Digital Transformation

Digital Transformation in Banks: Impact and Roadmap

Banks have been using technology to improve their operations for decades. However, the pace of digital transformation has accelerated in recent years.

Banks are no longer the primary source of financial services as non-bank financial institutions such as insurance companies, pension funds, investment funds, and finance companies are disrupting the financial services status quo. Non-bank financial intermediaries (NBFIs) can make the financial system more efficient and unstable. One reason the sustained increase in non-bank financial intermediation may matter is systematic differences in the balance sheet structures of banks and non-banks. Loans comprise most banks’ assets – some 60% – while only accounting for under 10% of investment fund assets.

Add to this the rise of digital banks —challenger or direct banks —which are licensed to provide the same banking services as traditional banks but without the physical infrastructure (e.g., no physical branch or ATMs). These digital banks operate entirely online and are designed to be cheaper and more flexible than traditional banks.

Digital Transformation in Banking

Digital transformation in banking refers to integrating digital technologies into all areas of banking operations. It refers to a network of digital channels, platforms, and tools that create a seamless and efficient customer banking experience. A digital ecosystem includes everything from mobile banking apps to online banking portals, chatbots, and more. For example, a customer should be able to start an application for a loan on their mobile device and complete it on their desktop computer without having to start over.

Transformation is not just about using digital channels to interact with customers. Instead, it involves fundamentally changing how banks operate, from their internal processes to customer-facing interactions. 

Digital transformation also requires having a fully integrated experience between banks and other providers such as telco, automotive, retailers, Etc. This means that banks are part of an overall ecosystem allowing customers to deliver on their needs. This integration can be achieved through open banking and IT integration with partners.

“Transformation involves fundamentally changing how banks operate, from their internal processes to customer-facing interactions.”

Banks can have a fully integrated experience with other providers through personalization features that help maximize functional benefits (e.g., loyalty programs) and simplify daily shopping activities by embedding transactions seamlessly (and often invisibly) within customer journeys and giving customers fast, convenient access to diverse retailers and service providers.

Banks can also enable white-label or cobranded financial services through partners to build on the increasing trust in other brands to distribute their products. White-label banking is another term for private-label financial services or banking-as-a-service (BaaS). Banks open their application program interfaces (APIs) to let third parties build their financial products with existing infrastructure. A white-label fintech service can be considered a partnership between a company and a financial institution. They share responsibility for providing financial services without legally owning each other’s assets or liabilities.

White labeling fintech solutions offer companies the ability to provide services such as virtual accounts, payments, credit facilities, stockbroking, digital wallets, or even a combination of all of those under their brand name while leveraging on another company’s technology stack. Some examples of white-label banking services include savings and checking accounts, current accounts, debit and credit cards, simplified bill payments, online payment transfer systems, personal loans, mortgages, and insurance.

The Impact of Digital Transformation on Brick-and-Mortar Banks

The impact of digital transformation on brick-and-mortar banks is significant. Traditional banks must adapt to the changing digital landscape or risk losing customers to more digitally-savvy competitors.

One of the most significant impacts of digital transformation on brick-and-mortar banks is the shift in customer expectations. Customers now expect a seamless and efficient banking experience across all channels, including digital channels. This forces brick-and-mortar banks to invest in digital technologies to remain competitive.

Another impact of digital transformation on brick-and-mortar banks is the shift in how banks interact with customers. In the past, banks used physical branches as the primary means of interacting with customers. There needs to be more to remain competitive. Banks must now interact with customers through multiple channels, including mobile apps, online portals, and chatbots. In addition, social media providers have been rapidly gaining traction, especially among younger consumers. This may be happening faster than many bankers think: 57% of millennials and 64% of Gen Z consumers now say they have a financial account with a nontraditional institution. Banks, therefore, must find ways to offer banking services through social channels such as social media and WhatsApp.

