As IT budgets grow, banks struggle to get a handle on expenses

When Kansas City, Missouri-based Academy Bank started its IT steering committee to oversee the technology budget and spending more than a decade ago, it didn’t spend a lot of time thinking about the future, says Chief Operating Officer Tom Kientz, who sits on the committee.

Academy is one of two bank units under the Dickinson Financial Corp. holding company, which has about $4 billion in assets. The focus of the group changed about eight years ago, and now “at least half” of a meeting is spent thinking about the bank’s future, he says.

“We recognize that probably the fastest growing expense line we have is our IT or tech budget,” he says. “We want it all centralized, and we think we get a better handle on the expense by having it in a centralized place. … We want two or three people who are always on the forefront to know what things should cost.”

Technology is a major — and growing — expense at financial institutions. Three-quarters of respondents said their tech budget increased between 2023 and 2024, with a median increase of 4%, according to Bank Director’s 2024 Technology Survey, sponsored by Jack Henry & Associates. Respondents at banks under $1 billion reported a median tech budget of $900,000, while respondents at banks with between $1 billion and $5 billion reported median tech budgets of $3 million.

Growing expenses, coupled with the pressure to adopt technology that grows revenue and reduces expenses, places pressure on executives to spend their scarce tech budget dollars wisely. But it can be hard to translate strategic business objectives and goals into specific information technology infrastructure needs or software, says Jason Chorlins, principal in risk advisory services at Kaufman Rossin. He recommends executives analyze their institution’s IT strengths, weaknesses, opportunities and threats, an exercise that’s often called a SWOT analysis. This analysis should include IT infrastructure, personnel and software and compare the institution’s current tech to its strategic plan to determine what systems and platforms they may need to grow or invest in.

“The best place to start is ‘Where are we today and where do we want to be tomorrow?’” he says. “Those IT objectives may look a little different from [what the bank is used to looking at], where you’re talking about net interest margins or loan-to-deposit ratios. Here, for example, you might be looking at a payments hub for your customers that can better facilitate cross-border transactions or faster payments.”

Having a future focus has helped Dickinson Financial’s IT committee set goals around migrating to cloud-hosted software as a service contracts. The focus also invites the committee to think about ways the banks can be more strategic when it comes to IT spending relative to revenue.

“We categorize it as ‘KTLO,’ or keep the lights on, and forward initiatives,” he says. Currently, he says the IT budget is 85% KTLO and 15% focused on future initiatives, with an eventual aim of 60% KTLO and 40% future initiatives. In Bank Director’s 2024 Technology Survey, the median bank said 10% of its IT budget is focused on new initiatives.

Dickinson thinks about technology in three ways: improving clients’ banking experience, growing revenue and increasing the institution’s efficiency. Outside of items such as regulatory compliance software, the IT steering committee attempts to calculate a return on investment, generally aiming to net double or triple benefits relative to cost. The committee manages the technology budget centrally and oversees all tech expenditures between the two institutions.

Brad Smith, a partner at Cornerstone Advisors, recommends institutions start at the end when it comes to building a thoughtful technology budget every year. He recommends executives leverage the institution’s strategic plan, which can have a time horizon of three to five years, and work backward to figure out what progress the institution needs to make toward that goal. Those steps — which can be tracked by year or quarter — should prioritize the institution’s technology spending and give senior managers a road map that helps them track progress. This road map allows executives to measure the cost and benefits of different technologies, keep tabs on project implementation and integrations and track the return on investments on previous purchases.

“When you start going that direction, you start building out the discipline — we call it governance — around how you prioritize projects coming to the IT steering committee,” Smith says.

The strategic plan should be integrated into an institution’s technology plan and budget. When Smith asks for a technology plan, he says he “almost always” receives a spreadsheet with a handful of line items, without any notes indicating how the detailed spending supports the institution’s strategic goals or initiatives or a summary behind the numbers.

Ideally, a bank’s technology budget would detail how the spending supports the institution’s strategy, with the strategic plan itself attached as an appendix or referenced in notes. Some institutions include a project schedule with current and planned initiatives — and their sponsors — and an anticipated timeline that runs parallel to the strategic plan. The budget could also list the business line item that uses the technology.

“We’re thrilled when we get a plan along with a budget … that typically means there’s been a lot of thought put into it, and it’s collaborative,” he says. “The worst practice is just a spreadsheet.”

Read the full article at FinXTech.