In a recent analysis, Bernstein highlights growing concerns around banks’ digital infrastructure, driven by a marked increase in technical failures and regulatory scrutiny. Mobile banking transactions have grown tenfold over the past few years, making it one of the fastest growing sectors in the world. This exponential growth, despite minimal changes in product offerings and regulatory requirements, appears to be a significant contributing factor to the current challenges facing banks.
Bernstein’s report highlights the lack of an objective method for measuring the reliability of banks’ technical infrastructure. To fill this gap, they view rising transaction volumes as a potential indicator of underinvestment in technology. Their analysis shows that banks have recently been subject to regulatory actions such as Kotak Mahindra Bank (NS:) (KMB) and Bank of Baroda (NS:), have experienced dramatic growth in transactions, far outpacing their peers. This anomaly suggests a discrepancy between transaction volumes and banks’ deposits or assets, hinting at possible underinvestment in necessary technology upgrades.
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Fortunately, such emissions are few and far between. Other private sector banks such as InduInd Bank (NS:) and IDFC First Bank (NASDAQ:), which also saw significant transaction growth, were able to scale appropriately or benefited from a low base effect, mitigating the risks of regulatory intervention. Thus, Bernstein believes that the technology issues requiring regulatory attention are likely to be specific and not indicative of an industry-wide problem.
In the short term, Bernstein expects regulatory vigilance to continue, forcing banks to continue increasing their IT spending. This trend will likely cause operating expenses (OPEX) to remain above long-term average levels. Larger banks, with their greater scale, are expected to navigate this landscape more effectively than their smaller counterparts. In addition, there may be a recalibration of product offerings, particularly those delivered exclusively through digital channels, with adjustments to pricing structures and minimum balance requirements.
Given the growing importance of digital infrastructure and recent regulatory actions, Bernstein advocates for the creation of standardized metrics to assess the health of banks’ IT systems. Banks now disclose various metrics such as share of digital transactions and IT spend ratios, but these are becoming less relevant. A standardized set of indicators will not only provide a clearer assessment of the health of a bank’s IT infrastructure, but will also facilitate comparisons across the entire sector.
Investors should expect continued growth in IT spending, which will likely push banks’ operating costs above historical averages. This environment favors larger banks with more extensive resources. Additionally, banks that are actively pursuing digital customer acquisition or promoting the adoption of digital channels among their existing customers may face higher IT spending needs in the near future.
Bernstein’s analysis highlights a turning point for the banking sector, where the balance between rapid digital growth and robust technology infrastructure will determine the industry’s trajectory in the coming years.
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