Banks Spend Big on New Hires, Technology as Operating Expenses Increase in Recent Years 2023

Banks Spend Big on New Hires, Technology as Operating Expenses Increase in Recent Years 2023

Banks’ operating costs (opex) have increased significantly in recent years due to significant investments in new staff and technology.

Bhavik Hathi, managing director of Alvarez & Marsal, says, “You incur early expenditures on-boarding a digital team, product teams, support team, and technology charges as you engage on the digitization journey.

“While on this journey, you do not phase out your traditional processes, products, and employees, which results in some overlapping cost for banks,” the speaker continued. Private bank operating costs increased by over 26% year over year (y-o-y) in 2022–2023 (April–March), while employee costs increased by almost 21% y-o-y. 

Similarly, in 2022–2023, operational and employee costs for state-owned banks increased by about 16% yearly. Y-o-y, total revenue increased by over 17%.

The 30–50% attrition rate to private banks, particularly among front-end employees, can be blamed for the increased spending by these institutions. Staff costs increased by 31-39% q-o-q in the June quarter for the top private sector banks. For banks in the public sector, it has increased by around 23–38%.

According to Harshvardhan Bisht, banking and capital markets leader for EY India, “Banks are tackling a huge issue of attrition and are attracting newer talent at a higher cost.” He also noted that the cost of hiring new hires, training them, and in some cases providing handholding may result in cost overlaps.

To compete with financial technology businesses, most private sector banks also obtain technical capabilities at a substantially greater cost by recruiting knowledgeable and experienced individuals.

Additionally, banks have projected significant expansion in rural companies, micro, small, and medium-sized enterprises (MSME), branch banking, and other industries that depend heavily on employees and have high recruiting expenses.

In the second half of 2022–23, private sector banks hired up to 40% more people, and in 2023–24, the effects of these increased labour expenses will be seen.

While expenditures related to employees have increased total costs, spending on branches has also increased significantly.

According to analysts, the Reserve Bank of India (RBI) has pushed lenders to digitize their customer-facing and back-end operations since the implementation of COVID-19, which has led to increased costs.

Other reasons have also contributed to the increase in operating expenses, such as the merger between Housing Development Finance Corporation and HDFC Bank and Axis Bank’s acquisition of Citibank’s consumer business in India. This has cost both of these institutions money in terms of integration.

Banks’ cost-to-income ratios will likely increase shortly as they incur capital investments and branch development costs. However, these expenditures will likely be offset by an increase in the current account savings account ratio (CASA), lowering the cost of funds.

Peeyush Dalmia, senior partner at McKinsey & Company, says, “Over the medium term, opex should stabilize and taper down as a result of increased productivity and efficiency in the system.”

Banks worldwide are witnessing a notable increase in operating expenses in the current financial landscape. Human resources and technology are two critical areas that draw significant investment from banks. This article delves into the dynamics of the substantial spending by banks on new hires and technology, exploring how these investments impact the banks’ operational efficiency, customer services, and overall competitiveness.

In the age of digitalization and constant technological advancements, the banking sector is no exception to the transformations. Customers now expect seamless, rapid, and secure digital banking experiences. Banks are investing heavily in technology, from mobile banking applications to cybersecurity measures, responding to this shift. Moreover, as banks seek to improve their performance and customer service, they also spend more on hiring high-quality talent.

Banks have increasingly recognized that top-notch human capital is essential for success. They have offered competitive salaries, benefits, and incentives to attract and retain the best talent. These practices have resulted in higher payroll costs, with some banks creating new positions, such as Chief Technology Officer (CTO) and Chief Information Security Officer (CISO), further amplifying the expenses.

Banks are not just hiring more, but they are also hiring differently. Growing demand for skills like data science, cybersecurity, AI, and blockchain is driving banks to source talent from technology sectors, which often demands a premium salary.

The emergence of fintech companies has pressured traditional banks to enhance their technology to remain competitive. Banks are now expected to provide services such as mobile banking, online account management, and real-time transaction alerts. These developments require substantial investments in software, hardware, and security protocols.

With the increase in digital banking, cybersecurity threats have also risen exponentially. Banks are allocating significant resources to enhance their security infrastructure, employing state-of-the-art technologies to protect customer data and prevent fraud.

While technology investments are vital, they add to the banks’ operating expenses, pressuring the cost-income ratio. Banks are now seeking ways to ensure these investments yield sufficient returns through improved efficiency, customer retention, and attracting new customers.

For banks, the challenge is to increase efficiency while managing costs. They are investing in technologies such as robotic process automation (RPA) and AI to streamline operations and reduce manual workload, ultimately aiming to lower service costs per customer.

The primary aim of these investments is to improve the customer experience. Enhanced digital platforms, faster service, personalized products, and top-notch security are all outcomes that banks expect from their investments in technology and personnel.

Increasing regulatory requirements are another significant driver for rising expenses in banking. New hires are often needed to ensure that the growing and changing landscape of regulations is navigated effectively, and considerable tech investments are required to maintain compliance efficiently.

As operating expenses continue to rise, banks are forced to innovate. We anticipate seeing more partnerships between traditional banks and fintech companies, shared services models to cut costs, and a relentless focus on technology that improves efficiency and customer experience.

The banking sector is profoundly transforming, driven by changing customer expectations and intense competition, particularly from fintech firms. As a result, banks have been investing heavily in new hires and technology, contributing to increased operating expenses in recent years.

While these investments are critical for banks to remain competitive, they must continually evaluate and adjust their strategies to ensure they are sustainable and yield the desired results in an ever-evolving financial landscape.