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Lloyds Banking Group, one of the UK’s largest banks, announced its 1H18 results at the start of this month. While overall operating expenses for the bank were flat, Lloyds explicitly focused on its investment in technology, which it expects to be 20% up over 2018 compared to 2017. With technology spend at around 15% of its overall cost base (circa £1.2bn), this spend growth alone represents 3% of total operating expenses – certainly not an insignificant figure given the bank’s reputation for its strong cost/income ratio and its focus on cost management.
What is driving this scale of investment? The answer is “digital transformation.” The bank claims to have one of the largest transformation programs in the sector, involving over 20% of its employees and over £3bn in strategic investment over 2018–20. Its focus is on digitalizing the group, not just on the front end but end-to-end transformation involving more than 70% of the cost base. Around a third of the technology spend is focused on simplification, with progressive modernization of its IT and data architecture, while two-thirds is directed towards enhancement and new capabilities.
On the front end, the objective is to drive a leading customer experience. Interestingly this is not just within the digital channels, but also in the branch network. While it is “reshaping” the branch network, it is also adapting, with a move towards mobile branches that can cover multiple locations, and a shift in purpose to addressing “complex” needs, such as mortgage appointments. The target is to have 60% of branch customer-facing time spent on those needs by 2020 compared to 34% in 2014. That said, the digital channels are clearly strategic priorities, with investment focusing on increasing the pace of development and innovation. The bank has re-platformed its mobile app, allowing a doubling of the release cycle, as well as investing in developing new propositions enabled by open banking in the UK (such as account aggregation).
With regard to end-to-end transformation, a core technology focus has been on robotics, with major investment in robotic process automation across areas such as mortgages, financial planning, retirement, payments, and risk. This will help the bank finance the level of technology spend while seeking to actually reduce overall operating expenses by 2020. Within this, there is also strong investment in cloud infrastructure, developing both private and public capability to drive cost efficiency and scalability.
While one institution doesn’t make a trend by itself, Lloyds’ strategy, although relatively aggressive in magnitude, is not out of line with more general undertakings in the sector. Ovum’s 2017/18 ICT Enterprise Insights program found that 25% of banks were planning significant ICT budget growth for 2018 (compared to under 10% in 2017), and Ovum expects that this will likely expand further in 2019 (the 2018/19 program will confirm in October). With the regulatory environment calming down somewhat (particularly in regard to penalties and consumer compensation costs), digital transformation will be the key focus for nearly all banks over 2018–20 and will be a strong driver of ICT investment growth.
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