It’s rare for an anonymous quote in a management consultant’s report to make much of an impression. But the admission by the chief financial officer of an unnamed global bank on the mystery that surrounds his own company’s technology spending is striking. It’s especially troubling for investors in the finance sector.
“I know 50% of my digital transformation spend is wasted — I just don’t know which 50%,” the CFO was cited as saying in an Oliver Wyman report on bank tech (in a nod to a famous old marketing quote). An executive also confessed to feeling “old-fashioned” when asking why there hadn’t been any profitable returns from their firm’s digital investments, adding to the sense that sound strategies are a rare thing in this field.
After years of plowing billions of dollars into shifting from serving customers in branches to mobile apps and instant payments, lenders are often in the dark about the difference their spending is making to operating profit.
Banks typically don’t provide much detail on how their technology budgets are being allocated between keeping existing systems going, improving cyber-security and changing how the company engages with customers. But overall investment is large — and growing. Even some of the biggest lenders with the deepest pockets, such as JPMorgan Chase & Co. and Banco Santander SA, are spending more than 10% of their yearly revenue on technology.
Too often banks don’t articulate how these billions improve the bottom line, though that’s natural enough if they don’t know the answer themselves. Investors are struggling inevitably to sift through the noise, the jargon and the lack of hard numbers to try to work out what their companies’ funds are being spent on. Unsurprisingly, 37% of the shareholders surveyed by Oliver Wyman found banks’ digital strategies neither clear nor credible, with a similar percentage skeptical about whether banks will be successful in adapting to the digital era.
Rather than just complaining in surveys, investors should hold lenders more accountable. While metrics around technology spending are difficult to design, they are not not impossible. Singapore’s DBS Group Holdings Ltd., Southeast Asia’s biggest bank, provides comparisons of efficiency and profitability measures for traditional versus digital customers. That’s a very helpful gauge.
Unfortunately, the numbers available elsewhere hardly point to much success for the finance industry’s vaunted “digitisation” strategies. Across banking, the cost of serving customers has increased, according to Oliver Wyman. Expenses to set up apps often are not offset by cutting back on physical operations. For example, while customers can open a bank account or get a loan without stepping into a branch, the cost savings will be minimal if the lender still depends on manual processes to complete those tasks.
One way for large banks to avoid the institutional inertia that bedevils major IT projects is to buy up promising fintech upstarts, but their track record here isn’t at all encouraging either. In a study of 15 000 financial services business launches, the report found 80 reached valuations in excess of $1 billion; incumbents had invested in only one-quarter of them before that unicorn stage. Hardly a sign that the industry can pick winners.
For now, competition from fintechs hasn’t made much of a dent to the revenues of the big banks. In Europe, the biggest hit on margins has come from low, or negative, interest rates. Yet as digital banks and payment providers expand, the pressure will increase on incumbents to allocate their cash smartly. After a lost decade for investor returns, European lenders in particular cannot afford to guess their way through the next.
© 2020 Bloomberg L.P.