Retail banking tech spending trends reflect multiple challenges

Competitive pressures and increased customer expectations are leading drivers of technology investments.

By Kieran Hines

The year ahead for the retail banking industry will be shaped by the need for adaptability. A tightening economic environment has already begun to translate into financial strain for many consumer and business customers, and the situation will continue to worsen before it improves.

Banks will need to find new ways to support their customers through this period, in terms of product, processes, channels and customer care. These issues will be central to technology investment and spending strategy across the market.

Celent surveyed senior retail bank IT, product and technology executives from 36 countries. Combined with additional industry inputs, the data show: The global retail banking industry is on target to spend $250 billion on technology in 2022, an increase of 4.3 percent from 2021 and 8.6 percent from 2020. The 2022 spend will increase by 5.2 percent to reach $263 billion in 2023. IT spending by retail banks is projected to climb to $308 billion in the coming five years representing 4.6 percent annual average growth from 2022 to 2027.

Drivers of technology investments

Four themes are driving IT budget growth for retail banks:

Pandemic recovery. As banks emerge from the pandemic in better shape than anticipated, they are addressing capability gaps, particularly in digital product sales and onboarding. Many are also catching up with regulatory and compliance deadlines that shifted due to the pandemic.

Competitive pressure. Challengers and fintech firms are creating competitive pressure for retail banks, with most banks (75 percent) feeling more pressure than even one year ago. Priority areas include customer experience, digital lending and digital channel improvements.

Customer expectations. Enhancing the customer experience is the most important driver of IT spending in 2022. Customer expectations are on the rise, particularly related to the quality of digital services. Challengers and fintech firms raised the bar for digital services, and incumbents recognize the need to up their game. Branch and contact center channels also remain sticky and important to customers.

Opportunities for innovation. Top areas of innovation include open banking, banking-as-a-service and embedded finance. As cloud technologies mature, banks will move workloads to the public cloud and embrace advanced analytics, artificial intelligence and machine learning.

These finding are based on the Celent Banking IT Strategy Survey, providing Celent with a new banking IT spending forecast model. The forecast incorporates multiple inputs: industry and macroeconomic data, focusing on bank performance data; results from the survey (378 respondents with either direct responsibility or oversight of retail bank IT spending and budgeting decisions), with direct feedback from those in the industry about their IT budgets and allocations; and analyst insights, drawing on the expertise of analysts who work directly with financial institutions and the vendors that service them.

Retail banks’ tech priorities

In 2020, banks spent 2.6 percent less on technology, when discretionary outlays were put on hold, using funds to address the challenges created by the pandemic. As retail banks grow out of the pandemic, spend will address multiple priorities, such as:

Applications. Predicted to reach nearly $85 billion annually by 2027, spending for applications globally will be the biggest area of spending for retail banks. This reflects investments in software, along with capabilities to address legacy issues, support product innovation and drive operational efficiency. This category includes outlays on software and directly related activities, such as license costs, development and testing (excluding staff costs), maintenance and software-as-a-service offerings.

External services. Estimated to reach $80 billion by 2027, the most rapidly growing area of IT spending in the next five years will be external services, which includes business process outsourcing and outsourcing of IT operations and service desks, consulting and professional services, cloud infrastructure and platform-as-a-service, and systems integration. As part of this investment, there’s a growing trend for banks to move additional workloads to the cloud as financial institutions become more comfortable with the approach and turn to areas such as AI and data analytics; 71 percent of banks expect to move additional workloads to the public cloud in 2022.

Internal hardware and infrastructure. Investments in this category (including data centers and server costs, storage, end user devices and communications and operations) are set to grow steadily, reaching $63.4 billion by 2027. The annual rate of spending will slow, however, in coming years, thanks to growing cloud adoption.

Internal IT staff and employees. A significant area of technology spending goes toward IT leadership and personnel, which is estimated to go to $59 billion by 2027. This includes allocations for staff across areas, including application development and testing, IT management, maintenance, operations and strategy. The coming five years will also mark a time of shifting skills and requirements, as AI, application programming interfaces and partnerships, cloud technologies and data management, for example, grow increasingly relevant and important.

The global outlook

North America will remain the largest spending region for banks. IT spending in the U.S. and Canada in 2022 will be $82.2 billion and will grow 5.1 percent between 2022 and 2023. This region, with a history of strong investment in banks’ technology foundations, will see IT spending grow to $100.4 billion by 2027, representing nearly one-third of global IT spend.

The strongest growth in IT spending in the coming year—with banks investing ahead of the global average—will come from the Middle East and Africa, Latin America and Asia Pacific, with each region’s retail bank IT investments growing by 5.5 percent by 2023. IT spending in Europe is on track to grow by 5 percent by 2023.

Change the bank vs. run the bank

These technology investments support varied activities. “Change the bank” expenses include investment and spending on new capabilities and initiatives focused on technology transformation. “Run the bank” activities include anything necessary to maintain the existing technology environment. The status quo may include application maintenance and software licensing costs, compliance and regulatory expenses, and most hardware costs.

The market with the greatest focus on “change the bank” is the Middle East and Africa, where 45.8 percent of IT spending is earmarked for change initiatives, largely reflecting past investments to modernize their tech stacks. Banks in Latin America have the largest “run the bank” burden, with 65.5 percent of IT spending allocated to such activities and only 34.5 percent allocated to “change the bank” activities; this ratio can limit capacity for innovation and growth.

Looking ahead

Though this projected spending growth suggests a positive outlook for the retail banking industry, there are several risk factors and challenges ahead. Inflation may take a bite out of the real impact of some spending increases, while an economic slowdown may see project and investment priorities changing further.

That said, the need to deliver value to customers remains unchanged. Those with a clear strategy—and tech investments to help them grow—will stay ahead of the market.

Kieran Hines is a principal analyst in the banking practice at Celent, a global research and advisory firm focused on technology and business strategies in the financial services industry.