The state of digital transformation in banking

By John Manninginternational banker

ONavigating through a global pandemic over the past two years has highlighted some goals for the banking industry, especially with regards to digitalization. Financial institutions around the world have been pressured to accelerate their digital transformation ambitions, whether that means launching an initiative ahead of schedule or scaling up projects already underway. And with the Omicron variant of COVID-19 ensuring the pandemic remains among the most influential issues in the banking landscape for the foreseeable future, the approaches financial institutions take to digital transformation this year will be more important than ever.

“2020 has sparked much broader and faster adoption of digital banking services by consumers, which represents a valuable opportunity for middle-market financial institutions,” noted Bill Topel, head of digital financial services at BDO, in the report recently published by the American bank “2021 Financial Services Digital Transformation”. Survey.” “Implementing a digital strategy can help them get closer to their customers and tap into new revenue and business models that will bring lasting benefits.” The survey interviewed 100 senior executives from intermediary banks, credit unions and other lending institutions, and found that most organizations had developed digital transformation strategies and nearly half were accelerating existing plans.

Indeed, even banks that presciently began their digital transformation journey several years ago with clear, multi-year modernization strategies must now face the prospect of implementing dramatic change, 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 IBM Institute for Business Value survey of global bank executives underscored this pressing need by revealing that almost 60% of respondents said the lines between sectors were blurring and more than 60% 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 reinventing the entire customer experience; redesigning the IT infrastructure (information technology) within the organization to accommodate the storage and processing of big data; implement new technologies such as cloud computing, data analytics, robotic process automation (RPA), blockchain, and artificial intelligence (AI) to increase productivity and efficiency and free up employees performing low value repetitive tasks; changing the entire business model so that it can work seamlessly in collaboration with external partners, including fintech start-ups; or, indeed, a combination of any or all of the above such as the word transformation involves – bank executives continue to recognize more openly that digitalization is fundamental to improving the performance of their respective organizations.

Simply put, if they haven’t already, the next best time for banks to invest in digitalization is now. And it would seem that the banks have heeded this warning. “Credit unions are way ahead of banks with 16% launching a digital transformation strategy in 2018 or earlier, compared to 9% of banks that launched a strategy then. “, according to the “2022 What’s Going On in Banking” study by Cornerstone Advisors. community financial institutions based in the United States. “By the end of 2022, only 11% of banks and 4% of credit unions will not have launched a digital transformation strategy. Overall, 5% of financial institution executives say they have completed or nearly completed their digital transformation strategy. »

The pace of digital adoption has kicked into high gear since the start of the pandemic. According to Gartner, 69% of boards surveyed had accelerated their digital business initiatives as a result of the COVID-19 disruption. “Before the pandemic, most organizations were advancing their digital strategies at a brisk pace. Either leaders wanted proof of success and didn’t feel a great urgency to invest more in digital, or the organizational culture seemed resilient,” Gartner said in November 2020. “But when the COVID-19 pandemic hit, many many employees have started working remotely and organizations have stepped up digital engagement with customers. The business leaders surveyed have increased the development of digital products and services to maintain and accelerate their customer engagement and help them achieve their revenue growth goals.

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

But are these transformation initiatives providing banks with the impacts they seek? Gartner’s survey found that 87% of business administrators believe technology has a transformational role in addressing strategic business priorities; 67% expected budget increases in the area of ​​technology; and the majority of them expected a 6.9% increase in their current IT budgets due to acceleration. And the Cornerstone study noted that of the 300 U.S.-based community bank executives surveyed in Q4 2021, 54% confirmed significant (greater than 5%) or moderate (0-5%) improvement in loan productivity, 63% for deposit account opening productivity, 60% for overall customer retention and 58% for operational expense improvement.

While these results attest to the tremendous progress being made, some observers have noted that much of the improvement actually comes from the digitization of existing banking products and services rather than innovating in new areas. In its “Retail Banking Survey” 2021, which surveyed around 60 European retail banks from 11 countries, consultancy firm Roland Berger noted that while digitalization has been particularly welcomed in the areas of consumer loans and mortgages and the pandemic has continued to act as a significant catalyst for digital transformation, a sea change within retail banking is unlikely as “most banks continue to primarily digitize existing products and processes but still rarely work on new innovative solutions”.

The report also noted that while agile working was growing in importance and job profiles were changing due to digitalization, “the majority’s fixation on a ‘customer expert’ positioning and the lack of a strict focus on initiatives digital” prevented real transformation. business models and thus differentiate themselves from the competition. “Banks should take a closer look at their direction and focus on additional offerings and services if they don’t want to be supplanted by new competitors.”

Nevertheless, the overwhelming majority of bank executives recognized that a digital transformation of at least some scale is essential to avoid falling behind the competition, especially in today’s environment, which values ​​customer experience above all else. “Banks that fail to advance their digital transformation across all areas of the organization and add additional offerings and services will find it increasingly difficult to stay competitive,” said Sebastian Steger, partner at Roland Berger and lead author of the company’s 2021 study. “Retail Banking Survey”, noted. “Retail banks also need to act now so they don’t get supplanted by big tech companies or FinTechs. New, innovative solutions need to be built across the value chain to deliver a top-tier customer experience. »

So how should banks looking to bolster their digital banking credentials move forward? Addressing the Technical Publication MIT Technology Review In November, Michael Ruttledge, chief information officer and head of technology services at Citizens Financial Group, said he believed banks needed to become more agile and embrace new technologies and identified five key pillars he had used to guide digital transformations in financial institutions. “The first pillar is to move to agility. Second, we are moving to a more modern architecture. Third, double the bank’s engineering talent, and fourth, be more efficient and transform the technology cost structure. Finally, the fifth pillar maniacally focuses on security and availability.

The BDO survey, meanwhile, also highlighted the importance of workforce strategy and change management as crucial to successful digital transformation. “Lack of skills or insufficient training (50%) and employee refusal (46%) are cited as the two main reasons why digital initiatives are underperforming. These challenges have only increased with the expansion of remote working and the increased need for a high level of digital literacy within the workforce,” the report states. “As financial institutions develop and execute their digital strategies, they should develop corresponding change management plans to ensure their staff have the training and skills necessary to support the success of digital initiatives.” According to the report, this requires a corporate culture that promotes agility and responsive approaches to change. And if necessary, organizations should also leverage outsourced solutions to fill gaps and maximize resources.