Run the bank versus change the bank

A set of gold scales weighing gold bars and dollar notesBanks continue to spend more of their IT budgets on day-to-day operations than on transformative projects.

This should come as no great shock to those in the industry - after you’ve allocated enough resources to run the bank, there is very little left to change the bank.

But how can banks reduce their total cost of ownership (TCO) so they can free up time and money for projects that will add value? A new international study looks at some of the main factors.

Run the bank

Research from Finextra shows at least two-thirds (67 per cent) of IT budgets are still being spent on maintenance and compliance.

Yet 75 per cent of the financial institutions surveyed say they take sustained approach to operational efficiency. In practice this means wrapping in some operational efficiency targets as part of regulatory compliance projects to get some business benefit from the changes.

Nevertheless, merely running the bank is becoming increasingly expensive. “For many financial organisations, there are core systems and platforms labouring with the demands placed on them that in some cases are more than ten years past their effective end of life,” says the study. This makes it harder to find money for change the bank projects, but highlights how transformation, such as tackling TCO, is all the more important.

Reducing complexity

The report delves into the main problems facing banks that seek to reduce IT complexity, which is critical for improving compliance, lowering costs and reducing risk.  

Respondents said costs and the need to stay on top of emerging technology were the biggest reasons for not simplifying IT infrastructure. Regulatory pressures were the third most commonly-cited obstacle, though some are seeking to turn this around to their advantage.

“While some organisations are using regulation related IT projects to wrap in efficiency gains, the rate of updates and introduction of new regulations means a constant flow of requirements that can override previous IT change plans,” the study authors noted.

M&As

Most of the banks polled for the study have gone through some kind of M&A in the past five years. As we know, mergers throw up various potential problems for the complexity of IT infrastructure. With so many banks involved, this is a major issue for the industry.

For 39 per cent of banks involved in some M&A activity, there has been no integration of systems. A fifth (22 per cent) said they are running duplicate systems and infrastructure runs in tandem.

“Achieving IT and operational efficiency by reducing the costs it took to run the separate entities that have now joined is usually factored in as one of the benefits driving M&A activity,” notes Finextra. “But in reality, things don’t always pan out that way.”

In the end, banks always have to balance spending on IT. But by embarking on cost-reduction projects, it's possible for banks to reduce overall operational expenses so there are more resources for dealing with changes in regulations and emerging technology. Simplifying IT infrastructure will also reduce risk and make it easier to adapt to future shifts.