Keeping the lights on: is your digital investment in the right area?
By : David Divitt
March 31, 2015 12:30 PM
Banks are spending more on digital and analytics, but could even more be done to develop the back-end systems that power an organization’s operations?
Two new research reports provide an interesting slant. Ovum says tech spending by banks in the US is to rise 4.3 percent next year from 2015. The bulk of this will be on security, analytics and digital banking - the catch-all term for everything mobile and online.
Kieran Hines, leader of the financial services technology practice at Ovum, told American Banker that there is a shift from “compliance-based spending to projects that will drive growth.”
It’s helped by the fact that the cost of ‘keeping the lights on’ - the basic costs of IT infrastructure - are falling, according to Ovum. Hardware and software commoditization is lowering costs, freeing up capital to spend on more productive projects.
So the investment is coming, but is it being directed at the right areas?
Front-end applications for consumers may be important, but research suggests greater profitability can be derived from focusing on back-end systems.
A study by McKinsey of digitization among financial institutions in Europe suggests digital investments are best placed in automation of back-office processes and in sales-side analytics. In a sense, investing to make it cheaper to keep the lights on.
“While correlation does not necessarily imply causation, it is interesting to see that more profitable banks have been investing in a few common areas,” say authors Giuliano Caldo, Matthias Hoene, and ‘Tunde Olanrewaju.
“The areas with the highest correlation with profitability were product back-office automation, digitization of document management and automation of credit decisions, and big data analytics applied to sales campaigns.”
The biggest gains were seen around cost control, project prioritization, advanced sourcing practices, and standardization of IT infrastructure and application architecture. Banks on top of these areas spend an average of 41 percent less on day-to-day IT operations.
For example, improved cash management provides banks with big operational savings by investing in the systems to deliver better outcomes in this field offers a clear payoff. It's a good example of a critical day-to-day activity where savings can be made.
And while the reports identified several areas of digitization showing less correlation with profit margins, the authors point out it does not mean that companies should not invest in these areas.
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