The FINANCIAL — Retail banks (including thrifts and credit unions) in the U.S. will spend nearly $16.6B on hardware, software, services, and internal IT staff in order to develop and implement digital transformation initiatives in 2015. And this spending on digital transformation will grow at an average CAGR of 10.4% into 2019, according to recent IDC Financial Insights spending models.
This compares to an overall IT spend growth of 3.9% for U.S. banks. A new report from IDC Financial Insights, “The Cost of Digital Transformation in US Banking: The Critical Technology Investments in 2015 and Beyond,” outlines how much money is being invested by U.S. banks in digital transformation, where those investments are going, and where IDC Financial Insights believes the growth will be the strongest in digital transformation investment.
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 burden, increased need to manage risk, and the constant attack on the bank’s security systems, discretionary spending for important line of business projects that can accomplish digital transformation is at a premium. This new report offers IT executives, line of business leaders, and financial chiefs at banks in the US critical insight into the industry trends and investments that are driving digital transformation, to help keep pace with the leaders in the industry.
Key highlights of the new report include:
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 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.
Spending on IT services for digital transformation is a smaller, but not inconsequential, source of spend growth as well, growing at 8.5% 2015 to 2016. Only hardware is keeping pace with total IT spending growth.
The growth of spending on digital transformation is outpacing aggregate IT spending by over 2.5 to 1. In 5 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. Payments is 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 strong areas of growth in payments transformation.
After using 80% of the IT budget to pay for mandatory improvements in compliance, risk, security, and just keeping the lights on, it doesn’t leave a lot to invest in the bank’s future. In this report, IDC Financial Insights quantifies reports heard from CIOs and line of business leaders and validates that about 24% of the total IT budget in U.S. based banks and credit unions is being used to enable digital transformation. And this investment is happening from two opposite end 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.
“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. It’s a $16.6B bet,” said Jerry Silva, Global Banking Research Director for IDC Financial Insights.
The budget season is about to begin for banking institutions in the U.S. And the challenge of funding digital transformation is a difficult one. This report provides market insight into what kinds of investments that market is making to enable digital transformation, where those investments are being made, and how those investments will grow over time. Banks can use this report to guide their own investment strategy in line with their commitment to transform their business.
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