Swiss private banks restrained in their IT investment reveal a survey conducted by the audit and advisory firm EY, in which almost 30 representatives of private banks in Switzerland, Singapore and Luxembourg participated.

The 2014 study has been extended internationally to include Luxembourg, as an established financial center, and Singapore, as a relatively young and dynamic private banking location, alongside Switzerland. The three countries offer a suitable basis for surveying relevant IT benchmarks in costs, service and the status of information technology.

Compliance requirements and optimization questions still dominate IT Compliance with regulatory requirements, such as adherence with tax transparency policy, is viewed as an important task for IT by 100 percent of those interviewed in Switzerland. This is closely followed by information security (92 percent agreement).

Automation of customer processes and further cost optimization are also considered priorities by 69 percent of interviewees. Just 46 percent of respondents view the use of mobile end devices and apps as important relationship management factors, while social media and cloud computing fail to make an impact at all (0 percent).

Andreas Toggwyler, Partner and Head of IT Advisory at EY Financial Services Switzerland, summarizes: "It is clear that private banks are increasingly relying on IT to respond to existential questions. We see that strategic bandwidth covers many areas, from questions of compliance right through to existing procedures."

"But many traditional private banks shy away from using IT for essential innovation in the customer interface. The Asian market plays a pioneering role in this area – for example Singapore where a tech-savvy attitude appears to prevail, with one in three respondents attaching great importance to social media. Switzerland as a financial center will also have to face this challenge, as its customer structure is currently undergoing generational change of generation."

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International IT cost comparison

The costs for IT in relation to the overall costs in private banking for the Swiss financial service providers amounted to 16.4 percent on average, remaining relatively stable between 2009 and 2013. Nevertheless, a successive drop in IT expenditure per bank employee from USD 64,000 to just below USD 58,000 was achieved over the same period.

Besides the total costs of IT, including hardware and software, personnel costs were also considered in the EY analysis. In Switzerland, an internal IT employee in private banking costs USD 185,000 (including all non-wage labor costs).

This figure has remained more or less constant since 2009 (USD 180,000), whereas the personnel costs for general bank employees has fallen by almost 10 percent over the same period (2009: USD 252,000, 2013: USD 230,000). The 2013 figures for the IT industry in Luxembourg are USD 136,000 (2009: USD 128,000), compared to USD 152,000 (2009: USD 136,000) for general staff.

Here there is a conspicuously low level of fluctuation between IT and non-IT staff, attributable to the low range of bonuses, a relatively modest proportion of better paid private bankers in the overall bank workforce, as well as the pool of qualified internal IT staff with many years of service. In Singapore the costs per IT employee in 2013 amounted to USD 129,000 (general staff: USD 189,000) versus USD 127,000 (general staff: USD 195,000) four years previously.

Andreas Toggwyler comments: "The value contribution of IT is still not appreciated to the full extent everywhere. This raises the question of whether further alignment of salaries between IT and non-IT staff might not be expedient in recognition of IT’s role not purely as a supporting function, but as a strategic one in private banking."

Differences between innovation and maintenance costs

It is apparent that IT costs are distributed differently between "run-the bank" expenditure, i.e., those necessary to maintain the actual status of the IT operations of the bank, and "changethe- bank" expenditure, in other words IT expenditure on new technologies. In Switzerland the "change-the-bank" share rose from 33 to 37 percent between 2009/10 and 2013, yet in Luxembourg it remained almost constant, increasing from 40 to 41 percent. In Singapore, however, there was a hike from 26 to 45 percent among the banks polled.

Robert Rümmler, Senior Manager at EY Financial Services Switzerland, who led the study, notes: "These figures are a clear sign that the significance of innovation within IT has grown. Singapore in particular is proving very innovation-friendly. As a result of growing digitalization of the value chain in private banking, new fields of application are set to emerge for IT – for instance in the integration of progressively more important technologies, such as mobile, social media and big data. These digital technologies open up a multitude of ways to access new customer channels and enhance customer retention. IT will have to take on a driving role in the integration of such tools if banks are to fully exploit the opportunities these technologies offer."

IT standard platforms the most common choice

The study also investigated which architecture model of the core banking platform entails the highest and lowest costs across the three countries. Here the distinction was made between three groups of private banks: those that mainly use a "standard IT platform", those that rely on a "self-developed platform" and others using a broad mix or a "best-of-breed platform".

Standard platforms and self-developed platforms are almost equally expensive on average. With standard platforms, IT costs constitute 15 percent of the overall costs of a private bank. For standard platforms, costs can fluctuate between 13 and 16 percent, depending on the software provider. Self-developed platforms make up 14 percent of a private bank’s total costs. Hybrid forms are significantly more expensive than the other two variants, accounting for 21 percent.

Robert Rümmler says: "Although the costs for self-developed platforms are lowest by a slender margin, these platforms are also often inflexible as far as modernization and adaptation measures are concerned. The industry tends towards standard packages, firstly to transfer development costs to the software provider, and secondly to enable increased automation of business processes. By virtue of the functional requirements that a standard platform has to fulfill, the right choice of software provider is definitely of crucial importance."