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Banking in the Digital Age: Navigating The Landscape of Digital Transformation

Karl Gorman

March

2023

Banking in the Digital Age: Navigating The Landscape of Digital Transformation

Over the past decade, banks, or financial institutions in general, have been moving very slowly in the adoption and adaption of digital transformation in their industry. Even in the world of today, where a lot of banks have gotten much more involved and invested in the concept, the current state of digital transformation in banking still requires several major improvements in multiple sectors.

There has perhaps never been a more crucial time for banks to hop on the wave of digital transformation in their services apart from now. This urgency can be attributed to the fact that, for every bank, customers are their most important asset, and in today’s world, customers have embraced digital frontiers more intentionally.

It is, therefore, important for banks to meet customers where they are and not be left behind in the digital wave. To excel, a need has developed for banks to make the necessary assessments, consult with relevant personalities and compare with their competitors to identify the avenues where customers are spending their time and forming expectations about digital experiences.

This article will explore the concept of digital transformation in the banking sector, some key steps that are required to properly adopt digital transformation in the banking industry, some challenges banks may face along the way, and possible solutions that can help with overcoming these challenges.

Table Of Content

A Background to the Need and Current Status of Digital Transformation in Banking
Six Key Factors to Navigating The Landscape of Digital Transformation in Banking
Challenges Banks Face in the Adoption and Adaptation of Digital Transformation in Banking
Benefits of Digital Transformation in Banking
Conclusion
FAQs

A Background to the Need and Current Status of Digital Transformation in Banking

Let’s go over a few things that’ll help you grasp the situation better.

What is Digital Transformation in Banking?

Digital transformation in banking can be described as a functional and cultural shift toward incorporating digital technology into all aspects of banking to improve the value of services delivered to customers. Where properly implemented, digital transformation improves a bank’s capacity to compete in a continually crowded market.

Over the past few years, start-up tech companies have overtaken banks in the areas of customer acquisition and engagement. A lot of people (both business enthusiasts and consumers) have begun to migrate toward digital experiences because of the ease and comfort that comes with using digital platforms for their everyday activities. Banking institutions are, however, lagging in this cultural shift.

The reason why tech companies are much better at engaging users than traditional banking institutions can be attributed to the fact these tech companies have been designed centered on users from the very start. They have the latest information about the cognitive psychology, usability, accessibility, and behavioral economics of their consumers because these concepts have been ingrained in their strategy from the very beginning.

Banks are, unfortunately, just recently heavily investing in user research technology and new methodologies (agile, for example) for digital transformation and to create a more user-centric experience for customers to increase their engagement and user satisfaction. There is, therefore, a crucial need at this time for banks to pay more attention to improving the experiences of their customers on their platforms.

How do customers feel about digital banking?

As previously established, the need to implement digital transformation in banking for every bank is based majorly on the acquisition, stimulation, and retainment of its customers. Over the past decade, research conducted into users’ experiences on digital platforms by finance-savvy bodies revealed certain statistics, such as:

“55% of customers would be comfortable using a technology company, such as Apple or Google, for various types of financial transactions.” (Fiserv, 2018)
“56% of customers prefer to interact with their financial organizations via digital platforms, compared to a contrasting 34% which preferred branch interactions.” (Fiserv, 2019)
“Digital-only customers now account for nearly 30% of retail bank clientele.” (J.D. Power and Associates, 2018)
“Customers who don’t use their bank’s mobile apps are twice as likely to be dissatisfied and not recommend that bank.” (The Financial Brand, 2014)
“43% of bank customers regularly use mobile banking.” (Federal Reserve Bank, 2016)
“44% of Generation Z customers anticipate supplementing traditional banking services with solutions from technology companies.” (Raddon Research, 2017)

These statistics prove certain points concerning customer’s inclination toward digital experiences:

Customers are gaining trust in non-traditional providers of financial services,
Young customers are gravitating towards familiar apps as opposed to traditional banking,
Tech companies at better at the engagement of customers,
More than half of bank customers prefer digital interactions to branch visits.

These points summarize the trend of customers’ acceptability of digital transformation. It is important to note, however, that there are certain exceptions to these points. Let us take, for example, the last point explaining that most bank customers prefer digital interactions to branch visits.

This is true for some basic activities such as viewing balances, transferring money, and depositing checks. However, complicated banking activities such as opening and closing accounts, or dealing with fraud events, have branches taking preference. It is, however, expected that as technical capabilities and customer comfort with using technology improve, more of these complicated interactions will move to digital platforms.

Where are banks today, and how prepared are they for digital transformation?

Although as much as 58% of the top 50 global banks already view digital transformation as extremely important (Bankless Time, 2018), up until quite recently, banks have been significantly lagging behind both in preparation for and adoption or adaptation of digital transformation. This is especially true for smaller banks without excess capital, but there are other reasons why even large corporations have been unable to adopt the trend, such as: fully.

