Swiss banks are not taking full advantage of information technology innovations to stay competitive – a serious failing as regulatory and other costs bite - while there are wide discrepancies in the earnings of IT professionals in banks, a new study by Ernst & Young shows.

In its IT in Swiss Private Banking 2013 report, E&Y said that as banks face rising pressures on IT systems relating to data security, regulatory compliance and regulations, it found that two-thirds of banks use standard software, rather than bespoke systems, in their core banking systems.

Some 17 per cent of banks use solutions developed in-house and an equal proportion uses software components from external sources that were adapted to their own requirements. Standard solutions are used by 50 per cent of large banks, 60 per cent of medium-sized banks and 78 per cent of small banks.

“Most smaller banks have no choice but to use standard solutions. The costs and work involved in developing their own system is beyond what they can achieve with their IT staff. But many medium-sized and large banks also shy away of the considerable initial costs of developing in-house solutions,” Robert Rümmler, senior manager in advisory financial services at Ernst & Young Switzerland, said.

The choice of standard solutions is not, however, fully explained just by costs considerations, the report said.

Banks using standard software in their core banking systems spend around 15 per cent of their total operational expense on IT, with licence fees accounting for much of that figure. For banks using core banking systems they've developed by themselves, expenditure on IT only accounts for some 11 per cent.

“We were surprised by the fact that medium-sized and large banks opt for standard solutions despite the higher cost. It may be that they find the additional cost acceptable because they want their IT landscape to be less complex. If you decide not to invest in your own development work, you tie up fewer staff and can concentrate on more-value-adding investments,” Rümmler continued.

Limitations

The report also identified limitations to outsourcing of certain IT functions.

Of the banks surveyed, 61 per cent manage their core banking systems themselves; 11 per cent of them outsource their IT, while 28 per cent outsource whole business processes to third-party service providers. But the study shows that outsourcing does not automatically lead to lower costs. The banks that outsource the operation of their core banking systems spend around 15 per cent of their total outgoings on it.

Where individual business processes are outsourced, the costs add up to around 15.3 per cent, while in-house management of the IT system works out cheapest at around 14.6 per cent, the report said.

“Extraordinary” salary levels

The report also highlighted a wide divergence in salary levels paid to IT workers.

Such employees earn on average 65 per cent of the average salary at the same bank.

“The discrepancy in earnings is extraordinary, especially when you consider the increasing importance of IT in the private banking business. Banks wanting to stand out from competition thanks to their IT services need to consider whether such differences in salary are still justified, said Andreas Toggwyler, partner in IT advisory financial services at Ernst & Young Switzerland.

On average, IT staff make up 9 per cent of a bank's total staff. With 12 per cent, the proportion of IT staff is highest in banks that develop their core banking systems themselves. Banks using standard solutions have only around 7 per cent of their employees working in IT.

Focus on compliance and data security

According to the study, banks use much of their IT resources for maintaining their systems, with day-to-day operations accounting for 73 per cent of IT costs and the remaining 27 per cent spent on adapting the systems.

Banks that develop their own core banking solutions spend the most - some 36 per cent - on adapting them when necessary.

Future IT expenditure is planned for compliance and data security measures; an overwhelming majority of the IT managers questioned (96 per cent) are planning to spend their IT budget for 2013 primarily on meeting regulatory requirements, while 87 per cent of them cite improved data security as another priority. No more than 4 per cent of the respondents are planning to focus on social media.