Banking Transformation
Banking Transformation
This is an introduction to Banking Transformation. This is based on an article written jointly by Ambrish Sundaram and Monty Pandey.
What is Digital Transformation?
Digital Transformation implies the use of digital technologies to enhance customer and employee experiences, operational processes and business models, by achieving an ongoing state of agility and responsiveness that leads to lasting business growth. Digital technology dramatically improves the economics and capabilities of every business. It’s not about implementing a specific technology, or project, or a group of projects, though it may include integration of several technologies and strategies.
Why Digital Transformation in Banking?
Traditional banks are saddled with old clunky technology, data model and processes. Digital Transformation is disrupting the banking sector driven by technology innovation and process optimization. Conventional banking margins are eroding, while customers expect more. Fintech companies (non-banks) are flooding the financial services market with new product offerings with shorter time to market cycles and lower governance costs. With recent increase in cybercrimes, banks can fight back with focus on their core intrinsic values such as customer experience, trust, discretion, security and compliance. Digital transformation in banking will lead to higher customer satisfaction and reduce the pressure on costs with deployment of agile and efficient operating models and technology platforms.
With the current Bank 4.0 model, there is first principle rethinking on how a bank should work. Banks are no longer a physical place, rather a platform utility that provides the ability to store value, ability to move money, and ability to access credit. Banks should provide cheap customer acquisition with easy digital onboarding, and low friction self-service engagement with anytime, anywhere, simple and convenient transfer of value at minimal transactional cost. Banks are expected to provide deep, secure, intimate, personalized advice in real time at scale. They provide a framework that monitors customer behavior to create a detailed risk profile and provide real time assistance on how to spend wisely, save wisely and invest wisely to help customers achieve their life ambitions. Banks aim to secure the financial well-being of people, households, communities and corporations. The future of banking depends on this.
What does it involve?
Digital transformation in banking largely entails the shift to offering online and digital services, as well as the extensive backend changes required to support this transformation. It includes changes across the entire spectrum including customer onboarding, omni-channel inputs and outputs, intelligent automation across payments, credits and security processing, front and back office functions, transaction processing, data processing, master data management, processing optimization, security and compliance. This requires big investments in technologies like social, mobile, analytics, cloud, big data, automation, personalization and artificial intelligence.
Key Focus Areas
Digital transformation may look daunting, but it does not have to be an incredibly expensive and lengthy process. There are a few key focus areas for digital transformation:
- Become customer-centric
- Prioritize change management
- Flexible operating model
- Leverage data analytics
- Agile IT platforms
Become Customer Centric
Banks have to recognize that digital transformation starts and ends with customers. Banks have to put customers at the forefront and determine how to provide them with an experience that is as smooth as possible. Customer centricity has to be an integral part of a bank’s overall strategy.
Traditionally, leads identified by the marketing department are transferred to sales and thereon to customer service. A customer goes through several departments before they ever receive a product or service, resulting in a disjointed and impersonal result. Customers expect the relatively painless experience they are used to with consumer tech companies like Amazon, etc.
Banks have to map the customers’ journey from start to end and help them move seamlessly from sales to customer service to product support, all through a single app or online portal. This would allow a customer to use self-service on their app or portal to complete all tasks including click on an ad, sign up for an account online with an easy onboarding process, and receive automated decisions such as loan approvals, pay bills and transfer funds online.
Banks have many customer journeys and it may be difficult to map all of them at once. Banks have to prioritize their key consumers and map their basic needs like initial prospecting, sales, onboarding, transactions, and account management.
Prioritize Change Management
Bank employees at bank branches, call centers and operational support need to change from being product centric to being customer centric. Digital transformation entails changing the practices, beliefs, incentives, and experience of the people who work at the bank, and they need to acquire new skills to meet customer expectations.
Successful digital transformation requires complete buy-in from all the employees and this requires extensive training and communication. A best practice would be to identify and appoint digital transformation ambassadors to usher in the new cultural changes.
Employees require coaching and mentoring to become curious about emerging digital practices, new services, and technologies. Leaders and executives have to be more embracing of errors as the organization takes a test-adopt-learn approach. Feedback and lessons learned should be frequently shared with internal teams, clients, and partners. Leaders – CXOs – have to initiate, lead and emphasize the vision and goals of digital transformation.
Flexible Operating Model
Digital transformation does not imply that all interactions with customers have to be digital. Customers are looking for the right mix of digital and human interactions. They recognize the need for greater speed and efficiency for managing their accounts, making bill payments, getting loan approvals and transferring funds. When it comes to more complex areas such as wealth management and investments, customers are looking for more human interaction, where they can discuss with and seek personalized advice from experienced professionals. Banks have to use a flexible operating model to meet these hybrid expectations of customers.
Banks may be at different points in their transformation journey, depending on when they started, and the speed of implementing and adopting changes.
Banks that are just starting on their digital transformation could maintain their current operations as is and offer digital products and services in an incremental manner. This would first address the low hanging fruit and learn lessons from the incremental efforts. Internal talent can be retrained to meet the incremental needs of the initiative. As the pace of transformation picks up, the bank will have to break down any organizational silos.
Some banks may choose to create a separate digital products and services department that owns all the digital initiatives. This could include a shared services model for IT, HR, Accounting etc. This provides clear accountability for progress of the digital initiatives resulting in a faster pace of transformation. This requires a combination of retraining internal talent and hiring from the outside. There will be a temporary increase in costs and complexities due to coexisting digital and legacy platforms during the transition.
