Retail Banks Will Spend 40% Of Their Technology Dollars On Digital Transformation

America’s biggest banks know where they need to put their money.

According to report from research firm IDC, retail banks in the United States will spend $20.2 billion on information technology in 2017 with the goal of realizing digital transformation in an industry that has long lagged behind technological trends.

Retail banks technology (including thrift banks and credit unions) spend on digital transformation initiatives will grow by a compound annual growth rate of 22.5% into 2020. Retail banks IT budgets will grow by 4.8% in that same time period.

Digital transformation spend will take place in four specific areas, according to IDC: hardware, software, IT services (including workers) and internal IT. Banks will ramp up spending on digital transformation from 27.5% of IT budgets in 2017 to 40% in 2020.

“There are very few banks in the United States that aren’t investing in transformational technologies, and fewer still that haven’t at least developed a digital transformation strategy. And the largest institutions are allocating more than 40% of their IT budgets to digital transformation,” said Jerry Silva, research director for global retail banking at IDC Financial Insights, in a press release.

IDC defines digital transformation for retail banks as: “the continuous process by which enterprises adapt to or drive disruptive changes in their customers and markets (external ecosystem) by leveraging digital competencies to innovate new business models, products, and services that seamlessly blend digital, physical, business, and customer experiences while improving operational efficiencies and organizational performance.”

Where Banks Will Spend Their Technology Dollars

IDC notes that much (82%) of the increased spend on digital transformation will take place on the backend and middle of retail bank’s technology stacks. Investments in backend platforms such as infrastructure, risk management and data initiatives tend to be more expensive than front-end investments, like apps and websites.

A report from 2015 from Finextra and Five Degrees said that 80% of retail banks were considering overhauling backend core infrastructure within the next five years. That prediction is coming to fruition as IDC predicts banks will put their money where their mouths are.

As banks expand digital transformation efforts, integration of third-party services like external application programming interfaces, machine learning and partnerships with FinTech startups will become more of a priority.

Retail banks, just like retail merchants, are also embracing the notion of omnichannel as a core business plan, instead of just a tack-on strategy to other efforts. Banks understand that providing excellent digital experiences to customers is the way to maintain and increase loyalty and expand business to new customers. Banks will focus on omnichannel efforts on the Web and mobile and increasingly in services like bots and personal voice platforms like Alexa, Google Home, Cortana and Siri.