Digital Transformation in Banking: Top Trends & Best Practices
Unlike industries like healthcare, financial services mostly deal with structured quantitative data which makes it easier to digitize and automate processes. This is a double-edged sword: Financial services institutions can have more effective digital transformation initiatives compared to other industries, however, it is also easier for attackers to launch digital-native financial institutions.
Given the numerous tech giants and fintech companies encroaching on their business, banks need to ramp up their digital transformation efforts and adopt technologies such as machine learning, automation, and blockchain. We have answered all relevant questions on digital transformation in banking.
What does digital transformation mean for financial services?
We have defined digital transformation before:
Digital transformation is the process of integrating digital technologies into all aspects of a business to meet the market and changing business requirements. It aims to increase the effectiveness of business operations and customer relations. To achieve these goals, organizations need to update their systems, processes, organizations and culture.
Digital transformation in banking requires a shift to online&digital services as well as a change in backend processes to promote digitization and automation. To compete with digital natives, banks should provide an end-to-end digital experience to their customers by integrating necessary technologies.
Why digital transformation is important in financial services?
Banks need to adopt changes in customer experience
With the advancements in technology, customer behaviors and expectations are changing. According to an Everfi report, more than half (53%) of consumers of financial institutions have changed the primary financial provider they use and an additional 9% said they are considering it. Banks should provide what customers want if they want to retain their existing customers.
Customers expect you to be where they are. Even before the pandemic, the usage of digital banking channels, such as online and mobile apps, was increasing among customers, according to a Deloitte report. This trend intensified during the pandemic as more customers started using digital channels(Figure 1). Since the usage of digital channels increases, financial institutes need to invest more in digital solutions.
Figure 1. Covid-19 pandemic increased the use of digital channels in the banking sector.
Organizations are aware of they are far from reaching their full potential
Though the importance of digital transformation is acknowledged by bankers, they believe there still is a long way to maximize their digital capabilities. The below image is a survey that is conducted by BCG that also supports this hypothesis. Results are as follows:
- 86% of respondents stated digital is the right strategy to invest in to gain a competitive edge,
- 43% of respondents believe their organization’s digital capabilities are far from market leaders,
- 86% of respondents reported that technology infrastructure is complicated and it may prevent digital interactions with consumers.
According to a survey by JPMorgan Chase & Co, in 2021 the company had around 58 million digitally active customers (6% increase from 2020) and around 44 million customer mobile active (10% increase from 2020). And they predict that this shift towards digital banking will increase in 2022 and beyond.
Banks are facing increased competition from digital native attackers and tech giants
There is increased competition in banking just like any other industry, even Tech Giants such as Google and Apple are looking for opportunities to get into the financial service industry. In 2019, Apple launched its credit card and Google is planning to introduce consumer bank accounts. Tech Giants’ involvement in banking is threatening for banks because these companies can be considered as experts in digital transformation and data analytics. They have most of the individuals’ data and they know how to use it. If Tech Giants keep investing in their financial services offering, it will be hard for banks to gain a competitive edge. The below graph shows the revenue-based attractiveness of banking operations and how well digital giants would fit into it. Retail deposits, SME payments, consumer wealth management, corporate deposits, and wholesale payments are banking operations they may want to invest in.
Currently, there are numerous tech attackers offering almost any service offered by a bank. Below, you can see the website of a bank with all of its digitally native competitors.
What are the key technologies and trends that enable banking DX?
Digital transformation starts with digitization. A company that dominantly relies on branches to serve customers, offers poor mobile and web banking services first needs to fix those.
As financial services companies digitize, they should use the latest technology rather than using legacy technologies. Though we are quite excited by iterative improvement, it would be unwise not to use the latest mature technology in digital transformation. Of course, the level of tech maturity preferred by the organization will depend on its strategy and how it expects to use the product.
- increase the efficiency of processes because it prevents human mistakes
- reduce operational cost by lowering the number of workforces
- focus on more important tasks that involve decision making
For example, a JP Morgan digital transformation initiative is called COIN, which is short for Contract Intelligence. With COIN, the bank shortens the time it takes to review documents, automates filling tasks, and creates new tools for bankers and clients.
