The New Decade of Digital Transformation in Banking

At the end of 2019, we reflected back on the 2010s and the early digital transformation that took place in financial services. The new wave of FinTech innovation launched new products, neobanks, and upgraded models for financial institutions to follow in the last decade. Many banks were slow to make progressive changes to their digital offerings and customer experience outside of the bank branch, which we recently discussed (in the “The Road Ends for the Bank Branch”). The post-COVID era of banking will require banks of all sizes to fully commit to changes in technology and processes in the 2020s. What does this next phase of digital transformation involve?

Defining the New Digital Transformation

Digital banking transformation involves the integration of data, analytics, and digital technology into all areas of a bank or credit union, changing the way work is processed and products delivered. More than an upgrade, this type of transformation requires a deep organizational change that challenges previous frameworks, demands innovative thinking, and aligns all priorities to the client.

The objective of digital transformation can vary between client experience, cost reduction, operational efficiency, sustainable growth, or a blended target. Ultimately, the status quo of past business strategy will need to be ripped and replaced — beyond a simple design change or newly added feature.

Before the pandemic, the financial services industry was fully aware of the need for digital transformation. Financial institutions took to action based on the relative priority with their company’s other strategic objectives.

For the firms that were still in discussion stages, COVID-19 has propelled these teams to act quickly to meet the change in consumer expectations and increased competition. Adapting and transforming is no longer an option, but a path forward to survival. Recent data shows that the consumer shift to digital banking will remain even after the pandemic subsides. Banks need to act now on how to engage with customers and decide what new options are release.

Pillars of Digital Transformation in banking

In previously discussing Digital Transformation in the 2010s, we outlined how FinTech was different from the organizational changes that financial institutions were focused on. We also highlighted three critical areas that executive teams would need to strategize within digital transformation: reinvent the customer journey, leverage the power of data, and redefine the operating model. In this new decade of post-pandemic change for financial services, these areas have become more defined into pillars to be driven by leadership and firmly ingrained in company culture.

being a Data and Analytics Leader

To unlock the potential of digital banking transformation, banks must first combine data and analytics through artificial intelligence. Beyond improvements in profitability and production, the key benefits from AI enhancements are:

• Delivering a premium customer experience;

• Customized engagement to a specific user;

• Robust security and privacy controls;

At a deeper level, proficiency in AI helps deliver strong insights within an institution. The challenge in adoption comes down to lack of capabilities from banks, and not a lack of belief.

Enhance the Consumer Experience

The effects of COVID-19 have accelerated the way customers interact with their bank towards online and mobile channels. This trend is reserved not only for younger generations, but older age groups that hesitated in signing up for digital access. Recent consumer surveys (we recently discussed) indicate that customers won’t go back to the branch visits once the pandemic improves. Banks need to modify their emphasis on the legacy branch model, alter their staffing mix towards differentiated service levels, and provide a better understanding of the new customer journey.

FinTech companies have raised the bar on customer expectations in banking, especially with personalized recommendations leveraging data and insights, delivered digitally. Financial institutions need to reassess their sales and service models (in conjunction with marketing channels) towards this enhanced level of experience and communications.

Foster Innovation

The technology for digital transformation is openly available in the financial services industry. The advantage from tech comes in its adoption and application throughout an organization. This human requirement is where the best initiatives stall and eventually fail.

Leadership, cultural change, communication at all staffing levels — these are the key variables in successful change management. Speaking to the benefits on a PowerPoint slide deck won’t drive consistency needed for organizational transformation. Fostering an innovation mindset enables digital transformation to take place and achieve its goals in any bank (regardless of size).

Titles get tossed around often, but the true innovation managers focus on the needs of their client. Collecting actual feedback from customers on current expectations, formulating a strategy to realize these expectations, and implementing small improvements over time leads to the highest rate of success. If changes still need to be made, they can be done so rapidly until the desired results are achieved. Overall, innovation is the broader journey in which digital transformation plays a key part.

adding Modern Tech

The next level of digital transformation requires financial institutions to layer in new technology that consumers have become accustomed to. What’s possible in other industries from a mobile interface, should also be available within financial services. For legacy banks, these new tools will force internal change in behaviors and processes. We previously discussed artificial intelligence, but there other components the heads of banks should also consider:

• Mobile channels. An app for viewing balances and performing basic transactions is no longer sufficient. Branch banking has become mobile banking — this includes account opening, customer support, and discussing product changes. In choosing between desktop and mobile enhancements to user experience, its clear organizations must favor what consumers use most often — smartphones.

