Unlocking Value from Technology in Banking

In today’s rapidly evolving financial landscape, investors, boards, and management teams are increasingly seeking to understand how banks can demonstrate differential value through their technology investments. Our research provides a framework to link these investments to value creation, emphasizing the critical role of data in this equation.

Technology has undeniably transformed banking, ushering in innovations like mobile apps, algorithmic trading, and automation. However, quantifying the value generated from these advancements remains a challenge for many banks, particularly in articulating how their technology strategies outperform those of their competitors.

As technology spending rises, so does scrutiny from stakeholders. Interviews conducted for this research reveal that management teams, board members, and CEOs are eager to see clear evidence of the value enabled by technology. Equity analysts echo this sentiment, expressing concerns that technology expenditures often seem opaque, making it difficult to communicate their true impact on the bank’s performance.

To address this, banks must focus on extracting greater value from their technology investments and demonstrating that value to stakeholders. This can be achieved by reallocating resources strategically and driving outcome-based execution.

The Negative Loop

Some financial institutions find themselves trapped in a negative cycle: constrained discretionary tech budgets lead them to build in-house solutions, as vendor offerings may not align with their needs. In a bid for organizational harmony, these institutions often prioritize projects from the bottom up, resulting in numerous small initiatives with unclear returns. Lacking sufficient funding and support, these projects often follow a cost-minimization approach rather than focusing on value maximization, complicating the narrative around their impact for investors.

Creating a Virtuous Cycle

Conversely, some institutions have successfully established a virtuous cycle. By adopting a value-focused mindset and fostering cross-functional collaboration, they can align technology investments with strategies that drive strong total shareholder returns (TSR). Our analysis of various banks reveals five strategic themes for technology investment that can enhance value creation:

1. Expand Growth and Net Interest Margin Through Data-Driven Relationship Banking: Utilize comprehensive customer data to personalize offers and attract operational deposits.
2. Boost Recurring Fee Income Through Tech-Enabled Business Building: Innovate in payments, wealth management, and transaction banking to create new revenue streams.
3. Improve Operating Leverage and Customer Experience Through Digitization and AI: Leverage technology for self-service customer onboarding and back-office automation, enhancing both efficiency and user experience.
4. Prevent Value Compression Through Tech-Enabled Risk Management and Compliance: Invest in cybersecurity, resiliency, credit underwriting, and financial crime prevention to safeguard the bank’s assets and reputation.
5. Optimize Technology Productivity, Time to Market, and Outcome Orientation: Pursue engineering excellence and platform modernization while focusing on data and AI enablement to maximize value delivery.

Conclusion

As banks navigate the complexities of technology investments, it’s essential to prioritize data-driven strategies that not only enhance operational capabilities but also clarify the value derived from these initiatives. By aligning technology spending with strategic objectives, banks can not only satisfy investor scrutiny but also unlock significant value, positioning themselves for sustainable growth in an increasingly competitive landscape.

Let’s continue to explore how effective technology investments can drive success in banking, ensuring that value creation is not just a goal but a measurable outcome.