Technology buzz, both inside and outside the banking industry, is centered on innovation — including the ongoing ramp of cloud migration and the excitement around the promise of AI, the new kid on the block.  

The World Economic Forum in January highlighted how topics such as the application of and disruption from generative AI sapped the oxygen in the room.  

Data company PitchBook also offers insight into the interest in AI and machine learning. In fact, in the third quarter of 2023, funding for AI and machine learning startups was six times the funding for Web3 technologies. 

Banks, like other industries, have been investing heavily in technology, whether it’s cloud, operational modernization or AI.

A survey of U.S. banking sector IT executives by the Economist found that half of those surveyed were already heavily using AI for fraud prevention and digital marketing. JP Morgan has indicated it plans to invest $1 billion or more per year in AI and data analytics.  

Reality of tech spend 

Within banks, a reality is setting in that may require tough choices.  

While the pace of tech innovation and customer expectations continue unabated and the imperative for modernization of legacy IT infrastructure is non-negotiable, and the heady days of double-digit increases in technology spend may need to be reined in.  

The last few years have been characterized by rising bank revenues as national, super-regional and regional banks in the U.S. enjoyed both growth in customers and an increase in income per customer, notably within their consumer franchises.  

Supported by this top-line growth, banks increased technology budgets and, overall, have seemed less inclined to manage stagnating or worsening efficiency ratios.  

The largest U.S. banks have led the way by increasing technology spend by 10% to 15% per year. Against the backdrop of the Federal Reserve’s current monetary tightening cycle coming to a potential end as it achieves its desired “soft landing,” bank executives are expected to focus more on efficiency and spend management, thus signaling that the days of large, year-over-year bank IT spend increases are gone.  

To better understand how bank CIOs are navigating the current environment and charting the technology course forward for banks, I recently sat down with Jude Schramm, chief information officer of $213 billion Fifth Third Bank, one of the top 20 banks in the U.S. What follows is an edited version of the conversation. 

How is IT spend managed at Fifth Third? 

Jude Schramm: IT spend is allocated into three categories: 

• “Run the bank,” which namely consists of infrastructure and resiliency spending; 
• “Protect the bank,” which centers on fraud, cybersecurity and other threat vector mitigation; and 
• “Advance the bank,” which includes modernization efforts and innovation.  

Roughly 50% of the total IT budget is allocated to “Run the bank” and our goal is to shift half of this spend to “Advance the bank” through modernization, cloud, mainframe migration and process optimization efforts.  

Historically, there has been a wide disparity in IT budget size for national versus regional banks. What can smaller banks do to compete better and what actions can their CIOs take? 

JS: First, regionals and super-regionals need to compete via the partnerships they can strike. For example, benefit from the scale of investments made by the hyperscalers and grow their relationships with them beyond a data center-only play.  

Second, smaller banks need to change their processes to match out-of-the-box vendor capabilities to both scale more efficiently and avoid heavy customization expenses. Additionally, smaller banks must be judicious in having business cases drive technology choices to better weather the economic cycle. When done well, an advantage regionals have via partnerships is that they tend to invest with their tech partners to drive meaningful outcomes by building on top of a “vanilla” platform to develop differentiated IP.  

What are your views on whether IT spend levels can continue to grow at historical levels? 

JS: There will be pressure and the need to cut expenses due to bank fee pressure and higher liquidity provisions for credit losses. We foresee regional bank consolidation occurring, which will also affect IT spend.  

What is your outlook and approach to managing IT spend moving forward? 

JS: Fifth Third’s approach is to somewhat moderate overall IT spend and, importantly, do so while holding modernization spend flat (i.e. not impede our modernization progress).  

We further anticipate capturing benefits from our “Run the bank” efficiencies through automation to offset spend. Depending on the severity of any potential softness, we may need to make tradeoffs such as adjusting the pace of our modernization efforts or focusing R&D on real use cases versus those that are at the peak of the hype cycle.  

Looking ahead, what technical capabilities warrant the most focus for U.S. banks over the next three to five years, especially as IT spend moderates? 

JS: Modernization of legacy platforms to the point where banks can say no to legacy platform support and meaningful applications of generative AI.  

Generative AI is getting all the hype at times it seems. What is your take on this potentially game-changing phenomenon and how it will deliver benefits? 

JS: We believe Gen AI is probably the biggest disruption since mobile technology changed the banking consumer front end. In terms of outcomes, the pace of Gen AI might be slower than folks want it to be as we still want the human in the middle for now. This is important to note as it means Gen AI in the earlier stages can be applied to not necessarily replace staff, but make them better. For example, [use of] “superhuman” contact center agents that can tap an AI-based knowledge base to provide better information to solve complex customer problems or help drive relevant insights faster.  

Given gen AI’s game-changing nature, how do you currently see your approach to investing in and developing generative AI capabilities? 

JS: We come back to our partnership approach as the large technology players are heavily investing in this space and the required skillsets. We do not see ourselves building our own LLM as an example, though we can leverage our great partnerships to harness the innovation.  

2024 will be the year that bank CIOs may need to make tough choices as macroeconomic cues suggest heightened pressure to reign in spend though corporate and consumer customers alike will not slow their desire for convenience, speed and digital sophistication from their bank.  

Hemal Nagarsheth is an independent consultant for Paydeeya, where he leads with a particular focus on the intersection of technology and innovation with banking and payments.