Across industries, digital innovations are changing how we do business. In the banking industry in particular, changing customer expectations and heightened compliance demands are among the factors driving a need for digital transformation. With 78 percent of tech-savvy consumers reporting that they would consider banking with a tech firm such as Amazon or Google, the future of traditional financial institutions depends on their ability to successfully adapt infrastructure and processes in order to compete in the digital economy.
Despite this imperative, digital transformation lags within the banking industry. In a recent global survey of technology leaders, 68 percent of CIOs within the financial sector reported that their company either did not have a clear digital vision or strategy or said they had a siloed vision that only existed within individual business units. But in order to meet customer expectations for faster, more personalized service, and to satisfy industry-specific regulations, a holistic approach to digital transformation is a must.
What’s standing in the way? Here are the top three digital transformation challenges in banking.
Challenge 1: Setting an effective technological foundation for digital transformation
Across all industries, legacy systems are a key factor standing in the way of successful digital transformation. But these problems are especially prevalent within banking, where some of the largest banks in the world still rely on core systems that were built 35 years ago, long before many of the improvement-driving advances we’ve come to expect were put into use. According to the 2018 Retail Banking Trends and Predictions report, 69 percent of banks are unable to leverage service and product-enhancing innovations due to legacy systems and dated back-end processes.
In order to compete, banks must consider expanding the role of IT, rethinking the function of technology as a crucial, over-arching driver of business strategy rather than a mere support channel. This can help to ensure that the system updates required for digital transformation are an organizational priority and that digital becomes central to any investments and strategies moving forward.
Challenge 2: Data-driven decision making
The demand from consumers for personalized banking services and the potential of automation to improve the efficiency and costs of delivering key services are two reasons the effective utilization of data is a business imperative for banks. Clean and accessible data is also a major precursor for digital transformation. But an industry that has long been reliant on paper – from checks to mortgage applications and other documents – has inherent challenges in this respect.
Paper is a problem because automated algorithms and processes require data to be in a digitized format. When documents have not been appropriately transformed using Optical Character Recognition (OCR), that data remains locked within; even traditional scanning methods – which essentially only create a photograph of the page – cannot make the written information digestible for computers. Furthermore, as data often exists in various formats or in silos within business units (for example, one customer may have separate profiles for credit cards, mortgages and other products), banks may have additional challenges transforming stores of discrete information into the holistic and uniformly-formatted data pools such processes run on. For this reason, the capture, conversion and classification of business and customer data is a necessary early step as banks approach digital transformation.
Challenge 3: Digital transformation amid heightened security and compliance requirements
Digital transformation does not carry equal burdens across industries – banking is subject to heightened security and compliance rules due to factors such as the highly-sensitive personal information contained within profiles and transaction records and regulations aimed at safeguarding the health of the economy.
On the surface, this may seem to put banks at a disadvantage, especially compared to newer players within the fintech sector who may not have to play by the same rules. But though security and compliance requirements are often seen as obstacles to digital transformation, the truth is that digital transformation should be viewed as a tool for reducing risk. For example, according to McKinsey, better use of data analytics can lead to risk-reduction savings valued at up to $1-billion annually for some large banks. Such savings might include a reduced risk of fines and compliance violations due to more accurate reporting, the improved management of sensitive personal information, and the reduction or elimination of other risks.
Between the service expectations of a new generation of banking customers and heightened regulations requiring full visibility into organizational data, banks cannot afford to lag behind on digital transformation. But in order to drive forward, they must first overcome key challenges, including outdated systems and siloed and unstructured data.