According to the 2021 World Retail Banking Report, 42% of bank executives polled said that they were not sure how to integrate and optimize mid-, back- and front-office functions effectively. 46% said they are unsure how to embrace open banking, orchestrate the ecosystem, or become a truly data-driven organization. There was an industry-wide conversation on what to make of the digital transformation in banking.
While most bank leaders understand that digital transformation is essential for long-term success and sustainability, many find themselves stuck using banking solutions that were created using outdated concepts and legacy frameworks. To keep up with the quickly progressing digital market, banks must adapt their operating models and place a greater focus on user experience.
Why Embrace Digital Transformation In Banking?
Consumers value time and engagement more than ever. Community banks that invest in technology and digital transformation are better positioned to keep up with customer’s growing expectations. They can also create a more accessible, efficient, and personalized customer experience.
Data-driven analytics provide real-time recommendations to create better, newer engagement methods and shift the bank’s focus onto consumers rather than products. Furthermore, digital innovations allow financial institutions to easily integrate their services into the customer’s daily life and needs.
Hesitancy to adopt digital transformation and update bank systems can result in difficulty with new customer acquisition, in addition to low customer retention. This is due to clients leaving to work with more tech-savvy competitors.
Reduction Of New Loan Applications And Accounts
The lack of options for online loan applications or account opening capabilities is a primary driving factor behind the decline in new customers. As society is becoming increasingly accustomed to digital options, competitors that offer online banking with a full suite of services stay ahead of the pack.
The adoption of the most modern and robust digital frameworks by large institutions creates higher expectations from customers for financial institutions across the board to do the same thing.
Concerns Arising From Data Security Leading To Customers Unwilling To Share Data
Many consumers have historically been reluctant to share their personal data digitally due to security-related concerns. Given that data breaches and events involving hacking or data leaks seem to grace the news regularly, their concern is understandable.
However, financial institutions that upgrade to sophisticated and secure applications simultaneously reduce their vulnerability to risk and address consumers’ security concerns. This may result in customers who choose them over the competition.
Inability To Provide Product Recommendations Due To Siloed Data and Inferior Analysis Tools
Many traditional financial institutions cannot keep up with customers’ demand for efficiency and productivity. They still rely on isolated and siloed organizational structures, as well as out-of-date analytical tools. All of these contribute to rising service costs, marginalizing customers’ needs, and reducing both the speed and efficacy with which a firm can respond to problems. As a result, banks that have not upgraded their systems still offer products that cannot compete with non-traditional institutions and earn the reputation of being obsolete or outdated.
Challenges of Digital Transformation in Banking
While the benefits of digital transformation in banking are numerous, the journey is fraught with challenges that need to be carefully navigated.
Legacy Systems and Infrastructure
One of the most significant obstacles is the presence of legacy systems and infrastructure. These outdated systems are often deeply integrated into the bank’s operations and make it difficult to replace or upgrade them without causing disruptions.
The challenge lies in modernizing these systems while making certain of business continuity. Banks must invest in scalable and flexible technology that can support future growth and innovations without compromising current operations.
Regulatory Compliance
Banks operate in a highly regulated environment. Any transformation effort must comply with stringent regulatory requirements. Handling these regulations while implementing new technologies can be a challenging and time-consuming process. Financial institutions must work closely with regulatory bodies to make sure that their digital initiatives meet all legal and compliance standards. Failure to do so can result in hefty fines and damage to the bank’s reputation.
Data Security and Privacy
As banks digitize their operations, the volume of data they handle increases exponentially. Assuring the security and privacy of this data is vital. Cybersecurity threats are constantly progressing, and banks must be proactive in protecting their systems against breaches and attacks. Hence, implementing reliable security measures and maintaining customer trust through transparent data practices are essential components of a successful digital transformation strategy.
Cultural and Organizational Resistance
Digital transformation is not just about technology; it also involves significant cultural and organizational changes. Employees and management must be aligned with the transformation goals, and there must be a willingness to embrace new ways of working.
Resistance to change can hinder progress. Banks need to create a culture of innovation and continuous improvement. Also, training and development programs can help employees acquire the necessary skills and mindset to thrive in a digital-first environment.
Why Do Digital Transformations Fail in the Financial Sector?
Financial institutions that pursue extensive digital transformation do so to create competitive advantage and attract more customers. Before embarking on this journey, there are major factors to consider in order to be successful.
Review The Underpinnings Of Traditional Banking Organizations
Banks that don’t update their systems will find their disadvantages far more numerous than banks that do. Traditional banks often identify challenges in the form of high operating costs, outdated core systems, difficult and inefficient back-office operations, and legacy leadership and culture.
Transformation can fail if these core inefficiencies are not properly identified and resolved before selecting and implementing new technology. Otherwise, the new upgrade may not function any better than the sum of its weakest unresolved elements.
Cost Cutting: A Short-Term Solution With A Long-Term Impact
Some banks may wish to take a more cost-efficient route and spend less money on technology while simultaneously updating their systems. While this may seem like a viable short-term solution, the consequences are too long-term for this to be a wise course of action.
One example of this strategy has appeared repeatedly in recent attempts across the industry to modernize while cutting costs. Firms fail by pursuing mergers and acquisitions and other growth strategies without supporting the infrastructure to scale appropriately and support the growth.
Learn More About The Benefits Digital Transformation In Banking
Transforming a bank to adopt a more digital, tech-focused strategy is not easy or inexpensive. The experts at Hartman Executive Advisors are experienced in helping community banks and financial institutions embrace digital transformation. We guarantee that the money spent results in measurable outcomes. Reach out to learn more or to schedule an appointment to get started.
