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How to Spend Your IT Budget Wisely

Almost two-thirds of banks' IT spending goes on regulatory compliance and maintenance at a time when technology-led new developments are seen as the future of finance; three steps will help community banks with their spending

Banks of any size and shape have to think carefully about their IT budget. Across the financial services industry, 32% of 2016 IT spending will go on regulatory compliance projects, and another 27% on the maintenance of existing systems, according to CEB data. That’s almost two-thirds of the budget spent before any of it can be used for activities that will generate revenue for the bank.

All this spending contrasts rather neatly with the growing and often breathless coverage of new approaches to banking, often as a result of innovations in digital technology. The problem – as ever in business – is that it’s difficult to know what’s worth investing in and what can wait, especially for smaller community banks. For example, does a community banker need to have a good grasp of Bitcoin? What about blockchains?

At smaller banks, because the overwhelming majority of products and systems are provided by vendors, executives often feel like they’re continuously trying to catch-up with the bigger fish in the industry. For example, while most community banks have now deployed some mobile banking capability, industry-wide investment in mobile banking means that what customers see as “standard” functionality keeps changing.

At the same time, CEB analysis shows that customers do not reward their providers with increased loyalty for making basic tasks easier (for instance, by introducing new digital technologies like mobile remote deposit capture); in fact it often just makes it easier to switch providers.

Three Steps to Wise IT Spending

Those running community banks should do three things to make sure they’re investing in the functionality required to keep customers happy but, at the same time, not chasing new technologies that aren’t yet ready for prime time.

  1. Set realistic timelines for investment: Are customers really going to need us to embed payment technologies into our refrigerators so that the fridge can order its own groceries? Maybe. But almost certainly not within a two year investment horizon.

  2. Prioritize vendor management: Regulators are already pushing banks to look more closely at their relationships with third party suppliers, but those relationships shouldn’t just be scrutinized from a risk management standpoint.

    For most community banks, vendor relationships govern the product portfolio and should be seen as critical to strategy. In this case, strong relationships with vendors that provide flexible, extendable products and platforms and that have a thoughtful view on where technology are going should be valued even over vendors offering the best price.

  3. Ensure executives are technology literate and on top of current trends: The days when senior executives could leave knowledge of non-branch channels and the underlying technologies that help the bank operate to “the IT guy” are over.

    All members of the senior team need to think of technology problems and opportunities as their problems and opportunities, requiring their attention.

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