How to make banking tech investment count

Insights

• Infosys has launched the Infosys Bank Tech Index to help executives understand how peers decide to spend their budgets across different technology areas and what are the evolving technology talent demands within banks.
• The study gathers quantitative data from 204 of the largest banks by assets in Asia Pacific, Europe, and North America. This group of banks represents 64% of banking assets for banks with more than $10 billion in assets.
• Strategic priorities – The survey found that banks from North America and Europe focused on reducing costs, while banks in APAC were focused on driving business growth and complying with regulations.
• Tech spending – Total tech spend by our surveyed banks was $32 billion in the most recent reported quarter and is expected to rise by 9.7% quarter on quarter. CapEx, which accounts for two-thirds of total IT spend is expected to rise 9.5%. OpEx is expected to increase 9.9% quarter on quarter.
• Technology talent - Banks are expected to increase recruitment of full-time technology staff by 4.2% quarter on quarter. Banks in APAC are expected to increase hiring the fastest by 8.0%. Europe will increase hiring the slowest by 2.9%.
• Technology project success – Nearly 70% of banks indicate that less than 25% of technology projects are on-track. Nearly two thirds of European banks have tech projects that are 25% on-track.

The need to track tech investments

These are unprecedented times for banks – the new high interest rate economic environment coupled with fast-paced technological changes including the emergence of AI have kept financial institutions on their toes.

As competition from new entrants rises, incumbents must balance a regulatory landscape that requires banks to adapt operations and open up their data to third-party providers. This move to open banking creates new cybersecurity risks, forcing banks to spend more on tech just as it becomes increasingly difficult to hire technology talent.

The explosion of AI adds to the pressure: it becomes all the more necessary to understand how banks invest in technology and if their investments are effective.

The Infosys Bank Tech Index

The index will help executives understand how peers decide to spend their budgets across different technology areas and what are the evolving technology talent demand within banks. We looked at four key areas:

1. Technology strategic priorities

We asked panellists about their main strategic priorities and found that for banks in North America and Europe, reducing costs was by far the main priority. In 2023, we witnessed a spurt in inflation and interest rates that dented the banking industry’s balance sheets and broke a few banks. Costs rose, eating into customers’ cash balances. Banks had to manage these economic headwinds, adapt to market and technological changes, manage profitability under tightening margins, and align resources for future strategic initiatives.

However, banks in the APAC region were more focused on growing their business and complying with regulations.

The second most important strategic priority was transforming the business model. The race to digitize products and services is forcing banks to re-evaluate their business model. Fintechs, neo banks and incumbents are looking to attract younger customers who seek more personalized, efficient, and digital-first services. This is prompting a model transformation.

Figure 1. Reducing costs is the #1 priority for banks

Source: Infosys Knowledge Institute

2. Technology spending

Total spend: We asked panellists about their capital expenditure (CapEx), operating expenditure (OpEx), technology spend on regulatory, IT operations (ITOps), and new projects.

Total technology spend by our surveyed banks was $32 billion in the most recent reported quarter, and we expect that to rise by 9.7% in the next quarter to $35 billion.

Generally, CapEx technology spend is to keep the lights on, for example, purchasing a mainframe or building a new data centre. OpEx technology spend, on the other hand, is the cost of running and maintaining those assets.

CapEx by our surveyed banks is forecast to grow by 9.5% to $23.3 billion and will account for two-thirds of total technology spend in the next quarter. OpEx is expected to grow 9.9% to $11.8 billion. APAC banks spent twice as much on CapEx versus North American and European banks. European and North American banks spent more than four times on OpEx compared to APAC.

Figure 2. Total CapEx spend to rise 10% quarter on quarter

Source: Infosys Knowledge Institute

Allocation of budget: Panellists were asked how their banks distribute resources on emerging technologies. We found spend on cybersecurity, open banking and cloud dwarfs that spent on artificial intelligence.

