Rotten core: Bank IT costs set for material increase

Rotten core: Bank IT costs set for material increase

Banks operating ageing IT platforms can expect to experience a material increase in running costs over the coming years, only partially offset by the introduction of smaller cheaper-to-run branch outlets.

Analysts at Deutsche Bank Research say most big bank core systems rely on too many applications patched too many times to cope with rising transaction volumes, regulatory change and digital channel changes in particular.

"This will drive up to a 10% increase in overall operating costs and will be encouraged by an exponential increase in regulatory attention given to operational IT risk," says the DB Research report.

The rise in IT spend will be offset by a five per cent decline in branch costs, as banks move to introduce smaller banks with fewer teller staff.

"Some countries (Italy, Spain) are over-served by existing networks but overall we expect branch numbers to edge lower but not collapse," states the report. "In DM we expect new branches will be 25% smaller, show 20% lower headcount, fewer tellers, more advisory staff and more automation. They'll likely be cheaper to set up, easier to move and faster to breakeven."

Banks that execute best will cope with much higher customer transaction volumes with little cost increase, will be nimbler in pricing and product launches, more adept at adapting the branch network to changing needs and will drive increased customer loyalty, higher wallet share and lower churn.

A big IT spend is the inevitable consequence, says Deutsche Bank, but timely action now will leave the industry in a better position to fight off new entrants.

"We see Big Data as a key driver of this in time, given the requisite investment by banks," say the analysts. "Combined with the very significant upside to returns when interest rates rise we think that retail banking remains a generally attractive investment prospect."

Comments: (1)

A Finextra member
A Finextra member 11 September, 2013, 15:571 like 1 like

The amount of time and resource dedicated to standing still is immense.  A contact once referred to spending "half a Shard" on a platform, which by any means is a large sum (but less visible or impressive than an actual Shard).

Scary stuff, but a significant contribution to the innovation paralysis in legacy players when an investent portfolio is doing the equivalent of underpinning the foundations every year.