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 study, authored by Thomas Désiré and Jordan Pandolfo, highlights a significant shift in bank operations over the past two decades, with a notable rise in investment in information technology (IT) and marketing.
This topic is important as banks continue to adapt to technological changes that influence customer experience, operational efficiency, and competitive dynamics within the financial sector. The report finds that while labor remains the largest expenditure for banks, the share of spending on IT and marketing has grown from 4 percent in 2004 to 19 percent in 2025. The banking sector is also among the leading adopters of artificial intelligence technologies.
According to the analysis, increasing IT spending can lead to higher profitability for banks. When a bank doubles its IT spending share from 20 percent to 40 percent, its return on equity rises from an average baseline of 8.2 percent to 9.1 percent over five years. This increase is sustained throughout the period studied. Additionally, income generated from deposit accounts increases under higher IT investment scenarios, peaking at $194 per account in the third year compared to a typical $184 baseline.
The study also notes that while loan rates do not show significant changes with increased IT spending, there is an almost 25 percent reduction in loan default rates when banks double their IT investments—from a baseline of 0.29 percent down to 0.22 percent—suggesting improved screening or monitoring capabilities.
However, integrating new technologies requires substantial upfront costs that may be challenging for smaller community or regional banks. These institutions often rely on third-party providers with limited customization options and additional fees, which could create competitive disadvantages and contribute to industry consolidation pressures.
The authors conclude that greater investment in technology and marketing can help banks achieve better profitability through increased deposit income and improved loan performance but caution about potential challenges faced by smaller institutions.
