Inflation’s first casualty in bank IT was the change budget

The week

On November 30, 2021, Federal Reserve Chair Jerome Powell told the Senate Banking Committee that it was probably a good time to retire the word “transitory” to describe inflation. He signaled that the Fed would consider ending its asset purchases sooner than planned. Consumer price inflation had been running well above the Fed’s 2 percent goal for months. At its December 2021 meeting, the Federal Open Market Committee accelerated the reduction of its bond purchases. The Fed began raising its policy rate in March 2022 and kept raising it through 2022 and into 2023. Consumer price inflation reached its highest level in roughly four decades in mid-2022.

Most commentary on the Fed’s pivot concerned balance sheets: deposit costs, loan demand and the value of securities portfolios. For technology leaders at banks and credit unions, the first effect was inside the IT budget itself. A typical institution’s technology spending splits into “run,” the cost of keeping existing systems operating, and “change,” the projects that modernize them. Run costs are largely committed and rise on their own. Budgets are usually set as a percentage increase on last year. When inflation jumped, the gap between those two growth rates had to come from somewhere, and in most institutions it came out of change. We look at three parts of that squeeze: committed run costs, people costs, and the change portfolio that absorbed them.

Committed run costs

Run budgets are dominated by multi-year agreements with core processors, card processors, digital banking providers, network carriers and software vendors. Earlier in this series we looked at how contract terms signed in the low-rate years, including escalators and volume floors, embedded assumptions that later bit. In late 2021 those terms started to execute. Index-linked increases that had added one or two percent a year began to add far more, and they compounded.

Two newer cost lines behaved differently. Cloud infrastructure and many software-as-a-service products are priced on consumption or per user. Vendors facing their own wage and energy costs raised list prices at renewal, and usage-based bills grew with activity whether or not anyone approved a larger budget. Unlike a capital project, there is no single decision point at which someone signs off on the increase. The cost simply arrives on the invoice, and finance sees it a quarter later.

The practical response was to make run costs visible as unit costs. That means cost per account served, per transaction processed, per active digital user. A run budget measured in unit costs shows whether a rise came from growth, from price, or from waste such as idle cloud capacity and unused licenses. Only the last can be cut quickly. Institutions that could separate the three negotiated better at renewal and found savings that protected project money.

People costs

The second pressure was wages. Demand for engineers, security analysts and data specialists was already high in 2021, and broad wage inflation raised it further. Banks and credit unions competing with technology firms and with each other paid more to hire and to retain. Contractors and consultants passed their own labor costs through in hourly rates. For institutions that staffed modernization with contractors, every rate increase landed directly on the project budget rather than on the run line.

Retention carried a quieter cost. When experienced staff left, institutions lost knowledge of legacy systems that is hard to buy back, especially for core platforms and custom integrations. Each departure slowed projects that depended on that knowledge, and replacement hires took months to become productive. Smaller institutions felt this most. A credit union with a dozen technologists can lose a third of its capacity for core conversion work when two senior people leave.

Managed services and shared platforms, such as those offered by credit union service organizations, became more attractive where they spread scarce skills across many clients. They also come with their own escalators and service limits. Outsourcing a function moves the labor cost into a contract. It does not remove the need for someone inside the institution who understands the service well enough to oversee it.

The change portfolio

With run costs rising automatically and budgets rising by a set percentage, change spending shrank in real terms. Rising rates then raised the hurdle for long-payback projects. A multi-year modernization program with benefits five years out looked weaker at a higher cost of capital than it had a year earlier. For some banks, wider net interest margins in 2022 eased the pressure for a time. Credit unions and community banks with thin margins and concentrated processor contracts had less room.

The squeeze was not evenly harmful. It forced discipline that many programs needed. Large single-release programs became hard to defend, and programs broken into stages with measurable value at each stage fared better. A digital account opening rebuild that ships in quarterly increments, each tied to a metric such as completion rate or time to fund, can survive a budget cut. A three-year core replacement with one go-live date cannot easily be trimmed without being stopped.

The tools for protecting a change budget are well known, if not always used. Set the run and change split explicitly at the board or committee level, rather than leaving change as the residual. Stage-gate major projects, releasing funds at each gate on evidence of value. Pair every new investment with a decommissioning target, so that retiring old systems reduces future run cost. Re-test business cases at more than one cost of capital, so that a rate change does not surprise the committee.

Each tool has a cost. Stage gates add governance overhead and can slow programs that need sustained momentum, such as a core conversion with a fixed vendor schedule. Decommissioning targets require business owners to give up familiar systems, which they resist. An explicit run and change split exposes trade-offs that executives may prefer to leave implicit. Those costs are real, but they are smaller than the alternative, which is a modernization agenda that quietly stalls while the run budget grows.

With hindsight

Inflation proved far more persistent than expected in late 2021, and the tightening cycle that began in March 2022 was the fastest in decades. Technology costs at financial institutions rose through contract escalators, wages and vendor price increases. The rate environment also reshaped deposit competition and, in spring 2023, contributed to the failures of several regional banks, which pushed many institutions toward caution on discretionary spending. Inflation later eased, and the Fed began cutting rates in September 2024, but contracts and salaries reset in 2022 and 2023 carried higher cost bases forward. By this point in 2026, the institutions with the most room for new work are those that measured run costs as unit costs, set the run and change split deliberately and staged their programs. Those that let change absorb every increase are still catching up.