Australian banks are the biggest spenders on technology in the developed world beating out European and US lenders in the battle for relevancy in a digital era.
In 2016, technology accounted for 11 per cent of the Aussie banks' total costs, according to Citi research on banks in developed markets.
Banking as an industry is the biggest tech spender, according to the Citi study which showed that last year lenders in developed markets spent almost 9 per cent of their revenues on technology - almost double the tech industry itself.
In fact, many bank chief executives in recent years have publicly said that they run tech companies given the number of tech employees and their tech spend, according to Citi analyst, Ronit Ghose.
“We believe a better description is that banks are the biggest tech clients in the world," he said.
Banks biggest spenders
“Banks spend more of their revenues (8 per cent) on tech than other large industries.
“And this amount is going up. Not surprisingly, tech vendors are doing well.”
While 11 per cent of the Aussie banks' total costs was spent on technology, Ghose believes this dramatically understates their total IT budget.
According to the analyst, that figure moves a lot higher when including capitalised software.
At ANZ, Commonwealth Bank National Australia Bank and Westpac, the amount of software being capitalised (net of software amortisation) has been running at between 5 per cent and 8 per cent of operating expenditure in last few years.
Single digit growth
Thus, the analyst calculated that the combined IT budget for Australian banks is closer to between 15 per cent to 23 per cent of costs, and this is before paying IT staff.
"Australian colleagues argue that Australian banks sector is in midst of once in 30 to 40 year IT reinvestment phase, where system of records/core banking systems are replaced.
“This will likely keep expense growth at low single digit levels irrespective of revenue growth.”
Although the US banks have a lower reported share of tech expenses, Citi says this too is up 3 percentage points since 2009.
In contrast to the Australian banks, European banks on average spend 2 percentage points less of their total opex on IT, albeit inconsistent disclosure between banks and regions make it challenging to draw direct comparisons.
Technology driven transformation is now top of banks’ C-suite and Boardroom agendas, the Citi note found.
“Earlier this week we hosted several banking and tech experts as part of Citi's 7th Annual FinTech Conference in New York city and discussed how digital/technological transformations can boost a banks’ competitiveness and also how many years hard work this takes for large incumbents.
“What are banks are banks spending on? Banks' legacy IT platforms are up to 30-40 years old, banks are making new investments on core banking, with Australian banks as the forerunners, and Europe, US following.
“The next biggest area of spending is on digital channels.”
The analyst noted that NAB is targeting an additional investment spend of $1.5 billion over the next three years.