Outlook for banks' digitization plans is darkening amid economic uncertainty

  • The outlook for banks' digitization plans is darkening as economic gloom puts uncommitted IT budgets at risk and threatens longer-term plans.
  • And despite cuts, big banks will increase their technological edge as smaller financial institutions fall behind.
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US banks are proceeding with restructuring plans, skirting a widespread promise not to lay off employees due to the pandemic, per Reuters. Personnel cuts reportedly include technology staff, raising the question of how much banks are willing and able to cut before it impacts their digital transformation agendas.

Costs related to the pandemic are piling up for banks. As they spend on adapting to rising consumer dependence on digital banking channels and start-up expenses related to government assistance loans, banks also must grapple with tighter interest margins and risk of loan defaults. They will look to offset some of these costs by reducing growth in tech spend: Insider Intelligence has projected a 3.6% increase in US banks' technology spending between May 2019 and May 2020 — a dramatic drop from 8.9% growth the preceding year, although we expect it to rebound incrementally through 2024.

Despite cuts, big banks will increase their technological edge as smaller financial institutions (FIs) fall behind. As US business restrictions are eased and the economy recovers, banks' technology spending should accelerate — leading to infrastructure upgrades, higher investments in AI and automation, more advanced fraud mitigation and detection, and cloud migrations, among other areas. The largest banks have multibillion-dollar technology budgets and the financial strength to invest in new technologies now. But that is not necessarily the case for smaller peers, which will cede market share if their digital evolution stalls.

In advance of a recovery, banks will need to direct attention to customer-facing digital services. Pandemic-related public health restrictions are far from over, and banks have reiterated that prolonged economic pain is in store. Technology is not likely the first place to cut: With branch traffic dramatically lower and closures already on the roadmap, physical channels could bear the brunt of early cost reductions at consumer banks. But as consumers continue to migrate their banking activity to digital channels, FIs will need to invest in the experience to engage and retain customers who are now less tethered to a branch network.

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