Social channels can be used to provide digital services in the following ways:

  • Customer service: Social media platforms can be used to provide customer service and support. Customers can ask questions and receive answers in real time.
  • Marketing: Social media platforms can be used to promote digital services and reach a wider audience.
  • Sales: Social media platforms can sell digital services directly to customers.
  • Feedback: Social media platforms can be used to gather feedback from customers about digital services.
  • Collaboration: Social media platforms can collaborate with other businesses and individuals on digital services.

However, banks need to maintain compliance with regulations and security while offering digital services by:

  • Developing a data compliance plan: Data security compliance won’t simply happen because a bank strives to make smart data security choices. It needs a plan outlining how it will comply with data security regulations.
  • Performing regular data assessments: Regular data assessments can help identify potential vulnerabilities and areas where a bank may be at risk of non-compliance.
  • Assessing what kind of data the bank has: It’s important to understand what type of data the bank is dealing with regularly.
  • Protecting against impermissible use or disclosure: This includes maintaining confidentiality, integrity, and availability of all electronic personal health data, identifying anticipated security threats, and protecting against impermissible use or disclosure.
  • Enforcing regulatory and compliance requirements: This includes protecting against threats, managing and monitoring risk, and enforcing regulatory and compliance requirements.

Benefits of Digital Transformation for Banking

Digital transformation in banking offers several benefits, including:

1. Improved Customer Experience: Digital transformation can help banks create a seamless and personalized customer banking experience, increasing customer satisfaction and loyalty.

2. Reduced Costs: By streamlining internal processes and reducing the need for physical branches, digital transformation can help banks reduce costs.

3. Increased Competitiveness: Increased competitiveness is driven by the agility/speed that an organization can achieve a digital transformation because it allows banks to stay ahead of their competitors and meet the needs of their customers more effectively.

4. Improved Risk Management: With digital technologies, banks can more effectively monitor and analyze customer behavior, which can help them detect and prevent fraud and other types of financial crimes.

Challenges Faced During Digital Transformation in Banking

Despite the many advantages of digital transformation in banking, there are also several challenges that banks may face during the process.

1. Legacy systems and siloed data: Integrating new digital technologies with legacy systems can be complex, time-consuming, and requires significant investment. Banks must ensure they have the right technology and infrastructure to collect and analyze this data effectively. They must also provide the proper security measures to protect their customer’s sensitive data. Legacy systems often also cause siloed data. When an organization has outdated computer systems or software not designed to work with modern technology, it can be challenging to integrate data from different sources. This can result in data being stored in separate databases or systems that are not connected or integrated, that is siloed data.

Another challenge is that customers expect a personalized experience across all channels, including mobile, online, and in-person. Banks must ensure they deliver a consistent experience across all channels and use customer data effectively to personalize their offerings.

2. Customer data and securing a digital landscape: With more digital channels comes an increased risk of cyber-attacks and data breaches. Banks must implement robust security measures to protect customer data and prevent unauthorized access. Banks also need to secure a digital landscape to protect their customer’s sensitive data from cybercriminals constantly looking for ways to exploit vulnerabilities in the system. They must ensure their digital infrastructure is secure and have the proper security measures to prevent unauthorized access to their systems by using a layered approach to data security. This includes using encryption to protect data no matter where it is, requiring multi-factor authentication to access data, and establishing secure processes to ensure security is implemented and tested. Additionally, banks can strengthen their cyber resiliency using a superior digital insights platform.

3. Right technology partners: Banks must ensure they are working with partners who can provide them with the right technology solutions. They need to ensure that their technology partners can help them deliver a seamless customer experience across all channels and that they can help them meet their regulatory requirements. They should also ensure partners align with their strategic goals, are committed to helping them achieve these goals, and are willing to work collaboratively with them.

4. Skills gap and Internal Resistance: Lack of digital skills could jeopardize companies with misaligned talent plans. Skill set or talent gaps are the top barriers organizations believe will prevent them from achieving their digital transformation goals. The digital skills shortage requires educational and capacity-building organizations and all other stakeholders to reform their training programs urgently.

