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The State of Digital Transformation in Banking

by internationalbanker

By John Manning, International Banker


Operating through a global pandemic over the last couple of years has brought certain objectives sharply into focus for the banking industry, not least regarding digitalisation. Financial institutions worldwide have been forced to accelerate their digital-transformation ambitions, whether commencing an initiative earlier than planned or bolstering those projects already underway. And with the Omicron variant of COVID-19 ensuring that the pandemic remains among the most influential issues on the banking landscape for the foreseeable future, the approaches financial institutions take towards digital transformation this year will be more important than ever.

“2020 prompted much wider and more rapid consumer adoption of digital banking, and this represents a valuable opportunity for middle market financial institutions,” Bill Topel, digital financial services leader at BDO, noted in the US bank’s recently published “2021 Financial Services Digital Transformation Survey”. “Implementing a digital strategy can help them get closer to their customers and tap new revenue and business models that will yield lasting benefits.” The survey polled 100 C-suite executives at middle-market banks, credit unions and other lending institutions, finding that most organisations had developed digital-transformation strategies and nearly half were accelerating existing plans.

Indeed, even those banks that presciently began their digital-transformation journeys several years ago with clear, multi-year strategies for modernisation are now having to face the prospects of implementing dramatic changes, not only as the pandemic continues to rage but also to remain competitive in a landscape increasingly dominated by fintech (financial technology) companies. A recent survey of global banking executives by the IBM Institute for Business Value underlined this pressing need by revealing that nearly 60 percent of respondents said that the boundaries between industries are blurring, and more than 60 percent saw competition coming from new and unexpected places. “Competition from start-ups, internet giants, and industries outside of banking, along with increased regulations, are forcing banks to accelerate their Digital Reinvention,” IBM noted.

Whether it’s reimagining the entire customer experience; overhauling the IT (information technology) infrastructure within the organisation to accommodate big-data storage and processing; implementing new technologies such as cloud computing, data analytics, robot process automation (RPA), blockchain and artificial intelligence (AI) to boost productivity and efficiency and liberate employees from performing repetitive lower-value tasks; changing the entire business model such that it can operate seamlessly in collaboration with external partners including fintech start-ups; or, indeed, a combination of some or all of the above as the word transformation implies—banking leaders continue to acknowledge more openly that digitalisation is fundamental to improving the performance of their respective organisations.

Simply put, if they haven’t done so already, then the next best time for banks to invest in digitalisation is now. And it would seem that banks have taken heed of this warning. “Credit unions got a head start on banks with 16% launching a digital transformation strategy in 2018 or earlier, versus 9% of banks that had launched a strategy by then,” according to Cornerstone Advisors’ “2022 What’s Going On in Banking” study of US-based community financial institutions. “By the end of 2022, just 11% of banks and 4% of credit unions will not have launched a digital transformation strategy. Overall, 5% of financial institution executives say that they’ve completed, or are almost done, with their digital transformation strategy.”

The pace of digital adoption has shifted into top gear since the onset of the pandemic. According to Gartner, 69 percent of boards of directors (BoDs) surveyed had accelerated their digital business initiatives in the wake of COVID-19 disruption. “Before the pandemic, most organizations moved their digital strategies forward at a steady pace. Leaders either wanted proof of success and didn’t feel great urgency to invest more in digital or the organizational culture seemed resistant,” Gartner stated in November 2020. “But when the COVID-19 pandemic struck, many employees started to work remotely and organizations ramped up digital engagement with customers. Surveyed corporate directors increased the development of digital products and services to maintain and accelerate their customer engagement, and help them reach their revenue growth targets.”

“We believe there [are] several ‘innovation truths’ that should not be up for debate,” Jim Marous, author of the December 2021 “Innovation in Retail Banking Beyond the Pandemic” report for Digital Banking Report, explained. “First, organizations that are successful with innovation have a bias towards forward progress and concrete outcomes. In other words, there needs to be less talk about the process and more emphasis on speed, scalability, and cooperation.”

But are these transformation initiatives providing the banks with the impacts they seek? The Gartner survey found that 87 percent of corporate directors deemed technology to have a transformational role in addressing strategic business priorities; 67 percent expected budgetary increases in technology; and the majority of them anticipated a 6.9-percent increase in their current IT budgets as a result of the acceleration. And Cornerstone’s study noted that of the 300 US-based community bank executives surveyed in the fourth quarter of 2021, 54 percent had confirmed either a significant (greater than 5 percent) or moderate (0-5 percent) improvement in loan productivity, 63 percent the same for deposit-account opening productivity, 60 percent for overall customer retention and 58 percent for improvements in operational expenses.

While such results point to the considerable progress achieved, some observers have noted that much of the improvement is actually coming from the digitalisation of existing banking products and services rather than innovation into new areas. In its 2021 “Retail Banking Survey”, which surveyed around 60 European retail banks from 11 countries, consulting firm Roland Berger noted that while digitalisation has been particularly well received in the areas of consumer loans and mortgages and the pandemic has continued to act as an important catalyst for digital transformation, radical change within the retail-banking business is unlikely because “most banks are continuing to digitalise primarily existing products and processes but still rarely work on new innovative solutions”.

The report also noted that even if agile working was gaining importance and job profiles were changing due to digitalisation, “the fixation of the majority on a positioning as ‘customer experts’ and the lack of strict focus on digital initiatives” was preventing a true transformation of business models and thereby differentiation from the competition. “Banks should scrutinize their orientation more consciously and focus on additional offers and services if they do not want to be superseded by new competitors.”

Nonetheless, the overwhelming majority of banking leaders have acknowledged that a digital transformation of at least some magnitude is essential to prevent falling behind the competition, especially in today’s environment—one that values the customer experience above virtually all else. “Banks that fail to drive their digital transformation forward across all areas of the organisation and do not add supplementary offerings and services will find it increasingly difficult to remain competitive,” Sebastian Steger, a partner at Roland Berger and the lead author of the firm’s 2021 “Retail Banking Survey”, noted. “Retail banks must also act now in order to not be superseded by big tech companies or FinTechs. New, innovative solutions should be built along the entire value chain to deliver a leading customer experience.”

So, how should those banks wanting to boost their digital-banking credentials move forward from here? Speaking to tech publication MIT Technology Review in November, Michael Ruttledge, chief information officer and head of technology services at Citizens Financial Group, said he believes banks must become more agile and embrace new technologies and identified five key pillars he had used to guide digital transformations at financial institutions. “The first pillar is moving to agile. Second is moving to a more modern architecture. Third is doubling down on the engineering talent at the bank, and fourth is being more efficient and transforming the technology cost structure. Finally, the fifth pillar is maniacally focusing on security and availability.”

The BDO survey, meanwhile, also stressed the importance of workforce strategy and change management as crucial to realising a successful digital transformation. “Lack of skills or insufficient training (50%) and employee pushback (46%) are cited as the top two reasons that digital initiatives underperform. These challenges have only increased with the expansion of remote working and the increased need for a high level of digital literacy across the workforce,” the report found. “As financial institutions develop and execute their digital strategies, they have to make corresponding plans for change management to ensure their workforce has the training and skills needed to support the success of digital initiatives.” According to the report, this requires a company culture that fosters agility and responsive approaches to change. And where necessary, organisations should also leverage outsourced solutions to address gaps and maximise resources.



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1 comment

Deep Das March 30, 2022 - 9:06 am

While technologies such as RPA are already being used today, future technologies such as blockchain, AI or big data still need some time to be fully adapted. In the long term, however, these technologies will present an entire industry with fundamental changes.


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