The Cultural Differences Behind Megabanks’ and Smaller FIs’ IT Spend
The Wall Street Journal reported that:
"Citigroup spent $8 billion on technology in 2017, [and] JPMorgan Chase said it will spend $10.8 billion on technology in 2018. In previous years the bank has said that roughly a third of its tech budget is spent on new investments. The big figures also give a sense of how much banks are betting that new technology, ranging from robotic process automation to open-ledger blockchain systems, can help slash costs over the longer term."
The WSJ article prompted a tweet from fintech influencer Jim Marous, who asked "Citigroup: Big Bank, Big Spender on Tech Can Regional & Community Banks Keep Pace?" I can tell you that the answer is: "They aren't. And neither are the credit unions."
The Spending Side of the Coin
Eight or 11 billion dollars is certainly a lot of money to spend on technology--especially when you're a financial institution with a quarter of that in assets.
But let's put this in perspective. Citi has roughly $1.385 trillion in assets. According to the NCUA, total assets in federally insured credit unions hit $1.34 trillion in the first quarter of 2017. And Chase alone has $755 billion more in assets than that ($2.1 trillion for the mathematically-challenged).
Even considering the differences in size between a Citi, Chase, and a mid-size bank or credit union, the megabanks outspend smaller FIs in technology in terms of:
- IT spend % of assets. As a percentage of assets, Citi's IT spend is 0.577% while Chase's is slightly lower at 0,504%. In contrast, according to the 2017 Cornerstone Performance Report, at the median, mid-size banks spent 0.223% of assets on IT, down 6% from the 2015 report. Credit unions fall in between the megabanks and mid-size banks. At the median, credit unions invested 0.410% of assets in IT according to our 2016 report. And that figure was up from 0.360% in 2014.
- IT spend % of total expenses. Citi's $8 billion IT spend represents about one-fifth of its total expenses, according to its CEO. At mid-size banks, on the other hand, IT expenditures only represent one-tenth of the total non-interest expense base. At credit unions, it's a bit higher, around 13%.
If the total IT spending levels at megabanks isn't enough of a concern to mid-size financial institutions, where the money is going might be. As the WSJ article pointed out, megabanks "are betting that new technology, ranging from robotic process automation to open-ledger blockchain systems, can help slash costs over the longer term."
In contrast, these new technologies aren't even on the radar at many mid-size FIs. At banks, for examples, just 5% have already made investments, or will make investments in 2018, in robotic process automation. And at more than six in 10 mid-size banks, artificial intelligence (AI) isn't even on their radar. Among credit unions, more than half are at least discussing AI and blockchain.
The Philosophical and Cultural Side of the Coin
The real issue here isn't the level of spending--it's the underlying philosophies and organizational cultures driving (and determining) the tech spending levels.
In a recent blog post, Chris Skinner wrote about the excuses smaller banks give explaining their resistance to technology (which was discussed on a recent episode of Breaking Banks with myself and Reading Coop CEO Julieann Thurlow), which included:
- We have too much to do
- But it costs too much
- But we have to build it
- But the regulators won’t allow it
- But the big banks have the advantage because they’re big
- But it’s hard to change
"If you don’t think you can change a teeny-weeny bank, then what the hell are you doing there? Massive banks are changing and they’ve got 1000x the challenges you have. Most of the barriers to small financial firms seizing the digital opportunities are created by negative thinking. But then I have to say that most small financial firms I’ve met are ultimately constrained by the negative thinking of their CEO. This is because many small financial firms are led by a CEO who was anointed ages ago. They got the job, and they’ve been there for years. They’re not really a CEO to be honest, but just a caretaker for the next guy."
I agree with the "massive banks are changing" point, but not the rest of the quote. I know (and work with) a lot of mid-size bank and credit union CEOs who have been in their role for a while, and I think I can safely say two things about them: 1) They weren't "anointed," and 2) They're not prone to negative thinking.
In response to a tweet from Chris about his blog post, I responded with the following tweet:
“Must be me, but I don’t hear any of those excuses. I hear: ‘we don’t need to be digital—our customers rely on branches and people are our biggest asset.’ “
To clarify my comment, I meant that's what I hear when I'm hearing between the lines. It's generally not a spoken thing among the execs--it's their fundamental philosophical belief about banking. The thinking is different for:
- Banks. On the bank side, it's driven by the reality that commercial--not retail--lending is the driver of profits in the organization. The level of technology-driven change on the commercial side has not been as dramatic as it has been on the retail side, leading many bank execs feeling comfortable with their lack of tech-driven change. And with growing post-financial crisis profitability, they've got numbers to support their view.
- Credit unions. On the credit union side, it's driven by misguided competitive thinking (I'm trying to find a nice way to say "delusion"). CU (and bank, for that matter) look at the product app by channel numbers, which still heavily favor the branch, and conclude consumers want "advice" from branch personnel when they open accounts. Or they look at research that says Millennials still go into branches X times a month or quarter, and conclude "See? Even Millennials want to talk to people in branches!" Then they look at the ACSI satisfaction numbers and conclude that their higher sat scores are due to their "people."
Unfortunately, this thinking misses three important points:
- Consumers go into branches to open accounts because the digital account opening process sucks in 99% of financial institutions;
- Consumers go into branches to talk to branch personnel because there's no option to Facetime them--or even call them directly! and
- Branch personnel are not nearly as knowledgeable as the senior execs would like to think they are.
The point of Marous' tweet was to wake community bank and credit union execs up to the realization that the megabanks are spending a lot on technology--and have been (and have garnered more than half of the Millennials checking account business, as a result).
And yet, there are still CFOs at community banks and credit unions who benchmark their organization's IT spend, find out their institution is spending more than 0.223% or 0.410%, and want to know how to reduce IT spend down to the median.
What's a Smaller FI to Do?
There's a sentence in the WSJ that points to the opportunity that mid-size banks and credit unions have in their fight against the megabanks:
"[Mega]banks are betting that new technology can help slash costs over the longer term."
Let the megabanks focus on cost-cutting. Mid-size banks and credit unions should look for the opportunities to use technology to reinvent and redefine banking products (that's what I was getting at in my recent Insight Vault post titled Can You Handle A Contrarian Opinion About The Customer Experience?).
Focusing on how much is spent on IT without taking into account where the money is going, and what you're getting in return for it, is utter foolishness.
Trying to match the megabanks' level of spend on IT is doable, and probably inevitable for smaller FIs over the next 10 years. But where they put that money will determine their success and failure.
Director of Research