Swiss bank information technology costs have risen in double-digit percentage terms in the last five years. Some of it is due to innovation but mostly it is a fight to survive.
Swiss banks have done things mostly right over the last few years. They have increased IT budgets significantly and stuck millions into digitalization efforts. Boutique IT consulting firm itopia said a survey showed IT costs for retail banks rose 20 percent between 2015 and 2019. The increase was around 17 percent for private banks.
Itopia also found out that IT budgets are up in the same timeframe and that they are likely to keep doing so. «They are in good company,» writes Felix Buschor, lecturer at the Institute for Financial Services in Zug, in a blog (German only).
Revenue Shortfalls
But where are the efficiency gains and revenues from all these digitalization strategies? They have been hardly visible until now. There are two reasons for that. Margins in the interest income and investment business are sinking. Any gains from digitalization simply serve to compensate for structural revenue declines.
The second reason. IT budgets don't only increase as a result of innovation or digitalization efforts. Much of it results from the necessity of updating and modernizing old systems. «Most expenditures for technology are not linked to innovation – by far», writes Buschor.
Spend to Survive
Most of an IT budget is simply the cost of doing business. What that means is that increased spending is strategically necessary to survive. They also help banks keep up with competition, meet client needs, and shore up market share.
The whole thing only pays off if they manage both – keeping legacy systems updated while using a part of their budget to innovate. «IT costs can only rise as long as earnings allow. That means that the money spent money on IT has to have the desired effect», writes Buschor.
Fintechs Cut Spending Benchmarks
He also warns against ignoring other developments in Swiss finance. Fintech players are challenging traditional banks, winning market share and underbidding them with a massively lower IT cost base as startups build greenfield IT systems without legacy baggage.
Buschor writes that fintechs are currently setting new IT cost benchmarks independent of the neo-banks. IT managers have not gotten headaches from the rising costs in the last few years but that could change quickly, says Buschor.
Never-Ending Cost Control
The success of a bank is increasingly defined by how it limits IT spending. The challenge in the future will be how to keep digitalizing while keeping the costs under control.