Most banks claim their core systems can’t support it,
Five out of seven banks have been less than halfway there in the last decade. 85% of the bankers said they were halfway there or behind. (Net Finance, Adobe, 2014)
Only one in three banks have digitized even basic banking functions,
Half of the banks at the end of the last decade had no strategy. Only 7% of bankers thought they were well prepared for digital transformation. (The Financial Brand, 2019)
Banks, because of their complexity, size, legacy, and systems, are lagging behind.

What, then, are some steps that can be taken to incorporate digital transformation in banking effectively? in the implementation of digital transformation for banks, what are some of the strategies to adopt? Let’s explore.

Six Key Factors to Navigating The Landscape of Digital Transformation in Banking

Banks, being the large financial organizations they are, are unique in their structure. Although they may bear some similarities with most other large organizations, it is important to note that when undergoing a lasting change like digital transformation, they cannot simply follow the patterns that most other large organizations have followed for successful implementation but must adapt them to fit their unique structure. Some of the approaches they can take include:

Partnerships

Collaboration and integration with e-Commerce platforms, Fintechs, and other tech companies geared toward an improved customer service experience is an applicable way of implementing digital transformation for banking. This approach is especially unique because it involves both parties being able to make up for the shortcomings of the other, and also being able to rely on the strengths of the other.

Fintechs and tech companies also have restrictions on how far they can go and are slowly hitting the limits of what they’re able to do independently for end users. Banks and fintech are therefore projected to start partnering even more in the future, which can take several forms, including acquisition or partnership.

Cultural shift

“Most banks and credit unions have simply put a nice veneer on legacy systems and products, ignoring the meaning of the internal changes that are needed to compete effectively with smaller fintech and big tech organizations.” (The Digital Banking Report).

Digital transformation in banking should be about more than just interfaces, websites, and user experience. Banks need to undergo a cultural shift. This means that banks’ corporate culture must undergo a complete and comprehensive change. This change must span the entire structure of the bank, all the way from the top brass down to lower-level team members.

Incorporation of agile methodologies

Agile is “an iterative approach to project management and software development that helps teams deliver value to their customers faster and with fewer headaches.” (Atlassian, 2023). Agile teams deliver services in smaller but substantial increments. It also involves continuously re-evaluating methods, plans, and results so changes can be responded to quickly.

Agile is, however, a form of management that was designed for the development of software. This means that banks must find a way to adopt agile methodologies word for word but must filter and adapt their concepts to accommodate ideation, research, design, and innovation and research for financial institutions.

Focus and improvement on customer experience

This is perhaps the most important approach to digital transformation in banking. Customer acquisition, retention, and satisfaction are key for every bank. Customers, however, demand a frictionless user experience, and tech companies are leading financial institutions in this particular aspect.

53% of wealth management clients view digital platforms as the number one factor influencing the client service experience. In their digital transformation process, banks must ensure that user UX delivers easy, intuitive, consistent access and usability in everything customers do. Banks have a highly unexplored advantage in this aspect over tech companies.

Banks have a lot of data (over fintech). They must learn how to tap into these data reserves using machine learning (machine learning can discover customer patterns that enable future predictions and ideal product offers), AI (Artificial Intelligence), and other tools to use to improve customer experiences in ways that even fintech cannot match.

Integrating physical branches into digital transformation

In recent times, banks have done commendably well in digitally transforming their branch experiences because branch experience is now more omnichannel, i.e., involves the integration of different methods of interaction available to customers. For example, A customer walks into a branch with their smartphone, running the mobile app, and the banker also runs an application on their tablet or computer. The branch, therefore, runs both the digital experience and the in-person experience at the same time to serve the customer in the best possible way.

The human connection branches provide, however, their most important and powerful component. Branches are important for people who have challenges with technology use (senior citizens, for instance) and people who have high-value relationships with their financial institutions. In many research statistics, the highest overall satisfaction with their banks comes from branch-dependent digital customers.

Training personnel to bridge the gaps in digital skills

The nature and needs of bank jobs are changing. 30% of the work currently done at banks is already being handled by intelligent automation. Banks have a difficult time filling IT positions, and this is because skill acquisition has recently become more effective and important than talent acquisition.

The banking industry has the widest gap in digital talent of all industries: 62%. To combat this, the rules and skills of the workforce will have to be more fluid, and employees need to be more agile. Retraining current employees is also now essential to this digital shift.

The most promising focus of skills training needs to be in agile, data science, and cloud technologies. Banks can improve skill gaps by training team members to embrace technology, learn about it and understand it better to be able to help their clients understand how technology works and adopt it.

It is also important to develop the soft skills of the workforce: leadership skills, organizational skills, and communication skills being the most important. Banks should particularly invest in this training for team members involved with agile and different types of technology applications in a bid to ultimately create a good user experience for their customers.

