This pillar page and companion e-book are the first in a series of four, covering strategies and best practices on how banks could accelerate their digital initiatives.
Over the course of this series, we’ll discuss building new banking products at the speed your customer's demand. Secondly, we’ll turn to targeting and onboarding new account holders. Finally, we’ll round out the series with lessons on upselling delighted customers.
But it starts with an initial burst of digital disruption. Here, we describe the business drivers and value propositions which demonstrate the benefits of taking on this challenge. The related e-book considers how to begin that journey.
Let’s set technology -- and the pace of its change -- aside for now and consider the business drivers of digital transformation.
Let us start with your competition. 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.
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.
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.”
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:
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.
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 lately with its virtual Visa cards.
Every financial institution is unique. That general statement also applies to its digital transformation too - both its starting point and its end goal. As a result, each journey is one-of-a-kind.
That means there will be a breadth of practice toward pursuing digital initiatives, but fortunately, this is something other banks have done well. Let’s see what lessons we can glean from leading banks which have been cited for their successful achievements in creating new digital business models.
The old model of business organization served civilization well, but it may well have run its course.
Hierarchical, siloed structures gave rise to empires, but not open-border unions of states. They brought us billion-dollar companies, but not trillion-dollar companies. And they built bridges and skyscrapers, but not the internet or distributed ledgers. A company that focuses on how to deliver a product to its customers, has to keep the decision making as close as possible to them.
“Up till now, we have been running DBS as a business with technology supporting the business,” Bidyut Dumra, DBS’s innovation head, told researchers at the Massachusetts Institute of Technology. “But as we entered the digital era, there was a stark realization that from a customer perspective … we’re one organization.”
That led to reorganizing development teams away from the traditional project office model and toward what has come to be known as “platforms”. Instead of an app being envisioned in a business unit, designed in DevOps and deployed in service delivery, the individuals responsible for all these efforts join together as a collaborative team without organizational barriers to block their progress.
While this sounds reasonable enough as an organizational design strategy, be prepared for pushback. The bigger your institution, the harder this is likely to be.
“We weren’t going to create this little starter innovation unit as an aside that was to disrupt the bank, which you’ve seen many organizations do,” said Dumra’s colleague, CIO David Gledhill. “The whole bank was coming with us, and therefore we thought of ourselves as a 26,000-person start-up.”
But organizations that move to the platform model tend to be glad they did. The employees -- who, like the targeted customers, grew up around tech -- are already accustomed to flatter organizations and willing to accept the empowerment the model provides. Looking outside your institution, you’ll find that any potential partner in the fintech space was following this organizational structure from the time of its inception; synching up your data might go a lot smoother if your organization is already in sync.
Of course, not everyone outside your institution is a potential partner. Many of them are competitors. The neo-banks are, like the fintech firms, already organized by platforms. Other legacy banks and thrifts, though, could well get to that state before yours does. If so, they’ll be the one forging partnerships first.
The processes that an enterprise pursued when it fell behind its competitors are not the ones that will move it ahead of them. While standard refreshes are the easiest asks during budget planning cycles, rip-and-replace simply isn’t the answer to everything, nor is it even a realistic possibility in all cases.
“I would caution [against] the belief that all the issues with a legacy system can be resolved with new software,” Ed Toner, CIO for the State of Nebraska, told GovDataDownload. “The same issues will reappear if they are not resolved prior to replacement. ... In some cases, the issues that already existed were not addressed before the replacement and the product had multiple defects upon release. In the worst-case scenario, the product did not function at all.”
The goal is to make the necessary processes easy to deliver once they’re put into a production environment. But which processes are necessary? That will change over time along with internal structures and external forces. Also, it is increasingly important to make those processes easier to deliver to customers in addition to employees. To the extent that they need to be accessible to employees, though, those might be employees of another firm. Fintech firms and other vendors will need access.
That in most instances is the main thrust of digital transformation. It is hard to conceive of a successful implementation that doesn’t include third parties accessing your institution’s data via the cloud. Leveraging readily available internal and third-party fintech services—e.g., new payment rails, utility bill payment services, and AI-supported loan decisioning—could all be facilitated by cloud technology helping the bank bundle new services rapidly enough for end customers to appreciate.
This transformation also hinges on application programming interfaces (APIs), which is the software that allows data to flow from one application to another.
