The new competition that’s driving Canadian banks’ IT spending

We talk a lot about innovation, but is it all just talk? Innovation may be a priority for Canadian banks, but CIOs are under pressure to reduce costs while supporting legacy systems — and that doesn’t leave a lot of room for out-of-the-box thinking.

But online banking, mobile payments and digital wallets are changing the game. In a digital world, customers want instant gratification. They expect a consolidated view of their products and services across all platforms. Canadian banks have to respond or their non-traditional competitors will quickly fill in the gap.

They intend to focus more resources on innovation projects as opposed to just “keeping the lights on,” according to a recent report from IDC Canada on the state of ICT spending within Canadian banks and other financial institutions.

“Intend” is the key word here. Almost all respondents told IDC they’re under “extreme pressure” to maintain or reduce ICT expenditures while at the same time accommodate inflation, acquisitions, and new banking products and services.

Innovation is, of course, important in any industry. But, in Canadian banks, it’s particularly so. We’re seeing companies like PayPal and Square offering up mobile payment solutions, while tech giants like Google are getting in on the digital wallet action.

And Walmart is teaming up with the likes of Best Buy to offer their own version of a digital wallet (while this is currently only available in the U.S., there are hints it could eventually come to Canada).

Banks are spending money on mobile banking because they have to. In fact, they’re spending “tens of millions of dollars with absolutely no revenue coming in,” said Robert Smythe, an analyst with IDC Financial Insights, who co-authored the report. “It’s a defensive move — they see a lot of new players coming into the area like PayPal and Google and so forth, and that’s a threat to their control over the payment system.”

But responding to regulatory, privacy and security requirements continues to eat up considerable ICT resources within Canadian banks and other financial institutions. According to IDC Canada, of the total $13.2 billion spent on ICT, 50.6 per cent is for development and professional services, 40.1 per cent is for computing services and 9.3 per cent is for communications.

“This has had some impact on addressing key business needs like Internet and mobile banking enhancements, customer centricity, and increased staff effectiveness,” says the report.

IDC found that if ICT initiatives don’t provide almost-immediate benefits, then funding isn’t being made available.

For example, Canadian banks are starting to explore social media analytics to anticipate their clients’ needs, but not a lot of money is being spent on it. Cloud is another area where Canadian banks and their peers aren’t necessarily spending, but it’s an area that could help them cut down on those massive infrastructure costs.

There’s certainly recognition that innovation is important — and dollars are being spent in areas where banks are trying to stay relevant, says the report. But much more could be done.

You have an opportunity to be proactive, instead of reactive, to the changing financial services environment. The question is: are you going to innovate because you’re forced to, or because you’re leading the way into uncharted territory?

Image courtesy of Stuart Miles / FreeDigitalPhotos.net