Wall Street’s massive tech spend has reached an ‘inflection point’ as billions in investment are starting to pay off

Business Insider

Banks have been spending billions on technology in recent years.
Banks executives made the rounds at financial conferences last week, and a unifying theme was how their monster tech budgets were resulting in meaningful savings.
Investments in mobile channels, automation, and artificial-intelligence is eliminating costs like paper statements and deposited checks as well as interactions with tellers and call centers.
JPMorgan Chase said its cost to serve customers has come down 15% since 2014. Bank of America’s has declined by $1 billion a quarter.
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Big bank executives made the rounds at financial conferences last week, and one theme came up over and over again: All the money they’re saving as they see their massive investments in technology paying off.

The big-four American banks have been spending billions annually on tech projects and upgrades — something that’s become a competitive requirement in the industry.

While the industry conversation is often dominated by the buzzy new capabilities being built — artificial-intelligence powered chatbots, automated mortgages, sleek mobile app experiences — this past week bank executives expounded on all the ways technology was stripping out costs and creating net savings.

The chorus coming from the financial conference stages was in harmony: Yes, we’re spending enormous sums on technology — but it’s all worth it in the long run.

JPMorgan Chase is the industry’s biggest spender, dropping $10.8 billion on tech in 2018 and upping that budget to $11.5 billion this year. Like the rest of the banks, part of this budget goes toward investing in the future, and part of it is dedicated to running the ship more smoothly and efficiently.

At a conference last week, JPMorgan president and consumer-banking chief Gordon Smith raved about the savings that were materializing within his division.

"In all of the years that I’ve been doing this, I’ve never seen the impact that technology is having on our business segment be so positive, be so sustainable and have such longevity," Smith said. "So I think the move to mobile and digital where we are investing exceptionally heavily is driving down our cost structure."

Shayanne Gal/Business InsiderJPMorgan’s "pure cost to serve" its customers is down 15% from 2014, he added, explaining that replacing a quick customer service call that costs the company $4 with a mobile interaction that costs a penny creates "enormous operating leverage" over time.

It was the same story from Bank of America, the second-largest tech spender at $10 billion in 2018. The company’s investments in digital and mobile platforms have resulted in a surge of customers who no longer use costly paper transactions at all.

"Close to 50% of our clients are completely paperless, meaning, no paper, no statements, no checks, no cash, nothing, just completely paperless," Dean Athanasia, head of the firm’s consumer bank, said early last week. "And as that number grows, it takes cost out of the system because it costs us to process check, it costs us to send them amount, it costs us to collect them."

At a conference the next day, CEO Brian Moynihan gave some more concrete examples of how this pays off: Five years ago the bank handled some 175 million in deposited checks a quarter, now it processes 120 million. Millions more are deposited digitally, as well, rather than via tellers.

That reduction is attributable in part to instant peer-to-peer payments platform Zelle, which handled $44 billion in Bank of America customer transactions in 2018, a figure Moynihan said is growing at an 80% to 90% clip this year. There’s a direct correlation between increased Zelle payments and a reduction in paper checks, he said.

"When you start to see that, that’s when you know you’re having an impact," Moynihan said.

There’s also the millions of simple questions ("What’s my routing number?" for instance) call centers handle each year that are instead being gobbled up by the AI-backed chatbot Erica, which has had more than 7 million customers use it since it launched last year, according to the bank.

These digitization efforts have in part helped drive down the costs of serving consumers by $1 billion a quarter, helping pay for a wide-scale upgrades to ATMs and bank branches, Moynihan said.

Citigroup CEO Michael Corbat said his firm reached a turning point last year in which its $8 billion tech budget, part of which is used for streamlining its operations to "shrink the cost of running the bank," started to pay off in meaningful net savings.

"Last year, we crossed the inflection point of actually getting net savings on that," Corbat said, adding that this year they’re expecting it to add up to some $500 million worth of savings.

For investors worried about these mammoth tech budgets, the commentary from bank executives seems like an assurance that capital isn’t being wasted on boondoggles.

Top-flight tech is crucial to banks staying competitive. The numbers are eye-popping, but banks are sending the message and providing evidence that the money is being well spent.

"I think if you don’t keep up in technology, you lose. I think it’s just a matter of time," JPMorgan CEO Jamie Dimon said on stage last week. "But to me, it’s not, can you do it? You have to do it. And if you don’t do it well, you will lose."

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