LONDON Banks which have patched up their information technology (IT) systems too often in recent years face big increases in spending to modernize their operations for the digital age.
But digital innovation should help offset the outlays by cutting the costs of new branches, which are likely to be 25 percent smaller and have a fifth fewer staff, according to a report from Deutsche Bank.
IT costs are likely to rise by about 10 percent over the next 10 years, broadly offset by a possible 5 percent fall in branch costs, analysts predicted.
"We expect a material increase in IT spend by banks over the next 10 years. Core systems are generally old and rely on too many applications patched too many times to cope with rising transaction volumes, regulatory change and digital channel changes in particular," Deutsche analysts Jason Napier and David Lock said in a note on Monday.
Investment banks and retail banks are already spending heavily on improving technology to cope with heavy regulation, demands to become more efficient and pressure to get ahead with digital platforms, Reuters reported in June.
The Deutsche analysts said there is much still to do, but those who move early can take advantage of higher volumes.
"Most big banks need significant IT renewal. Old mainframe systems are the norm, patched for M&A, geographic and product expansion, and regulation, which introduces complexity and inefficiencies while volumes continue to rise," the report said.
"Banks that execute best will cope with much higher customer transaction volumes with little cost increase, will be nimbler in pricing and product launches, more adept at adapting the branch network to changing needs and will drive increased customer loyalty, higher wallet share and lower churn."
Banks are already cutting branches and more big cuts are expected in countries such as Spain or Italy. Banks have shut about 20,000 branches across Europe in the last four years, including 5,500 last year.
"Some countries (Italy, Spain) are over-served by existing networks but overall we expect branch numbers to edge lower but not collapse," Deutsche said.
(Reporting by Steve Slater; Editing by Louise Heavens)