It’s become a cliché for banks to claim they’re more like technology companies than actual technology companies by virtue of the enormous amounts they spend on IT.
Banks do indisputably spend huge amounts on technology. It has become an important competitive differentiator. 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 to be quite a lot less.
The figures below show how much banks and big tech companies spend on technology each year, based on the most recently available figures. It turns out that even the biggest spending bank (JPMorgan) spends less than half the amount of big tech.
JPMorgan’s figures do help explain why banks might feel like they’re tech companies at heart, though. While Amazon and Alphabet devote 12 percent and 20 percent of their operating costs to tech (respectively), banks such as BNY Mellon and SocGen are devoting 29 percent and 26 percent of their operating costs to tech spending. At most banks, 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, spends a comparatively small amount on tech, both in absolute terms and as a proportion of its operating costs. 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 Europeans, 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.
JPMorgan’s analysts note that U.S. banks typically spend a lot more on technology than European banks and that this matters because “wisely spent tech dollar is going to be an increasingly important differentiator” in the investment banking space. Technology spending is partly about investments in trading platforms and trade processing technology. It’s also about the automation of the whole middle and back office as banks seek to cut costs.
As technology spending increases, however, banks are trying to get more bang for their technology buck. JPMorgan’s analysts note that at Goldman Sachs, for example, 33 percent of staff are now in the ‘strategic locations’ (e.g., Dallas, Bengalaru, Warsaw) where the bank is expanding its data analytics, cloud, mobility, machine learning, and process re-engineering functions, versus 25 percent in 2015.
A modified version of this article originally appeared in eFinancialCareers.