The Federal Reserve Bank of Kansas City released an analysis on Mar. 6 examining how increased technology and marketing spending by banks affects their performance. The report highlights that over the past two decades, banks have shifted more resources toward information technology (IT) and marketing, with spending in these areas rising from 4 percent in 2004 to 19 percent in 2025.
This trend is significant as it reflects a broader transformation in bank operations, where digital capabilities and customer-facing technologies are becoming central to business strategies. The analysis explores how these investments relate to profitability, deposit account income, and loan performance.
According to the report, when a bank doubles its IT spending share from 20 percent to 40 percent, its return on equity increases from an average baseline of 8.2 percent to 9.1 percent over five years. The study also finds that higher IT investment leads to greater income from deposit accounts—rising from $184 annually per account to $194 at its peak within three years—though it notes the net effect on consumers is unclear due to possible higher fees or lower deposit rates.
While increased IT spending does not significantly affect loan interest rates, it is associated with a nearly 25 percent reduction in loan default rates. This suggests that technological improvements may help banks better screen applicants or monitor borrowers more effectively.
The report cautions that integrating new technologies requires substantial upfront costs, which can be challenging for smaller community or regional banks. These institutions often depend on third-party providers for technology services, facing limited customization options and additional fees. As a result, the cost structure may create competitive challenges for smaller banks and could contribute to industry consolidation pressures.
The authors conclude that while technology investments can boost profitability through improved deposit income and loan performance, disparities in access and implementation may shape the future landscape of banking.
