How Aging Technology Bleeds IT Budgets

Banks must continually revisit their IT capabilities to avoid poor customer experiences and lost growth opportunities.

It’s no secret that community banks are highly dependent on IT vendors to maintain their customer experiences. IT helps banks embrace innovation, protect customer data and power online, mobile or ATM interactions. As technology evolves, executives should periodically re-evaluate and adjust their existing infrastructure to leverage new capabilities and cost savings that increase competitive advantage.

Many banks embrace this opportunity. Those that don’t often find themselves encumbered by poor customer experiences and lost growth opportunities.

Community banks and credit unions spend between 0.22% and 0.42% of assets on IT annually, according to a report by Cornerstone Advisors. Larger banks such as Wells Fargo & Co. spend 0.48%. Given this size of investment, a dated technology stack can give the illusion of saving money by maintaining existing technology in lieu of incurring a new capital expense. But this faulty rationale costs more in the long run, both in cost to maintain and in opportunity costs.

One of the technologies we repeatedly see bleeding IT budgets at community banks is the legacy networking technology known as MPLS. MPLS is used to connect branch offices, data centers, core banking and digital banking providers.

It gained popularity among banks and credit unions due to its reliability, security and ability to provide stable network connections between locations. It has been a tried-and-true technology for more than 20 years — until you delve into what these connections really cost.

Usually contracted in three-year cycles, MPLS circuits range from $300 to thousands of dollars a month in some cases. These connections are used by a large number of fintechs and form the network between many bank data centers. It is not uncommon for a bank to pay for five to 10 of these connections every month.

Oftentimes, the technology has been in place for so long that IT departments simply renew MPLS contracts — at a cost of thousands of dollars per connection — without stopping to evaluate if there are better, more-capable alternatives.

As technology has evolved, so have the networking options available to community banks. New technologies like SD-WAN provide greater reliability and performance, running over the existing internet connections at branches and data centers, yet cost significantly less than MPLS contracts. SD-WAN achieves this by using software for functions that were previously handled by costly proprietary hardware and telecom providers. SD-WANs also include features that enhance security and address compliance concerns from the Federal Financial Institutions Examination Council and the Office of the Comptroller of the Currency.

For cost comparison purposes, take a typical regional bank that is supporting multiple fintech applications, ATMs and connections to other branches. Assume that the bank has 10 MPLS connections, conservatively averaging $300 a month per circuit. This bank would pay approximately $36,000 a year for this connectivity.

By comparison, an SD-WAN at $2,000 for an annual connection would only cost the bank $20,000 a year. Switching the technology offers nearly 45% in savings that could be applied directly to the bank’s bottom line or to fund other IT projects and priorities. Attracted by its advanced performance and security features, many fintech providers are now offering SD-WAN as an option to their customers, with others actively exploring the offering. Fintech innovation is driving rapid change and evolution in the banking industry. Advances in all layers of infrastructure have also emerged, allowing banks to increase productivity, cost efficiency and customer value. Improving your bank’s network might not seem like the most obvious place to innovate, but it could provide just the cost savings your institution needs to tackle more important challenges.