Actionable Insights From APT's Financial Services Practice

Managing Shareholder Expectations When Making Technology Investments

April 16th, 2014 | Posted by JDouglass in Financial Services

As the economy improves, more banks are increasing capital expenditures in order to modernize existing operations and invest in new technologies.

In a recent American Banker article, Andy Peters points out that the retail arms of banks have traditionally lagged behind on technology, and that many have recently made sizeable capital expenditures on technology infrastructure. Peters points out that “banks are estimated to spend 4.2% more on technology this year compared with 2013,” and reports that banks such as Valley National and Zions Bank are spending between $200 million and $500 million over the next few years to set up key infrastructure that ranges from upgrading teller technology to improving retail branches.

There are two possible drawbacks to the increased spending. First, investors may be worried that such high spending on technology will drastically affect profitability and, at least in the short term, will impact investor returns. The article notes that this has already been observed: in one case, a bank’s announcement of a $250 million technology investment caused company shares to drop 10%. Evidently, the market is not simply reacting to increased investment in technology; shareholders are concerned that the investments will not pay off. Executives need a way to assure investors that such new technologies and other capital expenditures will provide positive ROI and help grow future earnings.

What some banks have already realized is that the most accurate way to determine the impact of large capital investment is to use cause-and-effect analytics to evaluate and target technology upgrades. Some leading banks have been testing new branch, ATM, and call center capital investments for years, enabling executives to quantify the impact of the investments. Banks know that innovation is key to performance, but new investments must pay off to maintain long-term profitability and stock performance. Testing the implementation of new technologies is the most accurate way to prove out the profit impact of capital investments and keep investors happy. Click here to read a case study about APT’s work in testing new branch technologies.

Be Sociable, Share!

You can follow any responses to this entry through the RSS 2.0 Both comments and pings are currently closed.