The Federal Reserve Bank of Kansas City released an analysis on Mar. 6 examining how increased technology and marketing spending by banks affects their profitability and performance. The report highlights that over the past two decades, banks have shifted a significant portion of their expenditures toward information technology (IT) and marketing, with these categories rising from 4 percent in 2004 to 19 percent in 2025.
This shift is important as it reflects broader changes in banking operations, including the adoption of online and mobile banking platforms and the integration of artificial intelligence technologies. The analysis suggests that higher IT investment can lead to improved customer retention, more effective cross-selling, attraction of new customers, and reduced acquisition costs.
According to the report, when a bank increases its IT spending share from 20 percent to 40 percent, there is an initial rise in return on equity from an average baseline of 8.2 percent to 9.1 percent. This increase is sustained over five years. The study also finds that increased IT spending correlates with higher income from deposit accounts—rising from $184 to $194 annually per account at its peak—though it notes that the net effect on consumer well-being remains unclear due to potential increases in fees or lower deposit rates.
While no significant change was found in loan interest rates under higher IT spending scenarios, the analysis reports a nearly 25 percent reduction in loan default rates when banks double their IT investment. This suggests that technological improvements may help banks better screen applicants or monitor borrowers.
The report concludes that while larger banks are better positioned to absorb upfront technology costs, smaller community or regional banks often rely on third-party providers for such services. This reliance can limit customization options and increase operational costs for smaller institutions, potentially leading to greater industry consolidation pressures.
