Banks spend tens of millions of pounds on IT every year and yet stakeholders have little or no knowledge where it goes and the level of return it generates, writes David Arnott, CEO, Temenos

Just 2% of banking IT spend is going on adding value. The rest is going on legacy system maintenance – the equivalent of bailing out a leaky boat rather than buying a new one. For now, the boat is staying afloat, but sooner or later it will start to sink.

There is a shocking lack of awareness of how much money banks are pouring away without any kind of return on investment. The level of disclosure on how IT budgets are spent is poor at best, non-existent at worst. Investors cannot look at the annual report and make decisions based on insight and value. The information just isn’t there.

But it isn’t all the banks’ fault. Stakeholders such as investors, government and regulators aren’t pushing for full disclosure, which is a mistake, destroying value and perpetuating risk.

IT transformation and the associated costs are a black box, with few quick wins and few people who really grasp the full implications. Understanding banking IT demands a very different skill set to understanding the market drivers of banking. It takes a technology specialist to really grill a bank on its IT strategy and even a brilliant banking analyst can easily be fobbed off with flannel about digital capabilities.

To date banks have been able to duck the question because there is very little understanding in the analyst community about the transformative power of IT. But banks are already losing market share to the disruptors such as Amazon and Apple as they better fulfil customer demands. Analysts and investors need to take note, need to start demanding clear disclosure about IT spend and what it buys in terms of value. IT is, after all, one of the biggest differentiators for banks.

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Those that want to compete successfully with the disruptors need to have similar core systems – digital systems. Data is their biggest asset. They know everything about their customers – salary, mortgage, credit cards, savings, spending decisions, tastes, hobbies, perhaps even their state of health, risk appetite and certainly location. Maximising the return on this data demands digital analysis – which means replacing and not maintaining core IT systems. The disruptors can and already do analyse all this and it will end up being hugely costly for those that can’t.

Given investors make a big deal about remuneration disclosure and who uses the corporate jet, I can’t understand why they don’t want the same granularity about the ROI of the IT budget.

In case it’s a question of not knowing which questions to ask, here are a few:

  • What’s the API strategy?
  • What are the bank’s data analysis capabilities?
  • How good is security?
  • How is the bank preparing for the internet of things?

Without medium-term plans for all these elements and more, banks will fail to tap new markets, exploit new revenue streams and will risk carrying on frittering away their IT spend, failing to create value. If I were an investor, I’d want to know.

Banks can save half their IT spend by using modern modular off-the-shelf software. This, once realised, goes straight to the bottom line. All other industries understood this decades ago.

Consider that IT budgets still make up some 13% of banks’ total operating costs. Halving that is a 6.5 percentage point total capex saving – tens of millions of pounds every year. But the benefits won’t be immediate. It will take perhaps five to 10 years for them to be fully realised in terms of savings and earnings growth. If the market were taking a medium to long-term view of value, share prices would move up when a bank announced a major change in IT strategy.

But it’s not just about costs and revenues. Shareholder value goes into regulatory areas. When banks can’t or don’t meet regulatory demands, they can face huge fines and open up themselves up to increased risk. Yet the banks’ current systems don’t allow them to adapt quickly enough to the ever increasing demands placed on them by the regulators.

Perhaps more of a worry, Basel II and III were delayed at the behest of the banks, which claimed they couldn’t meet the reporting deadlines. This meant regulation designed to make them safer was postponed. Risk was allowed to perpetuate even though off-the-shelf software packages existed that would have allowed the banks to meet the deadlines. This is truly shocking and should have been explained to investors.

Stakeholders should be demanding reviews and analysis of banks’ IT spend and banks must a give a full and clear picture of their IT spend and the returns they get for the money. If they don’t, it won’t just be the stakeholders that pay the price: when banks fail, we all do.