Contributed by Rubin Worldwide
Written by Dr. Howard A. Rubin, Founder, Rubin Worldwide

With all the hoopla around “digitization” in banking and financial services today – ranging from awards for the best digital bank to profiling of the fintechs – it seems that it would be useful to have quantitative information as to how the performance of digital organizations differ from legacy ones. Equally important is to have a real “proof of value” in business terms versus simply what might be considered “hype.”

The data and analyses presented herein is a first attempt to show such difference in legacy and digital performance. The initial data indicates a differentiated level of performance at the digital “frontier” is real. To understand it and the underlying technology (or is that “digital”) economics you need only look at the business performance of today’s major banks. And one window into their performance is their operating efficiency (defined as the ratio of Operating Expense (Non-Interest Expense) to Net Revenue as reported in their 10-Ks). The inverse of this metric is pre-tax margin and all aspire to drive that up.

A quick summary of the banks listed above grouped as “Big Banks” and “Investment Banks” provides some insight as to how much each of these groups has moved in the past six years.

The Big Banks have improved their Operating Efficiency by 8.39% while the Investment Banks have moved 15.30%.   This looks quite significant and there is more to come.  The Big Banks – as cited in their Annual Reports and communiques to shareholders – aspire to reach the low 50s while the Investment Banks hope to return to the glory days pre-2008 and drop to a similar level.

But, looking at the performance the new digitals – DBS, Danske, Commonwealth Bank of Australia – banks that have transitioned from legacy technology to digital puts all this into what may be a depressing perspective.  Let’s do the math using DBS.  Below is an excerpt from the DBS 2016 Annual Report

The “math” shows that for 2016 their ratio of Total Expenses to Total Income (their operating efficiency) was 43.3% — and the 2017 Annual Report shows it holding steady at this level.  But in 2012 they were closer to 50%

So what does this portend for today’s banks with what might be called their legacy “drag”?  The next chart provides some context.  The Y-Axis shows Operating Margin and the X-Axis shows a proprietary measure called “IT Intensity” (which is explained in the paragraph after the chart)

Banks today are operating at the performance frontier designated as “Traditional”.  They are struggling to reach the low 50s in terms of Operating Margin (the inverse of Operating Efficiency).  DBS and the others mentioned as digital are at the “First Sighting” frontier.  They have migrated from the Traditional frontier – a journey that has taken three to five years.  Over that period, they have had to transform their technology economics to a digital model.

Digital technology economics are characterized by the pattern shown in the diagram below evidenced by the change in shape of the IT intensity profile. IT Intensity is a single metric that provides a view of both IT spending relative to revenue and IT spending relative to Operating Expense concurrently. (See the second chart that follows.)

IT spend relative to revenue – as a percent of revenue – should go down as a result of revenue lift from technology investment if the intent of the investment was to drive revenue up at a rate higher than that of the rate of IT spending itself. At the same time, IT spend relative to Non-Interest Expense (Operating Expense) should increase as operations processes (either internal or customer-enabled) have more technology leverage and hence operations expenses decrease.

Another part of the economic transformation is a shift in the IT spending patterns of “Run vs Grow”.  Historically, the distribution has been roughly 65%:35%.  More recently, with injections of investment on the Grow-side, some legacy banks now are at 60%:40%.   The digital banks are the total inverse at 40%:60% but more importantly, those making the move from the Traditional to the First Sighting frontiers are going through a transition at 50%:50%.

The funding for the performance frontier “jump” is driven by focused optimization of Run and discerning investment in Grow which in turn can result in an increase in IT spending and not just a reallocation of dollars.

The Evolution 2 frontier on the chart is representative of the ground-up digital banks.  These banks are not encumbered with legacy transition costs and legacy processes.   Alipay and Amazon Bank will be operating at these levels and present perhaps the greatest challenge to the technology economics of today’s banks.  While the transition from the Traditional to the Evolution 1 frontier can be enacted by the aforementioned transition model; getting to Evolution 2 does not have such a clear path.  Attaining that level requires shedding the legacy past – the systems and the business models – as the drag of legacy costs is a barrier to the needed operating efficiency.

It should be clear that the technology economics of becoming digital requires an understanding of today’s technology costs and today’s technology impacts in banking and financial services.  It also requires a view of the destination defined by business performance, the competitive landscape, and a concurrent understanding of what is required to get there.  That perhaps is the biggest challenge for organizations today – it is not about “the cloud”, it is not about just “AI”, it is about “outcomes” – the outcomes of applying technology (the amorphous digital technology) to reach new frontiers of business performance while managing risk, security, and a host of other factors as the sector itself continues to evolve.


Dr. Howard A. Rubin is Professor Emeritus of Computer Science at City University of New York, the Founder of,  and an MIT CISR Associate.  He can be reached at and +1 914-420-8568