How banks can invest technology into competitive advantage

How banks can invest technology into competitive advantage

As selected banks around the world have proven, technology has become a new basis for competitive advantage. Whether seeking platform modernization, a digital customer experience, advanced data analytics, or new forms of artificial intelligence, leading banks are using technology to gain an advantage in areas ranging from process efficiency to product innovation. By helping to reduce the costs associated with running a bank, technology frees up a bank’s investment capacity to improve products and customer experiences. This has created a virtuous cycle: lower operating costs, increased investment in efficient and delightful technologies, happier customers, and more revenue and profits to invest.

Effective deployment of robust technology has become critical to the success of banks, for several reasons. Consumers and business customers demand simple, convenient, data-rich, and more personalized digital experiences, and they can easily move their money to whoever has the best offer. Digital vendors and large technology vendors continue to threaten traditional banks. Regulatory compliance requirements continue to expand. Top technology talent is attracted to leading banks as great places to work.

Modern technology, such as cloud-native banking platforms and AI-enabled processes, can enable banks to automate complex tasks and thus provide real-time responses to customers at a low cost. Banks can leverage the vendor ecosystem to verify customer identities through biometrics. Continuous integration, continuous delivery tools, and best practices enable companies to deliver more with less.

However, for all that banks spend on IT – about 16% on average of their total cost base worldwide – much of it remains mired in complexity with high operating costs due to outdated technology, bloated IT assets, and complex processes. . These characteristics combine to limit investment capacity, result in a poorer customer experience and smaller product portfolio, and lead to lower customer ratings and higher churn.

The solution does not lie in reducing ambitions and spending less, nor in simply spending more. Instead, it starts with a clear strategic intention from the top to modernize the business and its technology foundations to simplify and accelerate business growth. It’s all about intentional choices throughout the work.

What technology leaders do differently

To identify the most important options, Bain & Company analyzed the 42 largest banks worldwide by assets. We evaluated their results based on three dimensions: total shareholder return (TSR) and cost-to-income ratio (CIR) over the past three years, and net promoter score (NPS) from Q1 2023. We then evaluated their technology. Choices are made across 11 variables, ranging from board composition to recent technology stack to mix of IT staff profiles.

In a regression analysis of the variables, we found that banks with a strong technology focus rank among the best-performing banks globally and show a 5 percentage point higher TFR than other banks in their region, and a 10 percentage point lower TSR on income, and 12 percentage points. Highest NPS.

The strongest correlates of high performance were:

  • Tech-savvy board of directors. Technology strategy and performance should be paramount to the board and executives.
  • More in-house engineers and fewer other IT staff. The winning banks have built a world-class engineering function for parts of the business and technology portfolio that require differentiation.
  • Positioning as a technology company. A technology-focused mindset pervades leaders’ operating model, organization, and talent.

In addition, these leaders have a clear vision of the target structure. They modernize in the areas that matter most to create a distinct competitive advantage over customers, economics and risk.

The differences between the technology leaders and other banks were stark (see Figure 1). It is worth noting that spending more on technology alone did not lead to better performance. In fact, IT spending relative to revenue had a negative relationship with performance. The complexity increases when a bank increases its IT spending too quickly, because money can go to the wrong places, without proper architecture oversight or ongoing decommissioning.

A few technical choices have a significant impact on performance

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