2010s: The Digital Transformation of Financial Services
Two words have remained vibrant in the business world over the last decade: Digital Transformation. Since 2009, the combination of technology and consumer preferences have had a transformative impact on industries globally — no industry being more impacted than financial services. The 2010s has been the decade with the most industry change in banking. With my 14 years of financial services experience in banking and FinTech, across Top 5 banks in the US — there’s a lot to share about the digital transformation in financial services. Here’s what we’ll cover:
After the Financial Crisis, the financial services industry was in flux;
Digital Transformation, full of technology and promising innovation, was implemented as a remedy for banks to stay viable;
Digital Transformation and Financial Technology (FinTech) may both rely on technology, but are not the same;
Over 10 years later, there are still ongoing challenges from digital transformation today.
BANKING IN THE POST-FINANCIAL CRISIS ERA
The industry was reeling from the aftermath of the Financial Crisis — big banks were public enemy #1 due to the mismanagement of home lending guidelines (subprime mortgages) and exorbitant banking fees. Protests and demonstrations became common as the public decried banks being allowed to stay in business. Demanding that financial institutions pay back what they had done to the economy, the Occupy Wall Street movement emerged. Protestors would take to the streets and force themselves into branches.
Regulators compelled institutional changes to bank fees, interest rates, and account agreements in favor of consumers who had been paying hundreds (at times thousands!) annually in bank charges. I cringed when helping customers that had accumulated up to $350 in daily overdrafts (for transactions less than $20 each!).
To minimize the loss in fee income, banks had to reduce costs quickly — staffing levels (both in the branch and offsite) were the first major overhaul. Despite the same amount of customers waiting in line for their monthly banking needs, teller lines went from 5-6 associates down to 2-3. Customers waited twice as long to complete the same transaction, which drove down customer experience to all-time lows complaints.
The next change was in back office fulfillment centers. The industry had delayed changes to replace manual, outdated processes that required paperwork and back office processing centers. Entire departments that were in place to process teller line transactions started to wither and lay off employees as banks started to focus on automation to save on costs from personnel.
ENTER DIGITAL TRANSFORMATION
To offset the drop in bank staff both inside and outside of retail branches, bank executives turned their focus towards technology to give customers self-service options, and fully automate the banking industry. ATMs were beefed up to accept cash and check deposits, and perform withdrawals in multiple denominations. Online banking was enhanced to allow for internal transfers and payments to credit card or loans. Branch equipment was upgraded to scan checks, deposit, and withdrawal tickets — eliminating the need for processing centers.
In 2009, these changes were being labeled by bank executives in annual meetings as “Digital Transformation.” By definition, digital transformation is the continuously-changing use of digital technology to solve problems in business. Instead of physical hardware and servers, cloud computing was used to help speed up development in multiple industries across the globe. Additionally, low-cost subscription-based renewal models for software allowed companies to upgrade to newer models at a faster rate than ever before. For businesses able to act on digital transformation, the benefits were huge — lower cost of doing business and automation being the most sought after, especially for firms looking to go paperless. Banking was an industry in dire need of becoming paper-free automated.
Regional Managers applauded how these technological advancements reduced customer wait times and helped clients “skip the line.” Branch Managers weren’t as excited because they were tasked with the difficulty of changing the consumer behavior of irate clients asking for more tellers, which were there a few months earlier. Customers were not given clear communication about how the branch service model was changing, and how they would be required to change as well.
Bank staff questioned the longevity of their own roles, and how digital transformation would truly impact their job. The traditional retail branch model was demolished in favor of a leaner structure built on more technology and less staff. Most physical locations today have 3 - 5 associates working today, comprised of 2 customer service representatives (who process teller transactions and account maintenance), 2 bankers at desks (who open new accounts or process loan applications), and one supervisor / manager walking the lobby floor or approving transactions. Branches located in dense, urban areas may have more staff on hand at desks as bankers.
DIGITAL TRANSFORMATION VERSUS FINTECH
From the aftermath of the Financial Crisis, a mix of banking regulation and new technology supported the birth of FinTech upstart companies — who aimed to improve financial services from the bottom-up instead of top-down.
Technology in financial services is the simplest definition for FinTech. However, digital transformation and its emphasis on institutional incumbents updating the industry technologically is not the same as FinTech. A few clear distinctions that separate the two movements:
Digital Transformation is based on banks making it easier and affordable to continue delivering a business model based on increasing deposits and making loans based on deposits, monetizing on deposit interest and loan interest revenue. Digital transformation is bank-centric.