Attackers continue to target the financial sector. As of 2023, the average cost of a data breach in the financial industry worldwide was $5.9 million and a major cyber-attack on a global payments system could cost the world economy $3.5 trillion. Yet most banking regulators haven’t introduced cybersecurity regulations, an IMF survey of 51 countries revealed.

Open banking or APIs was the next largest category. North American banks allocated as much budget to this technology as to cybersecurity. Here, the move is being driven by market demand as customers expect better experiences and more value from their banks. European banks allocated 17% to open banking, thanks to governments mandating moves to a more open financial services marketplace.

Cloud computing was next on the list of how bank distributed resources. What started out as a pure-play cost take-out decision – cloud for storage and cutting costs – has now morphed into cloud-enabled growth and transformation. According to the Infosys Knowledge Institute, companies have made big commitments to cloud, with the banking industry averaging $33 million in cloud spend each year.

Now, we are at the cusp of an AI era and banks need to spend top dollar on new initiatives. While our survey found budget allocation on AI is still smaller than other technologies, Wall Street giants including J.P Morgan, Bank of America and the entire sector have likely spent $20 billion between them on AI in 2023.

Figure 3. Cybersecurity leads allocation of tech budget

Source: Infosys Knowledge Institute

3. Technology talent

Tech recruitment: Banks in our survey are looking to increase recruitment of full-time technology staff by 4.2% in the next quarter, with APAC banks set to grow hiring the fastest by 8.0%. Overall, we see that more than half of banks expect to increase recruitment of full-time technology staff by between 5% and 10% in the next quarter.

Figure 4. APAC to lead tech recruitment growth

Source: Infosys Knowledge Institute

Skills gap: As the workplace undergoes rapid transformation due to technology disruption, sustainability transition and changing workforce demographics, acquiring and developing talent has become a key priority for institutions.

We asked banking panellists to indicate on a 100-point scale which technology areas were the most difficult to acquire skills for (more points indicate a higher level of difficulty).

AI is significantly changing the global employment market. Yet there is a real dearth of AI talent and expertise, which our data confirms: panellists indicated that artificial intelligence skills were the hardest to acquire at 31%.

To obtain and retain talent, institutions must prioritize, retraining and reskilling, ensuring pay transparency and parity in roles and training programs to retain staff and close the skill gap.

Figure 5. AI skills are the hardest to find

Source: Infosys Knowledge Institute

4. Technology project success

Panellists were asked what proportion of their technology projects were on-track with timelines and/or business outcomes. Nearly 70% of banks indicated that less than a quarter of their technology projects are on-track. This is a huge cause of concern for banks that track their technology outcomes. One-third of European banks have tech projects that are between 25% and 50% on-track, relatively better than APAC and North America that have 26% and 29%, respectively.

Figure 6. Only a quarter of tech projects are on-track

Source: Infosys Knowledge Institute

Tracking tech investments is important

While there is cautious optimism for the year ahead with economic growth expected to marginally slow in 2024 to 2.9%, as inflation tapers, central banks around the world are expected to lower rates in the second half of 2024 to boost housing demand and consumption and grow their economies.

Banks are cautious about how they spend their money. Yet this shouldn’t translate into lower technology spending. In fact, quite the opposite – Gartner found that companies that cut investment during the 2008 financial crisis lagged competitors in the years that followed.

However, banks haven’t found an effective way to measure if their spend on technology generates the desired returns. Often, the need to measure gets diluted over time as technology projects run for multiple years, sometimes decades.

Our findings show that cybersecurity is a clear cause of concern for banks, with cyberattacks on the rise, meaning spending in this area is growing. Cloud investments continue as banks look to modernize their infrastructure to make them more agile and adept to dealing with a new generation of customers while not compromising on resilience. However, the talent squeeze is having a real impact on technology projects, with nine out of 10 running late.

As data is gathered in subsequent quarters, the Infosys Bank Tech Index intends to provide a dynamic view of the trends, track evolving patterns, and help senior executives at banks make informed decisions about technology and talent.