The banking landscape has undergone seismic changes over the past two decades. Driven by three significant waves, the industry has transformed and redefined its role in the global economy. This evolution represents the inception of a new digital banking era, which is now reshaping the core of banking.
Deciphering the three waves of change in digital banking
The first wave, consumerism, originated from the global integration of markets in the late nineties. It spurred novel business concepts in the banking sector, encouraging banks to align their operations with evolving customer preferences.
The second wave, characterized by the dot-com boom, emphasized the shift from traditional branch banking to anytime, anywhere banking. This change reflected the demands of a rapidly evolving digital consumer, championing the concept of web-based banking.
The third wave was triggered by the 2008 financial meltdown, when the world scrutinized bank lending and fund management practices. Consequently, banks emerged with a new focus on need-based and goal-based banking, an approach that centers on customer outcomes and ensures extreme personalization of banking products and services.
The aftermath of this third wave has seen the advent of new-age banking models. Notably, these models operate with higher levels of prudence, embrace paperless transactions, and leverage digital metrics for improved traceability. However, this wave has also marked the rise of fintechs, entities that have capitalized on banking inefficiencies, posing substantial challenges to traditional banking.
To keep pace with these fintechs, banks must evolve from being mere facilitators of financial processes to owners of the final outcome. They need to shift their focus from providing only financial support to creating comprehensive solutions tailored to meet their customers’ specific needs.
Understanding digital beyond the “Touch” experience
The notion that digital banking is solely about a “touch” experience is a common misconception. Digital banking encapsulates a culture, a perspective that permeates the front, middle, and back offices of how a bank operates.
Digital, as defined by senior banking executives, embodies doing things right, quickly, and without error. The ultimate goal of digital transformation is to enhance the customer experience while ensuring operational efficiency and cost-effectiveness.
The necessity of digital transformation in banking
The demand for digital transformation in banking is being driven by several factors:
Changing consumer behavior
Modern consumers are tech-savvy and expect banks to provide enriched experiences similar to other sectors. According to a 2019 Infosys Knowledge Institute survey, nearly 80% of respondents envision the bank of the future as a marketplace catering to all financial needs.
Emergence of fintechs
While no single fintech threatens traditional banking, banks are apprehensive about their shrinking market share. The surge in investments in fintechs, growing by 120% YoY to $40 billion in 2018, underscores this concern. As a result, banks need to become more organized, agile, and efficient to survive and thrive.
Legacy IT Systems
Today’s consumers demand instant access to products and services, challenging banks to rethink their existing IT infrastructure. They need to restructure their IT landscapes and processes to manage risk effectively and respond to rapid changes in the service landscape.
Undertaking the journey of transformation
Banks can approach digital transformation through a phased journey that includes:
Eliminating redundant processes
This phase requires banks to assess the depth and breadth of their existing processes. Implementing robust process management systems, they can overcome interoperability issues and deliver added value to customers.
Simplifying application management
This stage involves reducing the number of active applications, which can be as many as 4,000 to 5,000 in large banks, to a manageable figure.
Reevaluating business infrastructure
Banks must determine if their IT applications can support future business volumes, technology trends, and evolving customer behavior. Any application that doesn’t align with the bank’s future vision should be retired.
Executing without disrupting business
The transformation process should be carried out without destabilizing existing business operations. An ideal transformation, executed over three years, will enable banks to mitigate risk and change their IT landscape to deliver better and faster services to customers.
Benefits of digital banking transformation
The digital transformation journey offers banks several key advantages:
- Increase in market share: By focusing on customer needs rather than processes, banks can gain customer loyalty, resulting in an increase in their market share. A 2018 banking survey showed that 70% of respondents were willing to invest in technology to expand their market share.
- Rise in profitability: As digital transformation leads to cost-cutting, banks will see improvements in their bottom line and return on equity.
- Cultural shift: Banks can foster a culture that is cost-conscious, customer-conscious, and efficiency-conscious.
Overcoming the hurdles of digital transformation
While digital transformation is integral for survival and success in today’s banking industry, banks must overcome several challenges during their transformation journey. These include the fear of failure, cocoon syndrome, and lack of execution capabilities.
Overcoming these hurdles requires a strategic approach, including validating the team’s strengths, open candid communication, benchmarking, ensuring commitment from the top, and implementing changes quickly but cautiously.
Digital transformation is a critical aspect of redefining the core of banking. It’s about enabling banks to meet evolving customer demands, stay relevant in the age of fintechs, and drive improved operational efficiency. As we move forward, banks must prioritize this transformation to secure their position in the banking landscape of the future.
