Where U.S. bank tech spending is headed as economic uncertainty looms
The trend: We are waiting U.S. bank investment in technology will grow 10.6% year-over-year in 2022, faster than any previous year– despite the imminent threat of recession and financial market turmoilwhich will aggravate internal and external pressures on banks to reduce their budgets.
Our report on Technology spending by US banks look why Technology spending by US banks will reach nearly $86 billion in 2022 and reach nearly $112 billion by 2026.
The risk of recession: Banks are currently facing an inverted yield curve, rising interest rates, high inflation and uncertainties surrounding Russia’s invasion of Ukraine. 28% of economists interviewed by the Wall Street Journal expect the US to be in a recession over the next 12 months, a sharp jump from 18% in January and 13% a year ago.
In the past, when the economy contracted, companies responded with cost-cutting measures. But that may not be the best strategy right now, when much of the banking industry is still in the midst of major digital banking transformation efforts.
Where do banks spend? There is an arms race between neobanks and incumbents to the best digital customer experience. A majority of consumers, 54%, use digital bank tools no longer due to the pandemic, according to the 2021 Digital Banking Attitudes Study by JPMorgan’s retail banking arms. Meanwhile, 99% of Gen Z and 98% of Gen Y use a mobile banking app, according to a 2021 Chase study.
Back office operations have also benefited from the digital transformation. To accommodate more data-intensive strategies, banks are modernizing the technology of their core banking systems. U.S. bank executives said 40.0% of their bank’s technology budget for fiscal year 2021 was spent on core systems technology, according to the Bank’s 2021 Chief Technology Survey.
Industry executives we spoke with for our reports said that core banking upgrades are critical to the successful operation of open banking and bank-as-a-service (BaaS) partnerships, we therefore expect banks to continue to allocate resources to this area.
Growth in technology spending varies by industry: Our forecast shows that overall growth will stabilize at moderate levels after hitting a five-year high in 2022.
- The share of total technology spending by U.S. banks at the four largest banks—Wells Fargo, Bank of America (BoA), JPMorgan Chase, and Citibank— decline to around 38% of market-wide technology spending by 2024, from around 46% in 2017.
- Medium-sized banks like PNC, US Bank, Truist, Key Bank, and Regions will see their share of total U.S. bank technology spend rise to 12.6% in 2022.
- The “other” category of banks, which includes regional banks, community banks, credit unions and neobanks will account for 48.5% of total U.S. bank technology spending in 2024. Neobanks will play an outsized role in increasing the share of “other” technology spending among US banks.
How a slowdown could affect tech spending: Our U.S. tech spending report highlights the problem of growing shareholder pressure, which is unlikely to let up in the face of a prolonged downturn or recession. Investors are concerned about the profitability and transparency of spending plans. Banks will continue to face demands to justify their level of spending.
But banks could also benefit from the bursting of the technology bubble.
An influx of talent: Research firm CB Insights reports that fintech funding fell 18% between the fourth quarter of 2021 and the first quarter of 2022. This is the largest percentage drop since 2018. Fintechs not receiving funding outside needed to support an inflated labor cost began to lay off. Banks may be able to seek strategic hires from these freed-up employees and position themselves for future growth. The economic downturn could also slow the upward trend in earnings as companies cut staff or start offering lower wages.
Reduced technical costs: Other organizations that reduce their technology investments affect the balance sheets of solution providers. Banks that are still spending may be able to secure lower technology costs through better hardware and software purchasing terms.
Mergers and Acquisitions : With fintech funding drying up, we predicted in our The Age of Uncertainty report that unsustainable fintechs will not last. Companies that remain standing will be stronger, more sustainable and valued at more attractive multiples. We expect banks to, as Warren Buffett once said, “get greedy when others are scared” and seize the opportunity to buy high profile fintechs.
And after? Consumer banking is a cyclical industry affected by declining consumer confidence during economic downturns. Many fintechs have yet to prove they can withstand these ups and downs. But the incumbent banks did. In the event of a recession, they will benefit from the tighter capital requirements and annual stress tests they have endured since the 2008 financial crisis. customer experience will be better able to minimize churn and may even attract disillusioned customers from struggling competitors.