by Rob Patenge
with Amit Anand and Ravi Goel
The amount of money banks spend worldwide on information technology and digital transformation dwarfs the GDP of most countries. Of the $4 trillion allocated each year to IT, banks account for about $650 billion.1
According to recent McKinsey research, banking invests more in IT as a percentage of revenue than any other major industries.2 Spending in banking typically ranges from about 6 to 12 percent of revenue, while the next highest industry in spending—telecommunications, media, and technology—invests just 3.75 to 5.00 percent.
Banking’s push to use in-house IT development to support growth and strategy has elevated CIOs, CTOs, and other IT decision makers in the organization, but it also requires changes to how they manage their budgets and teams. A greater understanding of spending trends and their implications could enable IT leaders to make the right decisions.
The rapid rise in global banking IT spending
From 2013 to 2022, banks increased their tech spending by 38 percent to support customers’ evolving digital needs. Our research shows that banks’ IT spending reached 10.6 percent of revenues and 20.0 percent of expenses in 2022 (Exhibit 1).
Traditional banks are investing more in tech talent as they bring strategic app-development capabilities in-house. The share of applications developed in-house rose 40 percent from 2013 to 2022. Such internally developed software now constitutes nearly half of all applications. And as outsourcing spend decreased, IT’s share of full-time equivalents (FTEs) increased to 13.4 percent in 2022 (Exhibit 2). Some large banks have gone as far as creating in-house development megacenters to fend off maturing fintechs and keep pace with growing competition for digital-banking customers.
It’s not just the amount of spending but also the type of investment that has shifted dramatically. In 2013, IT expenditures were split about evenly between infrastructure and applications. In the ensuing ten years, applications grew considerably, accounting for 60 percent of total IT expenditures in 2022, compared with 38 percent for infrastructure.
Several factors contributed to this pattern. For example, rapid strides in computing power reduced total cost of ownership, and the advent of cloud service providers helped banks scale their infrastructure. In addition, industry consolidation in the infrastructure space means banks need to devote less time and resources to managing external vendors. Meanwhile, applications have become vital to business strategy, leading banks to bring a greater share of development in-house.
The rising number of apps and vendors increases complexity and pressure on IT leaders
McKinsey research reveals the pressure on banks’ IT leaders is amplified by fragmentation in both the number of applications and application vendors (Exhibit 3). The average number of applications used in banking IT increased from 133 per billion dollars in revenue in 2013 to 224 in 2022, a jump of more than 68 percent. During the same period, the average number of application vendors increased from 131 to 209 (an almost 60 percent increase), an indication of the rising complexity involved in managing both vendors and their applications.
And although the advent of cloud adoption and consolidation has reduced the number of infrastructure vendors a bank uses, the same cannot be said for the application side. The breadth and complexity of applications, as well as pressure to launch new services across channels, make consolidation more difficult.
Another challenge is that supporting existing apps and maintaining legacy applications can create tech debt, which is the accumulation of technology work a company needs to do in the future that doesn’t show up on the balance sheet. It can also be thought of as the tax a company needs to pay in the form of development to redress existing technology issues. According to a previous McKinsey survey of CIOs, companies pay an additional 10 to 20 percent to address tech debt on top of the costs of any project. About 30 percent of CIOs surveyed believe that more than 20 percent of their technical budget allocated to new products is actually diverted to resolving issues related to tech debt.
Big numbers, small numbers
For some banks, a high-energy, data-backed strategy can buck the trend of rising costs. The experience of one bank highlights the challenges and opportunity. It struggled with skyrocketing IT spending—a 5 to 10 percent increase annually—across a multibillion-dollar portfolio. Every investment seemed reasonable, and most of the spending could be tied back to initiatives such as regulatory requirements and critically needed replatforming. However, the bank had precious little funding left for competitive differentiation and customer and employee experience.
To reverse course, the organization froze spending levels and began a fierce multidepartment collaboration to target the source of rising costs and combat them. Leaders learned that reining in IT spending required extreme granularity into the sources of costs, so they built a detailed decomposition of all the costs underpinning each application (even server real-estate costs).
This analysis spurred fundamental replatforming and attacking costs where they arose. Teams across infrastructure, procurement, application development, and maintenance each identified what was driving the increases in cost (for example, cloud rate cards, flow-through costs of proofs of concepts that are still in production, and ungoverned change spending). The organization then successfully negotiated prices, reduced demand, and implemented guardrails and cost monitoring.
These combined efforts yielded the desired cost savings—and then some. The organization has lowered its net IT spending in key areas despite organizational growth.
Five questions for bank IT leaders to get the most out of IT spending
The demand for development resources and the need to manage tech debt are only expected to increase. Tech talent has never been cheap, and inflation is pushing up salaries. Cybersecurity threats are also becoming more urgent, demanding greater funds to address them. And figuring out how to integrate generative AI takes time, personnel, and money.
Despite these competing priorities and challenges, bank IT leaders have an opportunity to make their mark on their organizations and position themselves as central to their success—if they can address some key problems. We recommend IT decision makers consider the following questions to help them avoid common pitfalls:
- Do you understand why your technology costs continue to grow by as much as 5 to 10 percent each year?
- Are you spending the right amount on strategic new applications—enough to produce the kind of apps that attract and delight banking customers? Are new applications being built that enable outsized business value compared with the total cost of ownership of the applications?
- Is too much of your spending going to tech debt and just keeping the lights on?
- When it comes to your talent, are you nailing the right mixture of internal and external FTEs?
- Are you making good decisions about what you build with in-house developers and what you choose to outsource?
In our experience, IT leaders should never underestimate the importance of controlling and reducing tech debt whenever possible. Actions to correct course could include conducting frequent assessments to determine which areas are accumulating tech debt and developing plans to reduce it as much as possible.
More than many other industries, banking is a hotbed of new app development. Leaders who address these key questions can ensure they are directing their talent and resources to game-changing app development that directly contributes to their bank’s bottom line.
Rob Patenge is a partner in McKinsey’s Sydney office, and Amit Anand is an associate partner in the Gurugram office, where Ravi Goel is an expert.
The authors wish to thank Aman Gupta for his contributions to this blog post.
1 “GDP by country,” Worldometer, accessed October 3, 2024; “Gartner forecasts worldwide banking and investment services IT spending to reach $652 billion in 2023,” Gartner, June 21, 2023.
2 Analysis is based on McKinsey’s Tech:Performance benchmarking product across seven industries: advanced industries, banking, consumer, global energy and materials, insurance, pharmaceuticals and medical products, and telecommunications, media, and technology.