We won’t get at all technical here, but the ease and speed with which APIs can be crafted and implemented is a major challenge for banks and credit unions. Suffice to say, it is critical to ensure the seamless integration of:
Your preferred coding language is almost an arbitrary decision, although more and more financial services enterprises are settling on Ballerina by WSO2 for APIs. Similarly, Kubernetes, the open-source, cloud-native suite developed by Google, has become the standard tool to function as the app server. Vendors will have different approaches to integration platform-as-a-service, or IPaaS, and proprietary CIAM suites.
While it’s great to be close to your partners and especially to your customers, it’s vital that you protect the data - which is as much theirs as yours.
Institutions are constantly shifting emphasis between security and user experience. Such banks as Crédit Agricole have used these tools to set the standard for meeting customers where they are while securing their identities and data across these multiple channels of engagement. This French financial institution is hardly alone, although it is exemplary. According to Computer Weekly, the Big Four consultancies agree that the banking industry is taking the lead in CIAM.
When banks empower their internal technical and business teams to be more agile, development cycles that once took months can take mere weeks.
Another way of posing the question “why change…” is “why not stay the same?” Not all banking customers are new to adulting! In fact, some of them - often the ones with the highest credit scores and funds on deposit - are newer to mobile technology. For their sake, it’s important to maintain the right degree of human touch and branch access. While we feel that the image of a person with graying hair fumbling futilely with their smartphone is an ugly and increasingly fictitious stereotype, it’s also true that people who have done things a certain way for decades might want to keep doing things that way. After all, they are the cash cows. It’s great to market to people who are striving for wealth, but let’s not forget those who have already achieved it.
Not only have digital-native neo-banks changed the game, more and more legacy banks are discovering new ways they can build their own capabilities. They might end up not only succeeding at taking market share away from their traditional rivals, but also from the neo-banks themselves.
Delivering seamless omnichannel banking is critical for banks operating in today’s sprawling and ever-expanding digital ecosystems.
We’ve had smartphones since 2007, so the broader population - including gen X - has had ample opportunity to get up to speed. As banal as Facebook Mobile or Candy Crush Saga might seem to younger adults, this kind of socialization and gamification has helped their parents get over the hump. The convenience of an app that can recognize your face, tells your account balances, send instant messages if any of those balances drops too low, autopay bills, and allow you to send cash to a friend or family member without the bother of writing a check - all for free - outweighs a single moment of confusion and uncertainty.
Once these channels are secure, banks are able to target, onboard, and delight more customers. These borrowers and depositors tend to be younger, so the bank’s continuing challenge will be to keep up with them. At the moment, they might just be interested in the app’s intuitive interface, ease of use, and convenience. But soon they’ll be taking out car loans, buying property, having children whose education must be funded and eventually enjoying a well-planned retirement.
The trick, then, is to minimize customer churn, thus maximizing lifetime customer value. Are your existing products, and the technology and partnerships that backs those products, ready to capture this opportunity?
Your institution has probably already undergone the process of digitization—moving from analog data management to digital. It likely followed that up with digitalization, which Gartner describes as “the use of digital technologies to change a business model and provide new revenue and value-producing opportunities”.
To make the distinction clearer: You digitize mortgage statements. You digitalize mortgage approval.
If that sounds like your institution, then maybe you’re ready to tackle digital transformation, through which you build a new experience for your customers.
Digital transformation is big, complex and your institution will never be done with it. And yet, it is past time to get started if you haven’t already. Don’t worry - you can learn from the experiences of other institutions that faced similar challenges.
Now that we’ve established the case for digital transformation, it is time to shift thinking from “why” to “how”. To know more about procedures for setting the foundation for a new digital target state, please download our e-book as a first step.
Over one hundred banks and credit unions across the world have called on us to design and implement this work utilizing our API management, integration, microservices, adaptive authentication, and cloud-native engineering technologies. Across industries, we have collaborated with over 800 customers in healthcare, government, transport, education, technology, retail, and telecommunications, conducting 18 trillion transactions annually since WSO2’s inception in 2005.
In the same vein, we are committing to walking you through the process of taking those crucial first steps through our series of articles and e-books and invite you to sign up for our newsletter to be the first to receive new chapters as soon as they are released. We will guide you towards this exciting digital journey and help you build a future-proof bank.