aggregate IT spending by more than 2.5 to 1, the report notes. In five years, IDC Financial Insights estimates that fully one third of the IT budget at U.S. banks will be dedicated to achieving digital transformation.

Spending on consumer initiatives (including small business) and infrastructure improvements will continue to lead the way as well, the report finds. Payments will experience a healthy proportion of spend in transformation as well. However, given the range of payment types in that category – ACH vs stored value, for example – a more detailed analysis is needed to reveal the exact strong areas of growth in payments transformation, IDC further reports.

With the budget season right around the corner and the challenge of funding digital transformation becoming more onerous, it becomes more and more important to understand the investments being planned by peers to enable digital transformation. Banks and credit unions can use reports such as the one by IDC to help guide investment strategies as they work to increase their commitment to transform their business for the digital consumer.

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  1. Bogdan Neagu says:

    Sounds like good news.

    But I think there is a lot of overlap between compliance, regulatory and risk issues and digital transformation. When I think of digital transformation in banking I think of it having an enterprise-wide impact, thus also impacting regulatory, compliance and risk functions. Paperless technologies, for instance, enable banks to more easily stay compliant while at the same time digitising their processes.

    Perhaps a better divide of IT spend is according to bimodal IT (which ironically is a term coined by Gartner, an IDC competitor), which states there are 2 types of IT: type 1 is focused on stability and efficiency (essentially IT infrastructure) and type 2 is focused on agility and flexible processes. Just a thought.

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