5 Reasons (Besides Technology) to Digitally Transform your Bank

Photo by Johnny Brown on Unsplash

Organizations of various sizes, in different geographies and every sector are experiencing an accelerated change. As financial institutions grapple with the pace of change, it is worth mentioning that these organizations are more receptive to change than one might think. According to a report by KPMG, approximately 47% of financial institutions expect to see a radical digital transformation by 2023. 

However, this article will not focus on technology and its pace of change, instead we will focus on the other driving forces of digital transformation.

1. Competitors

A Cornerstone Advisors study finds that three out of four U.S. banks have launched a digital transformation program and are already seeing a significant benefit. The majority reports moderate or significant impacts not only on IT agility - which is to be expected - but also on overall customer retention.

Credit unions are experiencing even more pronounced positive results. In addition to those benefits reported by banks, the majority of credit unions also attribute improvements in loan volume, loan productivity, and deposit account volume to their digital initiatives.

“Weakness in the lending markets is going to expose the reality that the gains banks and credit unions saw pre-pandemic had little to do with their digital transformation initiatives and were just the result of a rising tide floating all boats,” according to Cornerstone. “Smart CEOs (and boards) will put new pressures on the organization to accelerate their digital transformation plans and hold the executive team accountable for tangible results.”

So, it’s not just a matter of keeping up with the competition. There’s also the matter of keeping up with other stakeholders who can add value to your institution’s offerings.

2. Fintechs and Neo-banks

While fintech firms and neo-banks are often lumped together into a single category, fintech firms apply digital technology to legacy financial services processes. Neo-banks, sometimes called challenger banks, are phone apps that claim to do everything that a bank can do, including lending money and accepting deposits. Stripe, Klarna, and Plaid are among the better known fintech firms, while Chime, Current, and Varo are leaders in the neo-bank space.

Forming a partnership with a fintech firm is often considered a project separate from digital transformation, but program managers would be hard-pressed to parse it out completely. Connecting the enterprise with its external stakeholders is, after all, a key aspect of any rigorous digital initiative. But regardless of how the project office is structured, two-thirds of financial institutions surveyed by Cornerstone consider it “somewhat” to “very important” to partner with fintech firms. These alliances have resulted in preventing fraud losses, non-interest income generation, deposit account openings, and above all loan volume increases. Going forward, financial institutions expect these relationships to open digital accounts, provide mobile wallets, and protect against fraud and data breaches.

Neo-banks, however, do not necessarily intend to be your partners. They might even want to put you out of business, and they do have the advantages of agility and an inherently consumer-centric business model. If you partner with one, the benefit to your bank or credit union is the neo-bank’s ability to brand exclusively to their micro-focused markets.

3. Convenience and Customer Experience at a Click

What fintech firms and neo-banks have in common is that they both claim convenience as a prime value proposition, surpassed only by price.

Everybody wants convenience in the abstract, but many see banking as a high-touch service. While not everyone aged 40 or younger has as much in common as demographers - and a lot of people over 40 - believe, these digital natives are overwhelmingly accustomed to technological solutions. They’d prefer to pay with an app on their phone than with a card in their wallet.

“It comes as no surprise that millennials and Gen Z are the two groups who are using mobile banking apps the most,” according to CNBC’s Alexandria White. A study from JPMorgan Chase “found that 99% of Gen Z and 98% of millennials use a mobile banking app for a wide range of tasks, including viewing account balances, checking their credit score, and depositing a check. Gen X and Boomers use mobile banking apps less (86.5% and 69.5%, respectively), but the ones who do are still in the majority.”

4. A Surge to Embrace Digitalization in the Middle of Turbulent Business Conditions

The covid-19 pandemic and the world’s economic response to it has only accelerated the trend. We found we could live without offices, supermarkets, restaurants, bars, and malls, so we can live without bank branches too.

“COVID-19 has accelerated [digital transformation] of banking as customer expectations change during the pandemic,” according to global consultancy EY. “This potential digital change, brought forward by COVID-19, will also help banks cope with the tougher operating environment the pandemic has brought. For the longer term it will be a fundamental step in boosting profitability and returns in the sector.”

Specifically, EY identified four areas that the world’s reaction to the pandemic has underscored as drivers of the digital journey:

a) Redefining customer experience: Putting customers and their needs to the forefront to build solutions with staying power. Banks should look at co-creating with customers frequently and often in a proposition lifecycle.

b) Taking a mobile-first view: From contactless banking to account access, customers expect product and service accessibility from portable devices, at a moment’s notice.

c) Developing a data strategy for personalization: Building solutions means knowing what data you have, what data you need, what questions you need to ask of that data, and how to interpret the answers. Centralizing existing datasets is key.

d) Selecting the right technology platforms: When building new services into operations with extensive legacy processes and assets, and subject to high levels of regulatory scrutiny as banking, choosing which platforms to use and how to use them is essential.

5. Globalization Impacts Banks Across the World

Of course, no country exists in a vacuum, and every business in every sector is under increasing pressure as globalization becomes more prevalent. While the U.S. is the leading country for banking innovation, according to Fintech Weekly, it does not have the field to itself. The article mentions that British, Singaporean, and Lithuanian financial institutions, as well as American ones, need to be aware of advances coming out of other developed economies. We would hasten to add that they also need to be aware of the potential threat from banks domiciled in emerging economies.

Remember how developing nations leapfrogged over post-industrial nations in cell phone adoption? It could happen again in digital banking. The unbanked in those economies - people who have never seen the inside or perhaps even the outside of a bank branch - might quickly adopt mobile-native banking or fintech services. Their local banks - or even firms that are not at core financial institutions - would certainly find ways to offer these services domestically and, given the rise of decentralized finance, they might eventually set their sights across national borders. It no doubt costs less to run a neo-bank out of Tanzania or Chile than one with marble floors and doric pillars in New York or London.

This has been taking place since 2007, according to fintech research firm WhiteSight, when Kenyan mobile phone provider Safaricom introduced the M-PESA peer-to-peer money transfer service. Nigerian neo-bank Kuda - which has already attracted at least $92 million in venture capital and 2 million customers - has been making news with its virtual Visa cards.

Next Steps: View Examples of Successful Digital Transformation in Banks

With a number of technology providers and advisors available to assist in your transformation, it can be difficult to focus on which has the right suite of solutions which can be tailored to fit your organization. Fortunately, as a starting point, WSO2 has developed a useful e-book which covers 5 banking api use cases, where they explain how they have provided their experience to help banks monetize their digital initiatives by building personalized and lively consumer experiences, delivering seamless omnichannel banking, accelerating taking new customer propositions to market, simplifying open banking compliance, and launching a vibrant marketplace to scale innovation.

Read this free e-book on how WSO2 has helped banks to improve their future posture using APIs.

Photo by Johnny Brown.