Published: 9 May 2024
Contributors: Teaganne Finn, Amanda Downie
Digital transformation in banking is the act of integrating digital technologies and strategies to optimize operations and enhance personalized experiences. Across the financial services industry, this can only occur by breaking down data silos and reimagining the customer experience.
The world is rapidly changing to be more digitally focused, especially in the banking industry. Traditional banks are undergoing major digital transformations in order to meet the needs of new customers and existing customers seeking a more tailored and individualized banking experience through digital channels.
For this to happen, banks and financial institutions must take on a digital transformation strategy that puts customer experience first by analyzing, interacting, and understanding customer needs.
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Digital transformation isn’t new to the banking sector, but it has become more relevant as fintech and new operating models have gained in popularity. Traditional banks must keep up with the changing market and ever-evolving customer needs, such as the drive toward using mobile apps or websites to perform transactions. These types of technology are part of the omnichannel strategy banks are using to break down data silos and reimagine the customer journey.
With the more recent shift toward automation, banks and financial service providers need to modernize their banking strategies. The growing demand for Artificial Intelligence (AI), Internet of Things (IoT), and blockchain are among the other technologies banks must consider when creating a digital transformation strategy.
Customers are seeking digital approaches to managing their accounts and seek personalized product experiences, transparency, and security, all in real-time. Key drivers of the digital transformation trend stem from the use of mobile devices and the increased need for customers to be connected always. The only way to meet these customer needs is through a digital transformation journey. This journey takes customer data and uses it to analyze customer behavior so that more relevant products and services can be aligned to their needs.
Customer journey: Taking into account the more customer-centric approach and by using data and other new technologies to tailor banking services to the individual customer.
Modernized infrastructure: New technologies, such as automation and AI can streamline internal operations and ultimately boost efficiency and give these banks and financial service providers the competitive advantage.
Data analytics: By using advanced data analytics tools banks can have more informed and strategic decision-making. Breaking down these data silos provides more opportunity for better risk management and innovation.
Security measures: A part of digital banking transformation is adopting new and advanced cybersecurity measures that better protect sensitive customer data. Online banking and digital services bring about a new layer of security concerns and with advanced technology in place banks can bring in fraud detection measures and ensure that regulatory compliance is met.
Digitization: The digital era is upon us and it's on the financial sector to align with these other sectors taking the digital-forward approach. This is why key digital transformation initiatives are so important, such as partnering with fintech startups or open banking frameworks that aim to expand services for stakeholders.
For a successful digital transformation to take place banks must take advantage of the latest digital technology available. Below are the most common existing technologies within the banking and financial services sector.
Application programming interfaces (APIs): An API is a software interface that allows for two or more software applications to integrate data services and capabilities, instead of having to develop them from scratch. Which allows for better connectivity for businesses to their new customers and partners? Furthermore, they can create new products and services for their customers and improve overall operational efficiency.
Cloud computing: Cloud computing technology is the on-demand access of computing resources, which banks and financial service providers have come to use and accept. The cloud environment allows for better operations and a more flexible infrastructure that’s agile and scalable.
AI and machine learning (ML): The AI and ML technologies are being used for several transformation efforts, including analyzing big data sets, automating certain processes and improving the user experience through personalized services. AI in particular is used in banking through online assistants and chatbots that can address basic customer issues. Separately, an advantage of using ML in banking is that it makes it easier to track changes in user behavior and detect fraudulent activity faster.
Internet of Things. (IoT): IoT refers to a network of physical devices, think wearable smartwatches or smart thermostats that are embedded with sensors and software that allows them to collect and share data. For banks this smart connectivity has allowed customers to make instant contactless payments and interact with their accounts in a mobile banking capacity. The IoT can also be thanked for bringing risk management and advancements in the authorization process unlike ever before.
Blockchain: The transparent and information-driven nature of blockchain makes it a popular technology for banks and financial service providers. It has resulted in more secure data transactions and an enhanced interface that meets and goes beyond customer expectations. Today customers trust blockchain solutions and find it to be a more transparent way of operating business models.
The changing market and push toward new technology make it imperative to evolve. While the digital transformation process can be intimidating, with the right resources and assistance, banks can see the tremendous benefits from the transformation journey.
As your bank or financial service provider begins the transformation process, here are some basic steps to follow:
Have goals in mind before setting out on a transformation journey. It’s important for the transformation team to lay out their business and technical objectives and understand what they want to gain from the transition.
Action item: Create a list of priority objectives to start and then tailor that list as the bank or financial institution leaders see fit.
Take stock of all the current systems and products that your bank is using. Once the list of all current systems has been made, evaluate them based on how each is working or not working toward your business goals. It’s important to be transparent about your bank’s process and be open to modifying it to fit the digital landscape.
Action item: Be clear about your processes. List out which processes are necessary for your transformation, while also considering constraints including cost and timeline.
To understand what your clients need next, take back a step and evaluate how you’re taking stock of current clients. Use data analysis to understand how you are segmenting and collecting data on clients. Use the data to understand which products are selling and which digital services are most popular to the clients.
Action item: Make a plan so that you are targeting consumers more likely to use digital services. Ensure that your data is working for your business needs. Marketing teams can have a much more targeted approach once these consumers are identified and understood.
Be realistic about your resources and what your organization can handle, in terms of both monetary and human resources. Define your target architecture and early proofs of value to measure achievements toward your business goals.
Action item: Write out your objectives; list out ways in which you can enable your institution to make incremental changes at first. Early wins, even small ones, help with transformation buy-in and momentum.
Once all transformation preparation has been made, present the business case for core systems transformation to key stakeholders. The business case must be delivered to the C-suite and Board of Directors, if relevant, for sign-off. Once you have sign-off, proceed with operationalizing the roadmap and strategy for a full transformation.
Action item: Prepare your presentation for key stakeholders. Be prepared to defend the transformation needs you have found and laid out.
Digitization in the banking system is complex and goes much further beyond just moving a traditional bank to an online banking system. The transformation process can bring about new opportunities for businesses of all sizes and bring forth banking solutions that provide greater customer satisfaction. Below are some of the greatest benefits from digital transformation in banking and financial services.
- More customer-focused investment banking: Digital transformation in investment banking is more customer-focused than ever before. Since digital transformation in investment banking has replaced investment banks with small investors, the focus is now on short-term goals and all on one-digital platform. Offerings and technological decisions are now based on customer profiles.
- Easier compliance: By making the switch to a modern financial management system, banks and financial service providers can stay compliant. There are automated processes that can help employees spend less time doing tasks like auditing reports and instead focus on the work that matters most. If a bank is on a cloud-based system, it provides timely updates and keeps up to date on regulations automatically.
- Access new clients: A digital-native environment makes attracting customers easier by being upfront about their services and what they can provide. By going digital, banks are making customer acquisition much easier with expanded services and 24/7 account access.
- Enhanced security: With the growth of digitization comes the challenge of data security and businesses securely managing customer data. Thankfully, there are sophisticated software development services available to protect your customers personal information and save their accounts from being hacked or scammed.
- More personalized banking: A digital transformation helps banks and financial institutions to hone in on exactly what a customer needs and wants. There is no longer the need to assume what a customer wants, with new technology, a bank can know exactly what it is the customer expects of them. Banking is no longer just a weekly practice, it’s a daily act that requires a fast and secure ecosystem that customers can trust.
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