Banks that are digital transformation leaders could establish a new digital entity focused on acquiring customers who are more digital savvy. This entity would have their own Budgeting, Accounting and Finance, HR and Information Technology departments. This approach allows the bank the greatest speed in the execution of the digital transformation, with accountability and authority completely residing with the new digital entity. The new entity is not burdened with legacy systems and processes and has the autonomy to make its own decisions by leveraging state of the art solutions and building new capabilities. This will increase the overall costs for the bank and will need to migrate existing customers to the digital platforms.
Banks have to flexible and adopt the model most suited to different markets, regions and business lines. Added complexities and increasing costs could pose challenges that will require banks to continuously manage the changing requirements and expectations.
Banks that have a significant market share in core product areas and are faced with demand saturation, could leverage their digital entity to grow into relevant ecosystems that provide the services customers want at a lower cost and with greater convenience. For example, a commercial bank could extend its offerings to include services like accounts-receivable management, factoring, accounting and cash-flow analysis to small and medium enterprise (SME) customers. This can provide additional revenue for banks and protect against customer erosion by finTech start-ups and digital giants.
Digital transformation is a journey, not a destination. Banks need to commit to a long-term vision by embarking on the digital journey, even when the end goal is not clearly defined. Banks have to adopt an incremental approach of test-and-learn and frequently review plans and priorities to stay competitive.
Leverage Data Analytics
Banks have a huge amount of customer data and this data should be leveraged to understand customer behaviors and provide real time feedback. This will help the bank in identifying opportunities, optimizing products and services and automating solutions.
Leveraging customer information allows the creation of targeted marketing campaigns. Customers do not want to be bombarded with ads for products and services that have no relevance to them. For example, using data analytics banks can predict when a customer might need a loan or an insurance product, providing opportunities to cross-sell and up-sell other offerings.
This same data can be used to provide special offers leveraging promotions and discounts from the banks’ partners. This will help with customer retention. Based on payment patterns, analytics can predict when a customer might default on a loan, allowing the bank to extend a personalized offer to that customer, thereby enhancing the customer’s experience.
Bank can also analyze payment networks to identify potential customers who are affiliated with their current customers. The bank can then contact these potential customers and market the benefits of being on the same platform as their business partners. Banks can use data mining to create profiles of their best customers and use reverse-lookup to find prospects with similar profiles and market relevant products and services to them.
Data mining can also help banks develop customized pricing models based on how much a customer may be willing to pay for a specific service. This would lead to the development of customer-centric pricing bundles leading to increased revenues.
Data is growing exponentially, and most of this growth has been in big unstructured (non-relational) data. This requires investments in new IT capabilities to analyze and store this data and use it for a variety of offerings for customers, as well as manage risks for the banks.
Agile IT Platforms
Digital Transformation requires an ongoing state of agility and responsiveness, so that digital assets including technology, functionality and data, can be securely leveraged, reused, combined and shared, with little friction across the company and ecosystem, so that the bank is always ready to evolve for whatever the customers may want next.
Banks need a fundamentally flexible three-tiered architecture IT platform:
- At the base is the core banking system, which forms the backend of the architecture, and is characterized by its ability to support fast resilient transactions.
- The middle tier comprises the customer intelligence kernel where the business logic resides and is built on top of the core system. This is where the bank creates a single 360-degree view of the customer based on robust data management capabilities. This is where dynamic pricing models, loyalty programs and the like are built and managed.
- Branches, call centers, web and mobile applications and other third-party apps form the front-end tier that connect to the middle tier through Application Program Interfaces (APIs).
The above requires a decoupling of traditional infrastructure, services and teams, and the creation of a loosely coupled architecture around cloud, containers, APIs and microservices. Instead of monolithic applications, banks need to build numerous small single function microservices, which are assembled together to create applications and digital experiences. Microservices use APIs (Application Performance Interfaces), which decouple back-end complexity from front-end development. Microservices are associated with Containers, which decouple applications from both hardware and operating systems. Management tools are used to manage the resulting complexity and security, reducing human intervention. There is a shift to smaller and faster independent teams doing parallel development, that can more quickly, deliver new features and experiences, learn from them, and rapidly iterate, increasing the pace of innovation.
Governance
Digital Transformation has impacted every aspect of the banking and financial services industry, and more change is on the horizon. Digital transformation is imperative for banks and financial services companies to continue to stay alive and operate profitably.
Digital Transformation always starts at the top due to its massive impact. Leadership capabilities are the key to implementing successful transformations. Bank leaders define a transformative vision, with clear intent and outcome. Vision sets the direction and may evolve over time. Bank employees are engaged at scale to make the vision into a reality. Employee engagement includes connecting (through wikis, microblogs, social networks, video conferencing), adopting (using executive involvement, digital champions, mentoring, use cases) and scaling (new ways of working together).
Digital transformations are enabled by IT, so IT and business need to collaborate closely for success. Digital Transformation governance is managed through a Digital Transformation Office (DTO), led by a Chief Digital Officer (DTO). DTO coordinates across business units and geographies. Digital Transformation Roadmap is established to drive the delivery timelines for various transformation initiatives. Delivery Cadence of weekly transformation meetings and monthly steering committee meetings are an indispensable part of an effective performance infrastructure. Tools and Systems to monitor performance include metric dashboards that track initiatives by departments, owners, projects and delivery status, to easily spot delays, observe trends and monitor impacts.
By making customer centricity a priority, continuously communicating the vision and strategic plan, seeking employee buy-in, operating with an agile mindset that focuses on efficiencies and innovation through state-of-the-art technology, banks can succeed in their mission of digital transformation.
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