The Digital Big Dig Connecting Investment in Channels with Investment in Back Office

An IDC report released last week cited what may seem like a staggering number – that banks are forecasted to spend $16.6 billion on digital transformation initiatives this year. Additionally, by 2019, one third of IT budgets at US banks will be dedicated to achieving digital transformation, a CAGR of 10.4%. This may seem like an astounding number but is $16.6 billion even enough?

Digital transformation needs to be a top-to-bottom, inside-and-out initiative in order to be truly effective, whether from a cost or output standpoint. We’ve pointed out before that most banks have taken a digital “band-aid” approach vs taking on a truly transformative digital mindset. The IDC report makes a valid point that this $16.6billion initiative is happening from two opposite ends of an institution, with “line of business executives buying consumer-facing solutions to improve customer engagement while the CIO and IT groups try to transform the bank’s infrastructure from the inside out.”

Jerry Silva, Global Banking Research Director at IDC Financial Insights, draws an amusingly accurate analogy – “It’s like two teams of diggers making their way through a mountain to build a tunnel. They’re hoping they’ll be aligned when they meet in the middle and it’s a $16.6 billion bet.” Can banks really afford to simply be “hoping” that these initiatives will align and deliver the desired outcome?

Not at all. Yes, banks are under tremendous cost and margin pressures and as such, IT funding is often spent quite quickly on the basic but enormous cost of doing business each and every day – from managing risk and compliance to operating in countries around the world. But digital transformation is about playing the long game. By taking a completely holistic approach to digital transformation, banks can make each and every one of those dollars work harder for them while positioning them to reap greater financial rewards as a result, from improving efficiency, more cost-effective rollouts of new products and services, and entering new markets quickly and seamlessly to better compete with a new crop of non-bank market entrants.

If we look at how banks are spending that $16.6bi, we see that banks are focusing spend on infrastructure and consumer-facing solutions. Commercial banking is a clearly underinvested area when it comes to digital transformation (less than 5% of the total digital transformation spend) – what may be a missed opportunity as banks focus on developing competitive advantages across all lines of business.

The IDC report cites that 80% of the IT budget is being used to pay for “mandatory improvements in compliance, risk, security, and just keeping the lights on” and that it “doesn’t leave a lot to invest in the bank’s future.” At Polaris, we believe that the most successful banks of the next few decades are the ones who are thinking carefully about investing in the long-term future of their institutions, rather than just focusing on their next quarterly earnings report.

We hope that banks aren’t merely gambling that their two “digging teams” will meet in the middle of the tunnel. As we all know from construction projects gone awry, this could be the equivalent of a digital “Big Dig.” Cutting corners today may only result in longer, painful timelines, unexpected escalating costs, and ultimately, more investment to be made to implement the right process and approach. We highly encourage banks to think 360° when it comes to digital transformation.