Organizations can use process mining tools to identify opportunities for process improvement which also includes digital transformation and automation initiatives. We have listed numerous such examples in our article on process mining case studies.
Advanced analytics and machine learning
Financial institutions collect transaction data of customers and store them for years due to regulatory and insurance requirements. Performing analysis of data can reveal insights about customer behavior so that organizations can improve the experience they provide for customers. For example, a common analytics application in banking is personalization. Any banking product first needs to be marketed to the right users. By using advanced analytics, financial institutions can reach out to the right customer at the right time with the right message and offer through the right channel.
Blockchain is applicable to various banking operations such as investment management, cross-border transactions, trade finance, and capital markets. Blockchain is an emerging trend for financial institutions because it helps prevent fraudulent actions, provide transparency, reduce costs and increase the speed of transactions to reduce the number of intermediary banks. The image below shows the estimate of Mckinsey about potential savings in banking with blockchain solutions.
Conversational AI: Digital financial assistants
Just like other industries, chatbots can be very useful for financial institutes in customer service. Implementing simple chatbot solutions will allow banks to respond faster to customer needs. It can also be used as a financial consultant from your customers. For example, recommending investment options based on the savings bank balance and risk profile is an application of a financial chatbot.
Which digital strategy goals should financial services prioritize?
According to the Mckinsey survey, financial service executives across the world believe enhancing customer experience is the top priority for digital transformation projects, 76% of participants value investing in customers while 16% prioritizes productivity and operational cost reduction in digital transformation strategy.
Will digitization and automation reduce employment in financial services?
In the short term no. Eventually yes. Or at least boring jobs will be gone. Employees will still be needed in tasks such as managing workforces, building systems, and models, face-to-face customer interactions, resolving inquiries, and decision making that can’t be handled by bots. To understand what the future holds for employees in financial services, the below graph can be helpful. Automated teller machines (ATMs) were designed to automate the tasks tellers do in the ‘60s but it appears that it didn’t reduce the number of tellers in total. ATMs handle simpler transactions and cash while tellers focus on sales and marketing. Though the number of tellers per branch is reduced, banks were able to open more branches (each has an optimal number of tellers) to provide service to customers.
This trend could change in the long run as more tasks are automated and machines can replace most human tasks. This can take place thanks to artificial general intelligence which is only expected by the 2060s.
Here are our insightful digital transformations articles, if you want to learn more:
- Digital Transformation: In-Depth guide for Executives
- Digital Transformation Consulting: In-Depth Guide
- Digital transformation for retail: Evolve or disappear
- Digital transformation in healthcare
- Digital transformation in real estate
- Digital transformation in insurance
- Digital transformation in automative
If you still have questions about digital transformation in banking, we would like to help:
Cem has been the principal analyst at AIMultiple since 2017. AIMultiple informs hundreds of thousands of businesses (as per similarWeb) including 60% of Fortune 500 every month.
Cem's work has been cited by leading global publications including Business Insider, Forbes, Washington Post, global firms like Deloitte, HPE, NGOs like World Economic Forum and supranational organizations like European Commission. You can see more reputable companies and media that referenced AIMultiple.
Throughout his career, Cem served as a tech consultant, tech buyer and tech entrepreneur. He advised businesses on their enterprise software, automation, cloud, AI / ML and other technology related decisions at McKinsey & Company and Altman Solon for more than a decade. He also published a McKinsey report on digitalization.
He led technology strategy and procurement of a telco while reporting to the CEO. He has also led commercial growth of deep tech company Hypatos that reached a 7 digit annual recurring revenue and a 9 digit valuation from 0 within 2 years. Cem's work in Hypatos was covered by leading technology publications like TechCrunch and Business Insider.
Cem regularly speaks at international technology conferences. He graduated from Bogazici University as a computer engineer and holds an MBA from Columbia Business School.
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