Pros of Digital Transformation in Banking

Successful implementation of digital transformation for any particular bank comes with its advantages. Some of the benefits of digital transformation for banks and customers include:

Maximal utilization of customer data and resources.
A seamless digital experience for customers ultimately improves their loyalty to their banks.
Training of the workforce improves both their digital and interpersonal skills, both within employees and between employees and customers.
The incorporation of agile methodologies in digital transformation helps facilitate faster results for projects and faster responses to any queries.
Partnerships with Fintechs and other tech companies help make up for shortcomings from either side of the parties.

Challenges Banks Face in the Adoption and Adaptation of Digital Transformation in Banking

Digital transformation has obvious benefits, but it’s also essential for banks to be aware of the challenges they might face along the way. These challenges include the following:

Costs and Technology: This is especially true for smaller banks. The costs that come with the acquisition and maintenance of new technology and personnel make digital transformation difficult to commence or maintain. There must be a sufficient budget to back up any attempt at digital transformation.
Corporate Culture: The corporate culture of financial institutions is perhaps the most difficult barrier to digital transformation. This is why a cultural shift is imperative to digital transformation. Commitment to transformation is required to go into the deepest levels of financial institutions, right from the CEO to the lower-level members.
Organizational alignment: Organizational alignment and company culture are just as important as new technology platforms. Organization of commitment includes the budget for technology funding, talent acquisition and development, developing and executing agile workflows, empowering teams to make decisions, and a willingness to take risks.
Avoidance of Risks: Banks are usually and historically risk-averse, i.e., they avoid unnecessary risks. This can be due to the corporate culture of banks, as well as the regulations by which they operate.

For transformation to be successful, risks have to be taken. There has to be distributed decision-making, which also requires empowering lower-level team members to make decisions. This is challenging for banks and financial institutions because most of the decision-making is centralized at the top.

To facilitate this, it is critical to recruit, develop and retain people who know how to make the right decisions and can thrive in agile environments. This is neither a simple nor fast process.

Poor Utilization of Resources: It has been established that banks have resources that give them an upper hand over Fintechs and tech companies, such as customer data. The challenge is, however, how to extract order and value from these very large sets of data and use it to create meaningful, timely, and personalized experiences.

As artificial intelligence and machine learning advance, there are more opportunities to identify and predict customer needs based on behavior. For example, a bank notes that a customer keeps a highly stable balance in a savings account and uses such information to recommend that the customer transfer their money to a different account with a higher interest rate or invest the cash in a self-directed brokerage account. This benefits the customer by giving them higher returns on their money and benefits the bank by empowering a deeper and more valuable relationship with the customer, overall increasing customer loyalty.

Conclusion

Digital transformation in banking has now become imperative for financial institutions if they are to remain relevant in a world that continues to become increasingly digital. It helps banks realize one of their most fundamental aims: to provide a seamless, convenient, and pleasant experience to their customers. It also benefits the banks in multiple ways, such as maximizing the customer data available to them.

In summary, six major keys to digital transformation in banking include: partnering with tech companies, which are fundamentally structured to provide optimal user engagements, facilitating a cultural shift from the CEO level down to the lower level members, transitioning to agile methodology, focusing on customer experience and making it better at all touchpoints, integrating physical branches into digital transformation, and bridging internal skill gaps in digital capabilities through training of incumbent employees.

Digital transformation is, however, not a hitch-free process. There are multiple challenges toward adoption and adaptation, and so banks must ensure they account for these challenges before initiating change to guarantee its long life and sustainability. Banks can also learn from the success and failures of other organizations trying to transform and adapt themselves accordingly.

FAQs

What can smaller banks do to bring their company and staff up to speed in digital transformation?

Small banks may struggle with financial capital to invest in technology for digital transformation, so they must invest in affordable and essential resources. They should also take advantage of any free resources available, both online and offline. These resources should be made available to not only executives of the bank but also the lowest-level team members to allow them to learn about digital transformation.

How does one manage/navigate a cultural shift, especially in large organizations like banks?

Providing data that helps rationalize transformation can spur executives toward transformation, such as recommendations, showing data on what competitors are doing, how they’re doing it, and how these best practices seen elsewhere can be applied and adapted to the organization. The extra step of providing thoughtful analysis and actionable recommendations can go a long way in influencing the leadership of the organization.

What’s the difference between business transformation and digital transformation?

Business transformation is much larger and much more overarching. Digital transformation is more focused on the digital channels and technology that supports the digital channels. Business transformation, however, includes more of the cultural shift necessary to ensure a successful digital transformation.

This can be facilitated by empowering more people to make decisions and take ownership of day-to-day activities instead of directions from the top alone. This improved user experiences and better team-member interactions. People who have a stake or some form of control in the activities of the institution usually feel more fulfilled.

Are Branches going to be obsolete with digital transformation?

No. Branches are a part of the bank and will change as well in the digital aspect. Branches are already changing in the sense that there is now less emphasis on personnel and size and more on the quality of services delivered. It is expected that branches will still undergo even more change.