Is digital transformation within banks’ control?

By Jens Rabe Co-CEO

For years, there’s been strong pressure on banks and financial institutions to digitalize in response to the drastic changes that have taken place. Not only has there been a shift in customer expectations and the threat posed by new, innovative competition, but the way business is carried out has transformed entirely. 

This is not a new phenomenon and it’s certainly not unique to the finance industry. A Capgemini report from 2014 found that from 2000–2014, 52% of Fortune 500 companies have gone bankrupt, been acquired, or no longer exist. 

Whatever way you look at it, traditional banks have had substantial warning for years about their need to innovate. Even the rise of the third wave of fintech – otherwise known as Fintech 3.0 – has been taking place since 2008. At the beginning of the last decade, you could forgive incumbent banks and credit unions for being taken by surprise. 

Now, however, it’s been around 15 years since new players began flooding the market and the rise of BigTech shows that no company or institution is safe. Given the time and the resources at their disposal, we’d expect the traditional banking industry to have caught up or even surpassed the innovative competition. 

This poses an important question, though – have traditional banks achieved full digital transformation? 

Digital transformation banking: industry status

When we talk about digital transformation, the main focal point from a customer service perspective is the ability to execute an omnichannel digital strategy that allows customers to engage with the brand on their own terms. By providing these capabilities, customers can benefit from collaborative online tools, artificial intelligence (AI) technology, and asynchronous messaging platforms for a superior experience. 

This is admittedly a complex undertaking in today’s financial services landscape. Banks need to take all aspects of the process into account, balancing digital and traditional challenges, and ensuring their technological resources are up to the task – while also factoring in customer preferences.

What’s more, with “experience” at the heart of all modern brand interactions, this is not a nice-to-have service add-on but a minimum service expectation. Customers have little patience or appreciation for how difficult it is to provide the experience; they simply expect the same quality and convenience they’re accustomed to with other brands. 

For example, in a global survey, 77% of Canadian customers, 71% of US customers, and 69% of Spanish customers who have online banks use it at least once every month. Any banks that don’t provide this service option will undoubtedly notice a decrease in satisfaction and loyalty. 

What recent trends show, however, is that although substantial transformation has taken place in the banking industry, there’s a number of institutions that are still failing to transform or transforming too slowly. 

According to Forrester, while 35% of global banking executives are making headway with digital solutions initiatives and related buying decisions, 12% only have plans to carry out their transformation initiatives. Worst of all, 6% have no plans at all to innovate. 

Why is transformation not taking place in banking?

It’s unfair to say that transformation in banking is not taking place. All banks, to a greater or lesser extent, have developed digital capabilities. The problem is that those who have invested less in digital transformation – particularly that 6% who have no plans in place – will find competing with the more innovative players increasingly challenging. 

As mentioned at the beginning, banks are very much aware of this reality. So, what’s stopping them from going digital? Above all, the main roadblock that banks face is the sheer scale of the challenge in providing a winning customer service experience.

Specifically, the roadblocks that are delaying the implementation of digital customer engagement strategies are security, data, and brand dilution.

The complex question of security

Security is unsurprisingly a daunting task in a finance context, where the safety of customer data and privacy needs to be ironclad. Yet in 2021, there was a substantial increase in the number of data-privacy breaches that financial services companies faced. Reaching record levels, the impact this had on customer trust was notable. 

Executives were shaken by this sudden increase in cyberattacks and what it means for transforming their technology stack. In fact, a quarter of executives named security as among their top obstacles to achieving digital transformation. There’s also concern among financial institutions that cyberattackers will become more sophisticated, further compromising customer interactions and data integrity. 

To realize even the most simple digital services and bring them to market, banks must engage in an overwhelming number of compliance, privacy, and data security requirements to ensure safety. The fact is, they have no room for error as any breach can have disastrous consequences in terms of customer trust. 

While in other industries this may be relatively simple, implementing digital tools in the finance sector is undoubtedly complex. To further complicate matters, the security measures themselves need to be followed up with extensive communication campaigns. 

Take the rise of voice assistants for example. Customers are warming to them, with 30% of US online adults using digital assistants to check their bank balance and 22% of Canadian respondents using them to transfer money. However, there still remains a certain level of distrust and customers push back against using them for more complex financial transactions. 

While security is important, it’s also essential to develop communication campaigns. In this way, banks can rebuild the trust that’s been damaged and reassure customers that their data, money, and privacy are fully protected.

Contending with new digital technologies 

According to Forrester, 25% of services decision-makers say that the technology strategy represents the biggest challenge of their overall digital transformation strategy implementation.

