Bank Director’s 2022 Technology Survey, sponsored by CDW, finds 81% of bank executives and board members reporting that their technology budget increased compared to 2021, at a median of 11%. Much of this, the survey indicates, ties to the industry’s continued digitization of products and services. That makes technology an important line item within a bank’s budget — one that enables bank leaders to meet strategic goals to serve customers and generate organizational efficiencies.
“These are some of the biggest expenditures the bank is making outside of human capital,” says John Behringer, risk consulting partner at RSM US LLP. The board “should feel comfortable providing effective challenge to those decisions.” Effective challenge references the board’s responsibility to hold management accountable by being engaged, asking incisive questions and getting the information it needs to provide effective oversight for the organization.
Banks budgeted a median $1 million for technology in 2022, according to the survey; that number ranged from a median $250,000 for smaller banks below $500 million in assets to $25 million for larger banks above $10 billion. While most believe their institution spends enough on technology, relative to strategy, roughly one-third believe they spend too little. How can boards determine that their bank spends an appropriate amount?
Finding an apples to apples comparison to peers can be difficult, says Behringer. Different banks, even among peer groups, may be in different stages of the journey when it comes to digital transformation, and they may have different objectives. He says benchmarking can be a “starting point,” but boards should delve deeper. How much of the budget has been dedicated to maintaining legacy software and systems, versus implementing new solutions? What was technology’s role in meeting and furthering key strategic goals?
A lot of the budget will go toward “keeping the lights on,” as Behringer puts it. Bank of America Corp. spends roughly $3 billion annually on new technology initiatives, according to statements from Chairman and CEO Brian Moynihan — so roughly 30% of the bank’s $11 billion total spend.
For banks responding to the survey, new technology enhancements that drive efficiencies focus on areas that keep them safe: For all banks, cybersecurity (89%) and security/fraud (62%) were the top two categories. To improve the customer experience, institutions have prioritized payments capabilities (63%), retail account opening (54%), and consumer or mortgage lending (41%).
Benjamin Wallace says one way board members can better understand technology spend is to break down the overall technology cost into a metric that better illustrates its impact, like cost per account. “For every customer that comes on the board, on average, let’s say $3.50, and that includes the software, that includes the compensation … and that can be a really constructive conversation,” says Wallace, the CEO of Summit Technology Group. “Have a common way to talk about technology spend that you can look at year to year that the board member will understand.”
Trevor Dryer, an entrepreneur and investor who joined the board of Olympia, Washington-based Heritage Financial Corp. in November 2021, thinks boards should keep the customer top of mind when discussing technology and strategy. “What’s the customer’s experience with the technology? [W]hen do they want to talk to somebody, versus when do they want to use technology? When they do use technology, how is this process seamless? How does it align with the way the bank’s positioning itself?” If the bank sees itself as offering high-touch, personal service, for example, that should be reflected in the technology.
And the bank’s goals should drive the information that floats back to the boardroom. Dryer says $7.3 billion Heritage Financial has “great dashboards” that provide important business metrics and risk indicators, but the board is working with Chief Technology Officer Bill Glasby to better understand the impact of the bank’s technology. Dryer wants to know, “How are our customers interacting with our technology, and are they liking it or not? What are the friction points?”
Some other basic information that Behringer recommends that bank leaders ask about before adopting new technology include whether the platform fits with the current infrastructure, and whether the pricing of the technology is appropriate.
Community banks don’t have Bank of America’s $11 billion technology budget. As institutions increase their technology spend, bank leaders need to align adoption with the bank’s strategic priorities. It’s easy to chase fads, and be swayed to adopt something with more bells and whistles than the organization really needs. That distracts from strategy, says Dryer. “To me, the question [banks] should be asking is, ‘What is the problem that we’re trying to solve for our customers?’” Leadership teams and boards that can’t answer that, he says, should spend more time understanding their customers’ needs before they go further down a particular path.