Internal resistance is also a significant obstacle to digital transformation success. Digital transformations require cultural and behavioral changes such as calculated risk-taking, increased collaboration, and customer-centricity. Resistance to change hinders digital transformation success.

To overcome resistance to digital change, banks need to create and implement an internal change management plan that outlines the steps that are to be taken to communicate the value of a digital transformation and enable employees with the skills and knowledge needed to adapt and embrace the change. A digital change management plan includes five components:

  • Switch to learning mode and encourage employees to do the same.
  • Emphasize that digital transformation is about the experience, not technology.
  • Talk about digital transformation’s role in security.
  • Go cross-functional in the pitch.
  • Launch the digital change management plan.

Roadmap to Digital Transformation

Digital transformation in banking is a complex process that requires careful planning and execution. The following are some steps banks can follow to ensure a successful digital transformation:

1. Assessment: In this stage, the bank assesses its current technology and identifies areas that need improvement. This includes identifying gaps in technology or skills that may prevent the organization from achieving its goals.

  • Define the Vision: The first step in any digital transformation project is to define the vision. Banks must clearly understand what they want to achieve through digital transformation and how it will benefit their customers and the organization.
  • Assess the Current State: The next step is to assess the organization’s current state. Banks must understand their existing systems, processes, and technology infrastructure to identify gaps and areas for improvement.

2. Strategy: In this stage, the bank develops a strategy for implementing digital transformation.

  • Define Objectives: This includes identifying specific goals and objectives for the transformation. This step should outline the steps required to achieve the vision, including timelines, budgets, and resource requirements.
  • Engage Stakeholders: Digital transformation in banking requires buy-in from all stakeholders, including customers, employees, and partners. Banks must engage stakeholders throughout the process to ensure they understand the vision and support the transformation.

3. Implementation: In this stage, the organization implements its digital transformation strategy. This may involve making changes to existing technology and processes, as well as introducing new technology and processes.

  • Accelerate Innovation and Customer Experience on the Cloud: Banks must use technology to transform products, attract customers, empower employees, and optimize operations. Building resilient, secure, and compliant operations is one way to accelerate innovation and customer experience on the cloud. 
  • Adopt New Technologies: 
    • Blockchain can help banks reduce settlement costs. By leveraging technology such as queue management systems, self-service kiosks, and other automation tools, banks can reduce the resources required to serve customers while maintaining the same level of revenue.
    • Artificial intelligence (AI) has been a game-changer in the banking industry’s digital transformation journey. According to a proposed framework for the digital transformation of the banking sector, there are three levels of application of artificial intelligence in digital banking. The first level refers to using machine learning in teaching machines to learn patterns to realize digital banking. The second level involves using natural language processing (NLP) and chatbots for customer service. The third level consists of using AI for fraud detection and prevention. To remain competitive, incumbent banks must become “AI first” in vision and execution, transforming the full capability stack, including the engagement layer, AI-powered decision-making, core technology, data infrastructure, and operating model. 
    • The Internet of Things (IoT) is an independent communication between objects that optimize operations, reduces costs, boosts productivity, and improves lives. IoT can transform customers’ experience in the banking environment by offering them fully digital services and minimizing direct interaction with clients. IoT solutions and devices embedded in banking infrastructure/wearable allow users to make payments effortlessly without debit/credit cards. Moreover, NFC-powered devices can enable contactless payments to ease online transactions. Banks can monitor customers’ activity through IoT-connected ATMs using data found on environmental parameters, including room temperature, light, and motion.
  • Actively Shape Day-to-Day Behavior: Through the use of various methods such as gamification, nudging, and social proof. Gamification involves using game mechanics such as points, badges, and leaderboards to motivate customers to engage with digital banking services. Nudging involves using subtle cues to encourage customers to adopt the desired behaviors. The social proof involves using peer influence to encourage customers to adopt the desired behaviors.
  • Systematically Reinforce Internal Capabilities: Leading banks invest in new capabilities only when designing a customer journey that specifically requires them. Banks can achieve end-to-end enablement much faster by combining this approach with a focus on front ends, including implementing micro front ends. Another way banks can systematically build new capabilities is by using their internal data more effectively for their operations by adding new analytics capabilities. This can help banks create new offerings, such as reports or benchmark analytics based on bank data.
  • Build Resilient, Secure, and Compliant Operations: Banks should utilize their existing governance structure to establish, oversee and implement a practical operational resilience approach that enables them to respond and recover from operational disruptions. In addition, a successful digital system must cover all business operations. With heavy competition, more than piecemeal productivity gains and ad-hoc plugins are needed to retain customers.
  • Drive Operational Efficiencies: Banks have deployed tools including lean, process digitization, robotics—and, in some cases, advanced analytics—to lower operations costs on the one hand and provide customers with experiences that match those delivered by digital natives like Amazon or Uber. A seamless innovation delivery pipeline built on agile principles is key to continuous improvement.

