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Going digital isn't cheap.
Banks are spending billions to keep up with the break-neck speed in technology and upgrade older, legacy systems. But firms without billions of dollars to pour into that effort are forced to get creative.
One option is teaming up. BB&T and SunTrust announced they were taking that route on Thursday, in part to stay competitive in today's digital landscape. The two plan to merge in a $66 billion deal to make them the sixth biggest U.S. bank based on customer assets.
The combined bank will be in a better position to invest in cyber defense, compete on mobile and automate existing systems, the companies said. SunTrust and BB&T told investors on a call Thursday that they factored in an additional $100 million on technology.
Changing customer demands set the stage for the "tremendous increase in the need for technological investment," according to BB&T's CEO.
"Our clients now demand what I call real-time satisfaction — they want what they want, when they want it," BB&T CEO Kelly King told CNBC's "Squawk on the Street " Thursday. "We are all facing an increasing set of complex economic realities where we have to invest more and more in technology."
While both banks are doing "fine today," King said going forward they need additional scale to make the technological investments necessary "to provide a digital platform and other technological support features."
Their competition knows this, too. J.P. Morgan Chase committed $10.8 billion to technology in 2018, according to its annual shareholder letter. CEO Jamie Dimon said roughly 30 percent of the bank's recent senior hires came from non-financial services firms. Other top banks are also taking tech seriously: Bank of America had $16 billion on reserve for global technology and operations in 2017, while 20 percent of Citi's entire budget is dedicated to technology spending.
BB&T acknowledged mounting pressure in its latest annual shareholder letter. Clients are increasingly banking on mobile devices versus visiting branches and the bank's CEO predicted technology would play an even bigger role in the bank's future.
"In the last three years I've seen more change in banking than in my previous 42 years at BB&T. And that's saying a lot," said BB&T CEO Kelly King said, who joined the bank in 1972. "For the latest, most jarring phase of change, we face a fundamental choice – disrupt our business or be disrupted."
In 2017, BB&T set aside up to $50 million to invest in or acquire emerging digital technology companies, which the CEO called a "powerful way to gain greater access to new technologies and talent while advancing a culture of innovation throughout the company."
As a result of this move to mobile, BB&T closed 148 branches in 2017 or about 7 percent of the bank's total branches, and planned to close about 150 more in 2018. The SunTrust deal should result in some consolidation between the banks' 750 branches that are within two miles of each other, the CEO said.
Financial technology start-ups are bringing their own dose of pressure. Many of these tech companies zero in on small segments of finance like lending or savings accounts, without having a bank charter. They often partner with a federally-insured bank who holds the customer deposits on their behalf.
Global venture capital spending on fintech start-ups topped $39 billion in 2018, more than doubling from a total $18 billion a year earlier, according to a recent report from CB Insights. There are now 39 fintech "unicorns," or private companies valued at more than $1 billion, globally.
"The competition is everybody," SunTrust Chairman and CEO Bill Rogers told CNBC's Squawk on the Street Thursday. "We view the competitive environment as anybody who is trying to acquire clients, and we want to be the most relevant, the most competitive and the most innovative against all competition."
The task of taking a multi-billion dollar, century-old bank digital is not an easy one. Amias Gerety, partner at QED Investors and a former acting assistant secretary at the U.S. Department of the Treasury, said the pressure to be excellent at digital is more "intense" than ever.
"The operational challenge of a digital transformation is really difficult," Gerety told CNBC. "There are technical and cultural challenges to it."
Future digital transformations may also include partnering with fintech companies, Gerety said. The two have "complementary" assets, and may very well learn to take advantage of those instead of taking the disruptor vs. disrupted approach.
Other mid-sized banks are likely face the same tech-spending dilemma. Marty Mosby, director of bank and equity strategies at Vining Sparks, is predicting more, similar consolidation for banks needing to compete on technology.
"The bigger banks have to compete with those who have the best digitization and mobile banks," Mosby said. "For them to be able to compete they need bigger scale and scope."
Mosby predicted a "barbell" effect in banking. While smaller community banks can rely on contact with customers, mid-sized banks with less customer contact need to go digital. Those on both ends will grow, leaving few options for those in the middle.
Wall Street embraced the deal on Thursday, with SunTrust shares rallying 8 percent and BB&T up 3 percent. Brian Klock, equity research analyst at Keefe, Bruyette & Woods, said the positive reaction might inspire others to do the same. Shares of Dallas, Texas-based Comerica, which Klock said had been rumored as a similar-sized take-over target, also rallied 5 percent after the news.
"The competition has gotten more intense from bigger banks and the non-banks," Klock said. "A similar deal would take any bank and put them on better footing."