Rising bank IT costs are a bigger worry than regulation and cyber threats

Rising IT costs for banksAsk a banking executive what their biggest worry is these days and chances are things like regulation and cyber security are high on the list. 

But as a new survey indicates, the real jitters are created by the rising costs of information technology, which are now second only to macroeconomic concerns such as central bank policy.

Global risk adviser Willis polled senior executives at 150 banks, insurers, reinsurers, asset managers, hedge funds and financial technology companies. It found that while the creep of regulation and rising cyber risks were worries, technology costs trumped these.

The firm’s Financial Institutions Risk Index highlighted six so-called mega-trends disrupting the financial services industry. These were: regulatory changes and complexity; digitalisation and technological advances; changes in investment and capital sources and returns; business operating model pressures; demographic and behavioural changes; and the global talent and skills race.

Within these, the executives polled were asked to explain what’s troubling them most, with a total of 31 risks highlighted and compared.

“The ranking of the risks is not as one would expect,” notes Jagdev Kenth, director of risk and regulatory strategy in Willis’ Financial Institutions Group. The top risk was macroeconomic factors - the impact of deflation/inflation and QE.

“The second risk, as ranked by financial leaders, is the risk of increasing costs associated with IT upgrades, as financial institutions manage outdated systems and invest in IT upgrades. The risk of a cyber-attack ranks fourth in comparison. Regulatory pressures prompting people to leave the financial sector is a top-three risk,” writes Kenth.

Banks are certainly having to spend more just to keep up. Total IT spending across banks in North America, Europe, and Asia-Pacific will grow by 4.6 per cent to $196.7 billion in 2015, according to forecasts by Celent.

Meanwhile, a report from Finextra shows two-thirds (67 per cent) of banks’ IT budgets are still being spent on maintenance and compliance. This figure is consistent with Boston Consulting Group figures showing European banks invest barely one-third of their IT budgets in “change-the-bank” projects, while “run-the-bank” costs account for about 70 per cent of total IT expenses.

Moreover, there may not be a direct correlation between spending more and operational improvements.

Deutsche Bank said in a 2012 report: “Amazingly, the top performing institutions derived the greatest business efficiency from a level of IT spending below that of their peers,” adding that “the quality of IT management is even more important than the spending level in achieving the desired results”.