Major U.S. banks are investing billions of dollars in technology as competition from financial technology companies continues to reshape the banking industry. According to a 2019 Bloomberg report, Bank of America, Wells Fargo, and JPMorgan Chase are expected to spend a combined $30 billion on technology during the year, reflecting the growing importance of digital infrastructure, modern banking platforms, and improved customer experiences.
However, the scale of these investments raises an important question: Are traditional banks investing to lead financial innovation or simply to catch up with their fintech competitors? While established institutions possess significant financial resources and extensive customer networks, emerging digital banks benefit from modern technology platforms, leaner operating structures, and the flexibility to introduce new services without maintaining decades-old banking systems.
Big Banks Increase Technology Spending to Compete With Fintech
Bloomberg reports that the investment by U.S. financial institutions in IT and digital infrastructure has been booming. Bloomberg expects Bank of America, Wells Fargo and Chase bank to spend $30 Billion on tech in 2019. Interestingly, the investment made in the U.S. by American financial institutions far outweigh that being spent in Europe. Much of this massive investment is explained by the need to keep up with creative fintech organizations.
Fintech Companies Question the Impact of Bank Technology Investments
Fintechs seem to be less than impressed with the big bank spend, believing it is intended to help traditional banks catch up, not exceed the smaller financial firms that often enjoy the benefits of a narrow focus on a unique services and have less pressure to return a profit:
For now, fintechs say they aren’t spooked by the sizable tech budgets. Traditional lenders are merely trying to catch up, not push innovation, according to Monzo’s head of marketing, Tristan Thomas. “So far they seem to be focused on skating to where the puck is, rather than where it’s going,” he said.
Legacy Banking Systems Create Competitive Challenges
And while most fintechs are turning losses, they have one big thing going for them: they don’t have outmoded technology weighing them down. Many major banks would need to spend billions of dollars just to bring their IT systems into the 21st century. Even Santander’s Parthenon back-end software platform is increasingly antiquated even though it is newer than what a lot of the other European banks use.
“While they can copy our features, they cannot copy our cost base,” Starling Bank said in a statement. “They have to contend with legacy technology, not to mention the massive costs of maintaining a branch network and the slowness to action that is inevitable with large bureaucracies.”
The substantial technology investments planned by major U.S. banks demonstrate how seriously traditional financial institutions are taking the competitive threat posed by fintech companies. Digital banking capabilities are becoming increasingly important to customer acquisition, retention, and operational efficiency, prompting established institutions to devote significant resources to modernizing their infrastructure.
However, spending more money does not necessarily translate into greater innovation. Much of the technology budget at large banks must support existing systems, maintain regulatory compliance, strengthen cybersecurity, and replace outdated infrastructure. These responsibilities can limit the resources available for developing new products and services that differentiate banks from emerging competitors.
Fintech companies and digital-only banks often operate with a different cost structure. Without extensive branch networks or the burden of maintaining legacy platforms, these organizations can focus their investments on specific customer needs and digital experiences. Although many fintech firms face profitability challenges, their ability to develop and deploy technology quickly creates competitive pressure on established financial institutions.
Ultimately, the challenge for traditional banks is not simply matching the features offered by fintech competitors but transforming their technology investments into meaningful improvements in efficiency, flexibility, and customer service. Financial institutions that successfully modernize their core systems while developing innovative digital capabilities may be better positioned to defend their market share. Those that focus primarily on maintaining existing infrastructure risk spending billions without closing the competitive gap.
Overview by Sarah Grotta, Director, Debit and Alternative Products Advisory Service at Mercator Advisory Group