FinTech is based on making financial services accessible and affordable to potential users around the world, by lowering (or completely removing) the minimum requirements to have a bank product such as deposit balances or recurring direct deposit from payroll. FinTech is completely customer-centric.
Digital transformation was a reactive movement based on the need to lower costs and deliver a banking model that maximized diminishing margins. It was led by bank leaders looking to maximize shareholder value.
FinTech is a proactive movement to completely change traditional bank models in favor of benefiting customers first and foremost. It is led by innovators looking to maximize stakeholder value.
Digital transformation has reached maturity as the biggest changes to automation, efficiency, and delivery of services have been reached. Further enhancements would only yield small, incremental progress.
FinTech is still evolving and yielding advantages in multiple sectors of financial services, from banking and wealth management, to real estate and financial planning. The future will bring dynamic changes not only in how customers interact financially, but in how consumers improve their financial wellness.
CHALLENGES IN DIGITAL TRANSFORMATION TODAY
Despite the success of digital transformation and popularity of FinTech in changing financial services, there is still a huge barrier for banks to overcome today: their current technology infrastructure. Internal transformation initiatives taking place today have only addressed banking functions within individual business units, while banking “cores” (the architecture that executes transaction requests and stores data) has remain unchanged.
Financial institutions have struggled in taking the first step in making this tremendous change happen: creating a unified, digital business strategy for their whole enterprise. In building such a strategy, there are three items that leadership needs to tackle head-on:
Reinvent the customer journey — optimizing customer onboarding to resemble what large tech companies are able to provide is the ultimate goal here. Both consumers and businesses of all backgrounds want a solution that allows them to signup and activate an account as quickly as possible (instead of days or weeks). Being able to digitally enhance all activities within a customer journey (prospecting, advice and sales, onboarding, transactions, and administration) will yield the most success. To begin, banks should focus only on the most valuable customer path they offer instead of all journeys at once.
Leverage the power of data — using data analytics internally is one of the biggest opportunities that banks have to digitally transform. Customer data is available that shows clients who are underpaying through discounts, likely to be delinquent on payments, or would qualify for upgraded products and services. Ultimately, data can be used to provide clients tailored advice based on their financial transaction history which could improve their financial wellness in areas such as debt, savings, and retirement.
Redefine the operating model — changing from traditional operating structures of large branch networks towards digital has been a slow advance for financial institutions, especially for regional banks and credit unions. Depending on early success in digital transformation efforts, banks can have a digital add-ons initiative (i.e. slowly rolls out small changes), a separate digital division within the organization (that rolls out company-wide digital initiatives), a separately branded digital offering outside the organization (with a new core infrastructure), or a mixture of the three. Overall, each method has various pros and cons for profitability, integration, existing customer base, and employees.
For established financial institutions that have existed for 50+ years, the need for digital change must be treated as a priority from beginning to end. The most common reasons of struggle for building a strategy that addresses the items above and legacy issues of the past are:
Commitment in managing two cultures simultaneously, the old traditional bank and the new digitally enhanced firm;
Overcoming slow-to-change implementation and difficulties in scaling efforts across the organization;
Not having the right staff with the data and analytics skills to make the digital change happen quickly;
The organization as a whole refuses to change the status quo;
Integrating digital changes on top of legacy bank infrastructures.
outlook on digital transformation
Efforts of transformation in business have been painful and costly, especially in the digital space. In financial services, the pain comes from structures and ways of operation that did not uniformly evolve with changes in technology. Additionally, not every dollar invested has yielded a positive return.
What started out as banks looking to cut expenses and increase margins, has become a need for survival by financial institutions that will be even more threatened by innovative and adaptable fintechs and large tech companies completely focused on the best customer experience.
Digital transformation has focused on making this change as quickly and efficiently as possible, despite the internal pressure to keep financial services as “business as usual.” Turning around deeply rooted processes and organizational structures will continue to be the biggest hurdle for executive leaders and institutional shareholders. Banks will also need to be concerned with balancing access and convenience for customers with protecting data privacy.
In 2020 and beyond, digital transformation will merge with FinTech in adopting technology solely for the benefit of consumers. Banks delivering the best solutions and financial services experience will succeed, while institutions focused on incremental change in rates or pricing will slowly lose market share.
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