As the man in charge of Internet technology at the French bank Crédit Agricole, Pierre Dulon wrestles daily with the digital costs of investment and commercial banking.
To make his life a bit easier, Crédit Agricole is currently trying out a new approach. It has partnered with FIS, the U.S. banking technology firm, to launch an IT platform for derivatives trading — and is on the hunt for rival firms to join in and share the costs.
German financial institutions, faced with soaring IT expenses, should be open to the idea. Outdated technologies and computer systems mean their costs are high, and they have the added expense of meeting many new banking regulations.
A survey of IT directors at 30 financial institutions by the consulting firm PPI shows the extent of the problem. At six in every 10 banks, more than a third of regulation-related expenses come from IT, according to a survey. At one bank in five, half of the budget for meeting regulations goes on IT.
About 90 percent of banks have been forced to cut other IT investments, according to the survey, and more than 60 percent have delayed urgently needed upgrades to their IT systems.
“Much is invested in regulations, but little in business processes,” said Thomas Reher, the head of PPI.
Wolfgang Kirsch, the chief of DZ Bank, warned that the overall costs may be damaging. “The obligation to conform to regulations has the potential to overburden banks,” he said recently.
For example, Finanz Informatik, the IT provider for the extensive network of Sparkassen savings banks, spends about €120 million ($149 million) a year on new software or changes to existing software. “A third of that expense is due to new regulatory requirements, and it has continually grown in past years,” said Fridolin Neumann, the head of Finanz Informatik.
The obligation to conform to regulations has the potential to overburden banks. Wolfgang Kirsch, DZ Bank
According to the survey, three-quarters of banks say all of this regulation-related IT spending contributes little or nothing to the success of their companies.
But Mr. Reher said banks do get something in return. “They too profit from declining complexity when, for example, data quality is improved,” he said. “And stricter risk management makes the bank more secure.”
There is unlikely to be any relief from the expenses any time soon. Andreas Dombret, a board member of Germany's central bank, the Bundesbank, recently told Handelsblatt that IT costs for meeting bank regulations will continue to rise. But in his view, the short-term increase in IT spending will lead to more stability in the financial system in the long term.
He said demands on banks’ IT systems are increasing not only because of governmental monitoring, but also because of issues such as data security or cyber attacks. In these areas, he said, banks have much to gain from regulation-induced investments in IT.
But jangling the nerves of many is the fact that one in three institutions are unable to predict how much they will have to spend to meet current regulations. Many complain that this will cause more complexity and uncertainty when it comes to planning.
“A special burden arises when new rules require changes at short notice,” said Mr. Neumann, the head of Finanz Informatik. “Then we not only have to change the software, but also quickly test the new version and utilize it with our customers.”
Mr. Reher notes that costs and challenges seem to be wearing the industry down. “Instead of making the change early on, banks wait until the relevant law has actually been passed,” he said.
And that inevitably results in expensive back-up projects.