Among other things, the largest banks are improving the standards for the remote provision of financial services and are supporting their sales channels technologically, which could improve their future competitive position in relation to smaller entities.
The dynamic development of information technology affects the provision of financial services in Poland. Competition — both between banks and with non-bank payment institutions — encourages organizations to invest in modern technologies, among other things, to meet customers’ expectations regarding the quality of provided services. In the second half of 2019, the Polish Financial Supervision Authority (KNF) and central bank, NBP, conducted a survey on innovation in commercial banks to find out the scale of these expenditures. The survey was conducted among 26 supervised entities (representing almost 79 per cent of the total assets of the Polish banking sector) and was focused on such investments in the years 2016-2019, the sources of innovation, the technological structure of the expenditures, the use of innovation in individual areas and business processes within banks, and the degree of utilization of cloud computing services.
How much do they spend?
In recent years, the surveyed banks have recorded a steady increase in their expenditures on ICT innovation and IT development. The rate of growth in expenditures was particularly high in 2018-2019: in 2018, they increased by 20 per cent, and in 2019, by 15 per cent (according to the banks’ forecasts). The expenditures of the surveyed banks on innovative technologies amounted to almost PLN1.46bn (EUR327m) in 2018, and in the entire period covered by the survey they exceeded PLN5.5bn (EUR1.23bn). Expenditures by the largest banks accounted for the vast majority of the reported spending figure.
The structure of the sources of innovation was dominated by the purchases of external services and the use of in-house resources. Other sources were less important, although in the case of a group of banks with predominantly foreign capital the implementation of solutions used by the whole group also played a certain role. However, even for these banks it was only the third most important innovation channel (after the purchase of external services and the use of in-house resources).
Why do banks invest in technology?
The vast majority of banks’ expenditures on development and innovation was directed to the optimization of the existing solutions and the gradual development of the banks’ technological resources. The second most important category was the digitization and automation of business processes. A relatively high share of expenditures was allocated on the development of network infrastructure and IT resources, which should enable the implementation of cloud computing solutions in the coming years. The fourth most important spending category were the expenditures on the implementation of Big Data solutions in the business processes. However, such expenditures accounted for a relatively small proportion of the overall investments.
The implemented activities (development of IT and network resources) and the incurred investment expenditures should allow the banks to make a significant technological leap in the coming years. One essential element of the preparations for that is the digitization and automation of processes, which will allow banks to exploit the full potential of the coming technological breakthrough associated with the implementation of cloud computing solutions, as well as the possible broader use of advanced analytical methods (Big Data).
The expenditures on innovative technologies in the Polish banking sector were primarily aimed at reducing costs. It was indicated as the objective of the innovation investments made in 2019 by 19 banks participating in the survey. Other less common objectives included: improving customer experience (in 16 banks); increasing revenues (in 15 banks); and reducing risk (in 15 banks).
The differences within the banking sector
The survey also shows that the objectives of expenditures on innovation are different in the case of large, medium-sized and smaller banks. Among the largest banks (with assets exceeding EUR11.65bn), there are two dominating objectives: reducing costs and increasing revenues. The objective of improving customer service also was important. This may be linked to the competitive pressure from the fintechs regarding the standards for the provision of financial services via the mobile channel. In medium-sized banks, the most important motivation was the reduction of costs. Other objectives, such as increasing revenues and improving customer experience where of a relatively smaller importance. The smallest banks (with assets below EUR3.02bn) are mainly focusing on expenditures related to operational support and the maintenance of existing systems.
We can therefore indicate that large banks have a certain advantage over the remaining part of the sector resulting from a more advanced model for the implementation of technological innovation. This primarily relates to increasing revenues by improving customer service standards. Large entities are therefore much more frequently utilizing technological investments to strengthen their market position. This is all the more important because in light of the experience of social isolation during the SARS-CoV-2 pandemic and the resulting changes of consumer preferences in the financial market, the quality of remotely provided services and the efficiency of remote distribution of financial products will in the near future increasingly determine success in the banking sector.
Technologies and solutions enabling the automation and digitization of processes (so-called Robotic Process Automation) were the most popular element of the innovation strategies. In three out of the four areas of the analysis — i.e. risk management, organization support functions and sales — Robotic Process Automation was indicated as the dominant technology, by 17 entities and the case of the first two areas, and 20 entities in the third one.
Modern technologies and solutions expanding the network resources and IT infrastructure for the purpose of implementing cloud computing services were also an important element of the banks’ technological development. Half of the surveyed banks (13) used and implemented modern and innovative technologies in the areas of IT risk management and cybersecurity.
The banks’ responses indicate a noticeable albeit still fairly limited use of Big Data, machine learning and biometrics, as well as a generally relatively-high level of use and implementation of modern solutions and technologies in sales.
The popularity of cloud computing solutions in the banking sector is still quite low — 16 out of 26 banks do not use cloud computing at all. Among the cloud computing tools, the authors of the report identified 14 solutions supplied by different providers, including one service offered by the provider to multiple entities, which, however, is not used in complex business processes. The survey revealed a lack of concentration of the cloud solutions providers supplying services to entities in the financial sector.
In recent years there have been a significant increase in technological investment in the banking sector. The survey responses indicate that the largest banks are utilizing the modern technologies in the most comprehensive way, which could likely be explained by the economies of scale. In the medium-term, such a duality of development paths in the banking sector could push weaker, less efficient banks towards consolidation. At the same time, it could also be driving the acquisitions of weaker entities by the largest entities, which would lead to increased market concentration in the banking sector over the longer term. The prospect of the growing use of cloud computing solutions, especially in key business processes, and the possible concentration of service providers on the Polish market will require ongoing monitoring efforts, also due to the potential systemic importance for the financial sector as well as its stability.