One of the standout competitive advantages that fintechs or native digital banks have is that they’re beginning with a clean slate. While these companies don’t have the market standing of traditional banks, they are much more agile and flexible by nature. Their platform architecture has been purpose-built from scratch and is largely future proof. 

Traditional banking institutions, on the other hand, have to contend with legacy systems that are exceedingly complicated to modernize. While these systems have been updated over the years, the demanding nature of digital transformation – which often involves embracing entirely new business models – is beyond the scope of these systems. 

There’s no doubt that the technical challenge involved is substantial, but there’s also an emotional element to this as well. Employees or decision-makers who lack relevant technological skills are wary of failing, which can stop transformation initiatives from taking place at all. 

This may be why a majority of banks think that digital transformation is simply a problem with technology, rather than an outside threat that could result in the bank no longer being relevant to its customers. 

Navigating practical challenges

Who is responsible for launching new digital transformation initiatives? Is it the CIO, CTO, or CEO? 

It turns out that there’s different opinions on this subject. When you ask service decision-makers, Forrester says that 48% believe the responsibility for beginning a digital transformation initiative is on the CIO or the CTO. However, 39% believe the CEO should spearhead the effort, with the CIO or CTO responsible for the execution.

This lack of clarity is telling and perhaps explains why efforts are often stuck in the planning stage. Even when they do get underway, initiatives often focus on just one functional or organizational area, rather than the company-wide digital transformation that’s necessary.

Beyond this, there are challenges associated with resource management. According to 25% of the respondents from the Forrester survey, it’s a challenge for employees to find time for large-scale initiatives while also contending with current responsibilities. 

Data and analytics obstacles

Given their enormous customer base and years of market dominance, it’s not surprising that banks have to contend with gigantic datasets. Every day, these stores of information grow as customer behavior provides new information. 

This data is the gold dust of the modern era, allowing decision makers to deliver more personalized experiences and differentiate themselves competitively. However, there’s a strong ethical responsibility in how the data is used, especially in a banking context, that makes utilizing these insights difficult. 

A reported 73% of bank executives admitted this to be the case in a recent survey, stating that it’s challenging to turn consumer data into patterns and trends. What’s more, 95% of those surveyed point to the operating systems themselves as what’s holding them back, claiming they restrict data optimization (Capgemini).

Even so, the data must be used to be able to improve financial products and failing to do so will likely have repercussions in terms of customer satisfaction down the line.

Ensuring brand integrity is maintained

To overcome the challenges involved with creating proprietary platforms, many financial services companies are turning to ecosystem platforms, where digital products and services from third parties are integrated into one platform. 

This is an excellent solution as it harnesses the key functionalities of market-leading software and enhances the customer experience as a result. There are concerns, though, particularly with regard to brand dilution. A total of 72% of executives admitted that this worried them – concerned that purchase decisions based on ecosystem platforms would negatively impact their organization’s brand (Capgemini).

The popularity of platforms like Zoom and Skype are common examples of this. While the platforms offer a convenient method of collaboration, the conversation has to take place outside of the branded environment, inevitably leading to some form of dilution.

Shifting mindsets to overcome challenges 

The challenges financial institutions face are substantial but they have no other option – they must overcome them. The finance industry is at a complex juncture and delaying the initiatives will likely have consequences down the line. Beyond the threat posed by innovative competition, the geopolitical situation, ongoing pandemic recovery, the mounting inflation crisis, and evolving customer demands mean that financial services companies must act. 

Beginning at the C-suite level, there needs to be a concerted and dedicated top-down effort to rebuild trust and provide the service expectations and digital experience that customers require. With a strong vision and determination, the roadblocks that executives are facing can be overcome. 

The key is to develop a culture of innovation and embrace the benefits of collaboration to push forward in their digital transformation journey. It’s no surprise that the banks that are furthest along in their digital transformation initiatives are also innovation leaders. 

Mistakes are going to happen – it’s impossible to realize user journeys without them and iterations are part of the process. But banks must have the confidence to let customers guide them, responding to the feedback and applying it accordingly. This means carrying out a large number of tests, and learning as much from the failures as you do from the successes. 

By being patient and vigilant, decision-makers can identify where there are gaps in the customer journey and provide seamless mixed experiences that take place across channels, whether in-person or virtual. Customer needs and technology are in a constant state of change and the organizations that are able to trust in the process of continuous iteration will be the ones that see results. 

Although the challenges are great, digital transformation is possible – and it’s within banks’ control. It’s a matter of shifting mindsets to embrace a culture of innovation.

Thinking outside the bots

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