Banks like to say they’re more like technology companies than actual technology companies by virtue of the enormous amounts they spend on IT. In fact, that saying has become something of a cliché.
Banks do indisputably spend huge amounts on technology. It has become an important competitive differentiator for them. But if having a big budget is the main criteria for self-identifying as tech rather than banking, banks still have a long way to go.
JPMorgan’s banking analysts looked at how much banks spend on technology compared to the likes of Alphabet (Google’s parent company) and Amazon. It turns out that even the biggest banks spend less than these tech giants.
The below chart shows how much banks and big tech companies spend on technology each year, based on most recently available figures. Even the biggest-budgeted bank (JPMorgan) spends less than half the amount of big tech. Something to keep in mind: The definition of IT expenses may not be fully comparable across companies (e.g., difference in IT investments (amortization vs. capitalization), run the bank costs vs. change the bank costs; plus, the cost of IT staffers, as well).
JPMorgan’s figures help explain why banks might feel like they’re tech companies at heart, though. While Amazon and Alphabet devote 13 percent and 19 percent of their operating costs (respectively) to IT, banks such as SocGen are devoting 23 percent of their operating costs to IT spending, while RBS devotes 30 percent. At all banks except UBS (which spends 15 percent of its operating costs on technology), technology spending exceeds 17 percent of total operating costs.
Curiously, Goldman Sachs (which was one of the first banks to self-declare as a tech company instead of a bank) is absent from JPMorgan’s list. In the first three quarters of 2019, Goldman spent $859 million on what it described as “technology and communications.” This seems pretty diminutive, but doesn’t include compensation for Goldman tech staff, who make up more than 25 percent of Goldman’s total employees.
JPMorgan notes that U.S. banks spend considerably more on IT than their European equivalents, and that the technology budgets at JPMorgan and Bank of America are around three times bigger than those at the average large European bank. This could create a significant competitive advantage for U.S. banks in the long term.
In the meantime, there’s a risk that tech spending could rise pointlessly as old technology investments are amortized over time. JPMorgan notes that Deutsche Bank, for example, took an impairment charge of €328 million on “self-developed software” in July 2019 as the bank began to restructure its technology operation under its new strategy. Deutsche said in December that the platform underpinning its FX trading business is being replicated across the whole of fixed income so that 30 percent of its applications can be decommissioned over the next three years. This presumably means that all the “internal software” developed on other desks is now worth nothing at all.
A modified version of this article originally appeared in eFinancialCareers.