The best companies leverage technology to solve a business problem, but too many management teams let the tail wag the dog, says Wallace. “The board can make sure — before anyone signs a check for a technology product — to press on the why and what’s driving that investment.”
Forty-five percent of respondents worry that their bank relies too heavily on outdated technology. While the board doesn’t manage the day-to-day, directors can ask questions in line with strategic priorities.
Ask, “’Are we good at patching, or do we have a lot of systems where things aren’t patched because systems are no longer supported?’” says Behringer. Is the bank monitoring key applications? Have important vendors like the core provider announced sunsets, meaning that a product will no longer be supported? What technology is on premises versus hosted in the cloud? “The more that’s on prem[ises], the more likely you’ve got dated technology,” he says.
And it’s possible that banks could manage some expenses down by examining what they’re using and whether those solutions are redundant, a process Behringer calls “application rationalization.” It’s an undertaking that can be particularly important following an acquisition but can be applied just as easily to organic duplication throughout the organization.
A lack of boardroom expertise may have members struggling to have a constructive conversation around technology. “Community bank boards may not have what we would consider a subject matter expert, from a technology standpoint,” says Behringer, “so they don’t feel qualified to challenge.”
Heritage Financial increased the technology expertise in its boardroom with the additions of Dryer and Gail Giacobbe, a Microsoft executive, and formed a board-level technology committee. Dryer led Mirador, a digital lending platform, until its acquisition by CUNA Mutual Group in 2018. He also co-founded Carbon Title, a software solution that helps property owners and real estate developers understand their carbon impact.
Experiences like Dryer’s can bring a different viewpoint to the boardroom. A board-level tech expert can support or challenge the bank’s chief information officer or other executives about how they’re deploying resources, whether staffing is appropriate or offer ideas on where technology could benefit the organization. They can also flag trends that they see inside and outside of banking, or connect bank leaders to experts in specific areas.
“Sometimes technology can be an afterthought, [but] I think that it’s a really critical part of delivering banking services today,” says Dryer. “With technology, if you haven’t been in it, you can feel like you’re held captive to whatever you’re being told. There’s not a really great way to independently evaluate or call B.S. on something. And so I think that’s a way I’ve been trying to help provide some value to my fellow directors.”
Less than half of the survey respondents say their board has a member who they’d consider a tech expert. Of the 53% of respondents who say their board doesn’t have a tech expert, just 39% are seeking that expertise. As a substitution for this knowledge, boards could bring in a strategic advisor to sit in as a technologist during meetings, says Wallace.
On the whole, boards should empower themselves to challenge management on this important expense by continuing their education on technology. As Wallace points out, many boards play a role in loan approvals, even if most directors aren’t experts on credit. “They’re approving credit exposure … but they would never think to be in the weeds in technology like that,” he says. “Technology probably has equal if not greater risk, sometimes, than approving one $50,000 loan to a small business in the community.”
The ways in which banks leverage technology have been featured recently in Bank Director magazine. “Confronting the Labor Shortage” focuses on how M&T Bank Corp. attracts and trains tech talent. “Community Banks Enter the Venture Jungle” examines bank participation in fintech funds; a follow-up piece asks, “Should You Invest in a Venture Fund?” Some institutions are evaluating blockchain opportunities: “Unlocking Blockchain’s Power” explores how Signature Bank, Customers Bancorp and others are leveraging blockchain-based payments platforms to serve commercial customers; risk and compliance considerations around blockchain are further discussed in the article, “Opportunities — and Questions — Abound With Blockchain.”
Technology is an important component of a bank’s overall strategy. For more information on enhancing strategic discussions, consider viewing “Building Operational Resiliency in the Midst of Change” and “Board Strategic Leadership,” both part of Bank Director’s Online Training Series.
Bank Director’s 2022 Technology Survey, sponsored by CDW, surveyed 138 independent directors, chief executive officers, chief operating officers and senior technology executives of U.S. banks below $100 billion in assets to understand how these institutions leverage technology in response to the competitive landscape. Bank Services members have exclusive access to the complete results of the survey, which was conducted in June and July 2022.