Digital transformation in banking continues to be a vital initiative. Discover the obstacles to digital transformation and how banks can overcome them.
The idea of a “digital transformation” has existed for over a decade, starting when the internet and mobile technology first enabled access to online banking transactions. Digital transformation in banking is not a singular event — it’s an ongoing effort to keep up with constantly evolving technology, industry standards, regulations, and customer needs. For example, customers have come to expect seamless, convenient, and round-the-clock access to banking services, prompting banks and other financial institutions to adapt accordingly.
That drive to keep pace is only growing. However, due to their size, traditional banks undergoing a digital transformation can struggle with the rapid pace of the changing landscape. Rather than trying to enact separate digital initiatives, banks need a top-down approach that addresses their core operations and the system limitations of their digital payment infrastructure to stay ahead within increasingly competitive markets.
Digital transformation in banking needs to be holistic; integrating digital technologies and strategies to deliver a single online platform that optimizes processes and enhances the customer experience. This requires the strategic integration of emerging digital tools and technologies (such as generative AI and blockchain), plus institutional support into all appropriate areas of banking operations.
What are the key areas of digital transformation?
Effective digital transformation requires banks to integrate technology supported by their talent, culture, and business operations. One way to approach digital transformation is to break it down into three key areas:
Technological transformation:
When most people think of digital transformation, they envision advanced technologies that either evolve existing operations or introduce new services. To effectively prepare for the future, a bank’s technological transformation should consider how to:
Upgrade legacy core banking systems to be more flexible, efficient, and scalable
Leverage large amounts of data (“Big Data”) to better profile customers and offer personalized services
Utilize mobile apps and web portals to offer seamless, user-friendly services
Implement fraud management and security measures to prevent fraud, protect data, and comply with regulations
Enable interoperability with third-party services and foster innovation through open banking
Young woman sitting on the sofa in the living room, managing online banking with mobile app on smartphone. Transferring money, paying bills, checking balance.
Business transformation:
Digital technology also allows for powerful business transformations, enhancing customer experience and internal operations. A successful digital business transformation can include:
Creating personalized customer omnichannel experiences that are seamless and accessible through all digital channels (mobile apps, online banking, chatbots, etc.)
Streamlining processes through automation and reducing manual tasks to optimize decision-making and resource allocation
Developing new digital products and services to meet evolving customer demands
Moving toward more flexible IT infrastructures, including cloud computing and microservices, to support scalability and rapid deployment of new technologies
Collaborating with fintech companies, tech providers, and other partners to leverage external expertise, technologies, and platforms
Culture transformation:
Digital transformation must be woven into the bank’s culture. This may require a shift in the way the entire workforce interacts and operates, which can include:
Promoting a culture that values experimentation, accepts failure as a learning opportunity, and encourages creativity and innovation.
Establishing a structured approach to managing change, including processes for planning, execution, monitoring, and adjusting
Constant, consistent, and clear communication from leadership about its vision and the steps to achieve it
Fostering a culture of innovation and continuous learning within the organization, and upskilling employees in digital competencies and data literacy
Cultivating a focus on customer needs and experiences, driving innovation and service improvements based on customer feedback and data insights
What are some technologies driving digital transformation?
Technologies currently driving digital banking transformation initiatives include:
Artificial Intelligence (AI) and Machine Learning (ML)
AI and ML enable banks to analyze vast amounts of data to uncover patterns. This allows the system to automate routine tasks to deliver personalized banking experiences through tailored financial advice and product recommendations. AI and ML enhance data analytics capabilities, helping banks predict market trends and assess risks.
Internet of Things (IoT)
IoT technology facilitates instant, secure contactless payments through connected devices, allowing real-time account management and enhancing risk management with advanced authorization processes. It enables customers to make instant contactless payments and interact with their accounts in a mobile banking capacity.
Cloud Computing
Cloud computing provides on-demand access to computing resources, reducing the need for extensive on-premises infrastructure and associated costs. It enhances operational efficiency with scalable, flexible infrastructure that supports rapid deployment of new applications and services.
Application Programming Interface (API)
APIs enable seamless integration of data and services between different software applications. This enhances functionalities like real-time payment processing and account management to foster innovation and collaboration within fintech companies.
What are some examples of digital transformation?
The technologies driving digital transformation manifest themselves as real-world banking applications that include:
Cloud technology: Cloud technology continues to play a crucial role in banks’ digital transformation efforts, offering unmatched scalability, flexibility, and cost-efficiency.
Signals:Signal analytics add a layer of precision to predictive decision-making, helping organizations make more informed, data-driven decisions.
Interactive teller machines (ITMs):An update to the traditional ATM, ITMs serve as multifunctional banking kiosks where customers can perform routine and low-value branch transactions.
Digital wallets: Software programs that store users’ payment information, enabling them to make purchases and track their payment history on any device with a web browser.
Payment gateways/Payments orchestration: Payment gateways act as a bridge between an eCommerce website and a payment processor to transfer funds from the customer to the merchant account. Payment orchestration is the collection of multiple gateways into a single payments management platform.
Payments tokenization: Tokenization is the process by which payment data is replaced with a unique numeric sequence to secure the financial transaction.
Why is digital transformation essential for banks?
More than anything, digital transformation is essential because banking customers want digital banking services. Recent surveys from the American Bankers Association show that U.S. consumers are conducting their banking through digital banking channels more often than any other method.