4. Measurement &Continuous Listening:

  • Measure:  Banks should measure the success of their digital transformation efforts and identify areas for improvement. This may involve collecting data on key performance indicators (KPIs) such as:
    • Return on Digital Investments: This metric measures the value provided by individual priority digital initiatives and their collective support of strategic organizational goals.
    • Digital Sales: This metric measures how much revenue digital channels generate.
    • Digital Adoption: This metric measures how many customers are using digital channels to interact with their bank.
    • Digital Talent: This metric measures the availability of digital talent within the organization.
  • Listen to Customers: Banks should proactively get continuous feedback on essential topics across the customer and employee lifecycle. Banks can aggregate data through Voice of the Customer (VoC) programs plus usage data from Fullstory to discern relevant issues and identify the most desirable interventions for improved CX.

Customer-Centric Digital Transformation:

Digital transformation can only be successful when banks adopt a customer-centric mindset and commit to uniting around the customer and the employee. This is achieved by:

1. Understanding customers in the digital space: This step involves understanding customers’ needs and preferences in the digital space and how the bank can meet those needs. The bank should then define the relevant journeys, prioritize the key ones, draw the forecasted outcomes, and juxtapose them with the digital transformation implementation.

2. Promoting omnichannel touchpoints to gain insights: This step involves creating a seamless customer experience across all channels, including social media, email, chatbots, and other digital platforms. By doing so, banks can gain insights into their customers’ behavior and preferences across different channels.

3. Breaking down data and uncovering what customers seek: This step involves analyzing customer data to identify patterns and trends that can help understand what customers are looking for. Cloud platforms such as FullStory, Medallia, and Qualtrics enable banks to understand their customers better and improve their overall experience.

4. Developing an engaging user experience on the platform: This step involves creating a user-friendly interface that is easy to navigate and provides a seamless experience for customers. Banks can use design thinking principles to create a user-centered design that meets their customer’s needs and preferences.

5. Creating a flexible IT environment: To achieve a flexible IT environment, banks should adopt cloud computing. This allows the following:

  • Scalability: Scaling up or down IT resources based on business needs. 
  • Agility: Quickly deploying new applications and services without significant upfront investment in hardware and software.
  • Flexibility: Accessing IT resources anywhere in the world with an internet connection. 

6. Aligning all departments and functions: By creating a unified approach, banks can ensure that all departments are aligned around the customer and are working together to create a seamless experience.

Future of Banking in the Digital Age

Digital transformation in banking is not just about adding digital channels; it is about building an entire digital ecosystem that serves customers’ needs. A digital mindset enables organizations to become more customer-centric by understanding and meeting customers’ changing needs. Recent research shows that 70.5% of executives say that the factor for driving their digital transformation is improving customer experience compared to 28% who say it is to access new technologies.

Banks can create a seamless and efficient customer banking experience by investing in digital technologies, reducing costs, staying competitive, and improving risk management capabilities.

As we look to the future, banks will use data analytics and machine learning algorithms to better understand customer needs and preferences, allowing them to provide hyper-personalized products and services. They will collaborate with Fintechs, support digital payments, and uncover data and AI opportunities.