• Cloud infrastructure. Often overlooked, cloud computing has fully penetrated the banking cores at many banks and credit unions. The benefits in data collection, security, and processing are worthy of the high upfront investment. Making sure not to simply layer cloud on top of existing architecture is the current challenge the industry faces — whether its a progressive migration or all at once, this critical change needs to take place.

• Voice banking. Consumers interacting with companies through voice-enabled devices is still somewhat new. The reality is that banking inquiries and payments through Alexa or Siri may become the norm in the next few years. Large institutions, such as Bank of America with Erica, have used this interface to reduce customer support inquiries and improve client experience.

• Blockchain. No longer a buzzword in financial services, blockchain is improving payments and custody in banking. Distributed ledger technology has expanded beyond money movement to insurance and lending applications. JPMorgan Chase has developed its own Blockchain Center of Excellence to lead the exploration of what’s possible within the US banking ecosystem.

System upgrades and Process improvements

To expand on the internal challenges with outdated systems, banks are spending over 70% of their technology budget to maintain this poor performing infrastructure. The amount of upgrades that they can make on annual basis is then limited by cost, and ultimately has a smaller impact year-over-year. Choosing the best solution provider to make these incremental improvements deliver the most value is a critical need. As industry shifts take place rapidly, cloud computing becomes a mandatory part of transformation for banks and credit unions.

With the path toward system changes in place, banking leaders must acknowledge that the expected change won’t happen in real-time. There is no “one-size-fits-all” mold to digital transformation — each company has different needs and users it must optimize for. Financial institutions should target flexibility in their new infrastructure, which allows for future innovation to be implemented rapidly.

Within these system upgrades, the majority of change will take place behind the scenes with manual back-office tasks that go back 20+ years. It’s no longer efficient or cost effective to have bank personnel manage processes that can be automated and audited at a faster rate. There is no room for extensive manual review when it comes to sales and customer support in financial services. The streamlined customer interface that customers see in their app must mirror what happens in the background.

modifying Your Workforce

In branch banking models of the past, the role with the highest headcount was the teller — responsible for processing transactions in-person for customers that walked in to the bank. In today’s branch environment, this role no longer exists; on-site staff have been cross-trained to fulfill this component or technology upgrades (such as ATMs or online banking stations) perform the same functions. In a similar way, the workforce in banking needs cross-training or re-skilling to match the digital transformation within the industry.

Before new training programs or ideal employee profiles are created, the internal mindset needs to change. Staff should be proactively strategizing on ways to enhance their team/company’s output based on industry trends and customer perspectives. Too often, financial institutions focus on how a process should take place without referencing if this adds unnecessary friction for a customer.

In-house recruiters can target candidates with experience in this mindset as a long-term strategy. Company trainers can develop programs to foster the thinking and skills that the bank needs for the changes in transformation to be a success. Unfortunately, current employees in financial institutions are not receiving the communication and training needed to stay relevant at their company. This leads to waves of employee turnover that can damage the company culture at banks and cause concern for clients losing their favorite banker or teller.

the Digital Future of banking

As 2020 comes to close, banks and credit unions of all sizes have come to terms with digital transformation as an immediate priority. Whether it was completely pushed off or slow to move, organizations must act quickly and enact changes that determine their company’s performance over the next few years. The dynamic shifts in the banking landscape, competition from tech-first alternatives, and migrating off of legacy systems require action.

Leadership within financial institutions is the x-factor in successfully bringing all the components of digital transformation together. From clarity in goals and objectives, choosing technology solutions, communicating new processes and culture changes, to constantly iterating for improvements — executives have a tough journey ahead. The winners and losers will match the effectiveness and adaptability of their leaders. Market share, profitability, and longevity are all on the line this decade with digital transformation.

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