Technology investments drive up banks’ costs
For all their boastful talk of becoming technology companies, most banks still run on core systems installed in the 1970s and 1980s.
It is surprisingly difficult to find out how much banks spend each year on IT.
Banks periodically try and tell the world – especially when tech stocks boom and trade at high valuation multiples – that they too are essentially technology companies that just happen to have regulated financial businesses attached.
Goldman Sachs, for example, has 34,400 employees, of whom 9,000 are software engineers. That’s about the same as Facebook and more than the entire payroll combined of Twitter and LinkedIn.
And yet how much banks actually spend on IT – including investment in new systems to bring product and customer channels into the digital age, typically accounted as capital expenditure amortized over time; the annual expense of running legacy systems; and then pay for IT staff – is not easy for investors to extract from financial statements.
Analysts at Citi took a stab at it recently. They estimate that maintaining legacy systems, investing in new ones and paying IT staff together amounts to anywhere from 15% to 25% of a typical bank’s annual budget. That’s a lot. Banks spend around $200 billion every year on IT. Most of that – Citi estimates close to 80% – is spent internally on legacy and new proprietary systems rather than on systems installed and maintained by third-party vendors.