Banks that can successfully execute a digital transformation will have several advantages over their competitors, including:
Greater operational efficiency
Digital technologies can enable banks to streamline processes, reduce manual tasks, and minimize errors. Automation and AI can handle repetitive tasks, allowing employees to focus on more complex and value-added activities. This shift reduces operational costs plus ensures customers receive timely and accurate services.
Greater customer satisfaction and loyalty
Customers want mobile banking apps, online portals, and 24/7 customer service support using chatbots that provide instant, seamless access to banking services. Banks can use advanced data analytics to understand this behavior and preferences, offering tailored services that enhance the overall customer experience.
Expanded services and revenue streams
Leveraging digital platforms, banks can introduce innovative products and services, such as peer-to-peer payments, digital wallets, and personalized financial advice. Analyzing customer data also enables banks to cross-sell and up-sell more effectively, identifying opportunities to offer additional services that meet customer needs. Furthermore, partnerships with fintech companies can create synergies and drive revenue growth through collaborative ventures.
Future-proof operations
Traditional banks should offer digital wallets, account-to-account payments, and buy now, pay later (BNPL) service options. As banks face unprecedented competition against rivals, digital transformation helps future-proof operations by making them more agile and responsive to changes.
What are obstacles to digital transformation?
Even though digital transformation isn’t a new concept, according to The Financial Brand, roughly 9% of banks are fully digitally mature. Most financial institutions (53%) are still in the relatively early stages of a digital transformation, with just 38% of banks at the midpoint of their banking transformation.
Banks face tougher barriers in achieving enterprise-wide digital transformation due to their higher technical debt from massive legacy investments. This creates technological, organizational, and cultural hurdles, including:
Lack of focus
Banks may face difficulties maintaining a clear focus during digital transformation initiatives, often split between developing customer-facing services and enhancing internal operations. This can lead to budgeting and prioritization issues, as resources are divided between different objectives.
Security concerns
As banks increasingly adopt open banking practices and partner with technology firms, they expose their infrastructure to new vulnerabilities. Cybersecurity threats are a significant concern, as integrating with third-party applications and platforms can create entry points for cyberattacks.
Underestimating costs
Leadership sometimes does not account for the complexities of a digital transformation, which can involve complicated interfaces and interdependencies across various initiatives. Underestimating the magnitude of changes required or not involving all necessary stakeholders can miscalculate the extent of the changes, hindering any modernization efforts.
Organizational silos
Traditional functional or business silos can lead to conflicting or misaligned priorities and a fragmented approach to execution. These silos result in duplicate systems and solutions across different business lines, reducing efficiency and increasing costs.
Complex infrastructure
To fulfill short-term and long-term digital transformation strategies, banks need to move away from complex legacy systems. However, it can be extremely difficult to finding experts who can understand and update these complex, custom-made systems. Efficiently moving away from legacy systems requires selecting the right technology partner who understands the journey to upgrade to newer, flexible, scalable technologies.
Skill set shortages
Talent is a critical component of digital transformation, but the banking industry is not typically seen as a preferred destination for technology professionals, leading to a shortage of analytical talent needed to build data engineering, data science, and UX design teams. This talent gap limits banks’ abilities to develop and implement personalization initiatives.
Lack of leadership conviction
An overly risk-averse executive culture can view new technologies as unproven and risky, despite clear consumer adoption trends. This hesitation delays and can actively hinder digital transformation efforts.
How can banks prepare for digital transformation?
For banks that want to overcome the obstacles to their digital transformation, consider taking the following steps:
Assess the current digital state: Identify the gap between the current state and desired outcomes. This requires a comprehensive analysis of existing digital infrastructure and an evaluation of the level of digital adoption among employees and customers. A SWOT analysis to identify strengths, weaknesses, opportunities, and threats can provide a clear picture of where the bank stands, and which changes need to be made.
Considering national and regional nuances: Banks must consider specific regulatory, infrastructural, and cultural factors in each market they operate in. This involves reviewing local regulations and compliance requirements, assessing the technological infrastructure and talent pool, and considering socioeconomic and cultural factors that might influence the adoption and usage of digital tools.
Support company culture and employee adoption: Banks should develop training programs to educate employees about new digital tools and processes, establish support systems to facilitate smooth adoption, and foster a culture that embraces change and innovation. Ensuring that employees are well-prepared and supportive of the digital transformation efforts is key to its success.
Leverage data and partnerships: Banks should utilize traditional and alternative data sources, plus form strategic partnerships that boost the impact of digital transformation. This process involves exploring various datasets that provide more personalized consumer information to generate new product offerings. Working with technology firms and non-financial industries to enhance customer acquisition and retention.
Aligning technology with business processes: Banks should ensure that technological needs sync with business processes and project scope. This may require a thorough analysis of current business processes, aligning technological implementations with business requirements, and maintaining focus on project scope to avoid scope creep.
Defining KPIs and performance metrics: Banks should define key performance indicators (KPIs) and performance metrics before starting any initiative. Then monitor progress and adjust strategies based on performance data. Being able to measure the impact and effectiveness of digital transformation initiatives helps to ensure a clear ROI.
Any digital transformation strategy is a core part of an organization’s strategic planning process. By following these steps, banks can navigate the complexities of digital transformation and overcome obstacles that may hinder progress
To learn more about how ACI Worldwide’s payments hub solution can help your organization realize the benefits of digital banking transformation, contact us today.
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