How banks can leverage technology for a competitive edge

As preferred banks are emerging globally, technology has become a new basis for competitive advantage. Platform modernization, digital experience for customers, advanced data analysis, or new forms of artificial intelligence, leading banks use technology to achieve the edge, from process efficiency to product innovation. Technology lowers the costs associated with running the bank and frees up the bank’s investment capacity to improve products and customer experience. This has created a virtuous cycle: reduced running costs, greater investment in highly efficient and exciting technologies, happier customers and more revenue and profit to invest.

Effective deployment of powerful technology has become critical to the success of banks, for a number of reasons. Consumers and business customers want simple, convenient, information-rich and more personalized digital experiences, and can easily move their money to whoever has the best offer. Digital natives and mainstream technology providers still threaten traditional banks. Regulatory compliance requirements continue to expand. And the best tech talent is attracting banks as great places to work.

Modern technology, like cloud-native banking platforms and AI-powered processes, enables banks to automate sophisticated tasks and thus respond more honestly to customers. Banks can tap into an ecosystem of suppliers to verify customers’ identities through biometrics. Continuous integration and continuous delivery tools and best practices enable companies to deliver more with less.

However, for all that banks spend on information technology—globally, an average of 16 percent of their total spending base—many are still mired in the complexity of legacy technologies, congested IT assets, and complex processes. These characteristics lead to a poor customer experience and product portfolio, limiting investment potential, and resulting in low customer standards and high churn.

The solution is not to scale back ambition and spend less, or simply spend more. Instead, it starts with a clear strategic idea from above to modernize the business and its technology deployments to simplify and accelerate the growth of the business. It’s all about deliberate choices in business.

Technology leaders do it differently

To tease out which choices matter most, Bain & Company analyzed the 42 largest banks worldwide by assets. We evaluated their performance in three dimensions: Total Shareholder Return (TSR) and Cost-to-Income Ratio (CIR) for the past three years, and Net Promoter Score℠ (NPS) from the first quarter of 2023. Then we reviewed their technology. Choices with 11 variables, from board composition to state-of-the-art technology stack to mix of IT staff profiles.

In our regression analysis of the variables, we found that technology-focused banks ranked among the top globally, with an average of 5 percent higher TSR, 10 percent lower CIR, and 12 points than banks in their region. High NPS.

The strongest correlations of high performance were:

  • A tech-savvy board of directors. Technology strategy and execution should be a priority for the board and the C-suite.
  • A large number of in-house engineers and few other IT personnel. Winning banks have built world-class engineering functions for business and technology stack segments that require differentiation.
  • Positioning as a technology company. A technology-centric mindset dominates the operating model, organization and talent of leaders.

In addition, these leaders have a clear view of the target architecture. They modernize where it matters most to create a unique competitive advantage across customers, economics and risk.

The difference between technology leaders and other banks was very strong (see Figure 1). In particular, spending more on technology alone does not lead to better performance. Indeed, relative to revenue, IT spending was negatively correlated with performance. The complexity increases when a bank rapidly increases IT spending, as the funds can go to the wrong places without proper control of the architecture or ongoing outages.

A handful of technology choices have an outsized impact on performance.

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