The strategic deployment of technology resources emerges as critical differentiator for banking institutions
The financial landscape continues to evolve rapidly, with technology spending across banking institutions reaching £513 billion ($650 billion) in 2023. This substantial figure, comparable to the GDP of Belgium or Sweden, underscores banking’s technological dependency. However, this significant expenditure has not necessarily translated to measurable competitive advantages or productivity gains.
McKinsey’s comprehensive analysis offers a framework for financial institutions to strategically allocate technology resources and transform what many view as a cost centre into a proven catalyst for value creation.
Addressing productivity paradox
The analysis highlights concerning trends within the sector. Since 2010, productivity at US banks has fallen by 0.3 percent annually on average—a stark contrast to productivity gains enjoyed by most other sectors. Furthermore, the strong correlation between banking revenues and employee numbers, regardless of institution size, suggests the industry struggles to achieve economies of scale from technology investments.
“Most of the technology spending seems to be table stakes or required to meet regulatory requirements—the share of technology investments driving competitive differentiation seems very limited,” noted one banking equity analyst interviewed for the McKinsey study.
Another critical observation reveals that banks across all sizes typically allocate approximately 10 percent of revenues to technology. However, the mature ecosystem of vendors ensures rapid commoditisation of technological innovations, minimising first-mover advantages and complicating differentiation efforts.
Breaking the negative cycle
Many financial institutions find themselves caught in what McKinsey terms a “negative loop.” Limited discretionary capacity for technology spending forces institutions to develop bespoke solutions when vendor offerings prove inadequate. Prioritisation typically happens from the bottom up, resulting in numerous small technology initiatives without sufficient funding or focus on immediate outcomes.
The research proposes a transformation toward a “virtuous cycle” where technology investments directly enable shareholder value. This approach begins with freeing up discretionary technology capacity, followed by strategic allocation of investments based on value drivers, outcome-based execution, and transparent communication about technology-enabled value to stakeholders.
Five strategic investment areas
McKinsey identifies five strategic themes that financial institutions should consider when allocating technology investments:
- Data-driven relationship banking to expand growth and enhance net interest margins, particularly through personalised services powered by comprehensive customer data.
- Building technology-enabled businesses in high-growth areas such as payments, wealth management, and transaction banking to boost recurring fee income.
- Deploying digitisation and artificial intelligence to improve operating leverage and customer experience through self-service onboarding and back-office automation.
- Implementing technology-enabled risk management and compliance solutions to prevent value compression in areas including cybersecurity, operational resilience, and financial crime prevention.
- Optimising technology productivity through engineering excellence, modernising platforms, and establishing robust data and AI capabilities.
The research indicates that focusing on one or two of these strategic areas could enable typical banks to improve return on tangible equity by three to four percentage points.
Beyond cost reduction
Contrary to conventional wisdom, the McKinsey analysis reveals that reducing operating expenses represented less than 10 percent of the difference in total shareholder returns between top-performing and bottom-performing banks. Revenue growth emerged as the single most important variable, accounting for 34 percent of performance differentiation.
“Technology investments are like a call option on becoming a best-in-class digital bank 2.0, but it is unclear to us if or when this option will be in the money,” observed one analyst interviewed for the report.
Generative AI driving transformation
The research highlights generative AI as a transformative force for banking. Early adopters report 40-50 percent acceleration in software engineering tasks, including code generation, documentation, and testing. Customer relationships benefit from hyper-personalised, contextual communications that were previously impossible to deliver at scale.
Additionally, generative AI promises to fundamentally transform customer service through text and voice assistants for simpler queries, while human agents handling complex issues gain productivity through AI copilots providing real-time suggestions.
The increasing regulatory scrutiny of technology also demands attention. US banks face growing numbers of consent orders covering cybersecurity, operational resilience, data risks, and legacy system modernisation. Failure to address these concerns can result in significant remediation costs, penalties, and regulatory restrictions that limit growth opportunities.
McKinsey’s research provides a clear message: technology in banking must transition from a budget line item to a strategic enabler of value creation. This requires financial institutions to elevate their approach, focusing investments on areas that drive differential value while establishing frameworks that link technology spending directly to business outcomes.
The evolving expectations of management teams, boards and investors highlight the need for greater transparency around technology-enabled value creation. As competition intensifies and technological demands grow, banks that establish a virtuous technology investment cycle stand to gain substantial competitive advantages in the coming years.
