Digital transformation in banking: 5 trends to watch
Technological advances over the past decade have seen massive shifts in the way companies do business. One significant area of change is the digitization of many aspects of business, commonly referred to as digital transformation. No industry has been left unaffected by this transformation, and those that are slow to adapt risk greater disruption than the early adopters. A 2018 survey of US and British IT decision-makers, undertaken by Alfresco Software found that 40% of the respondents believe that banking will be negatively impacted by failing to move ahead with digital transformation initiatives.
Banking is a heavily regulated industry, limiting the ability of newcomers to compete with banks directly in all areas. However, traditional banks are now facing more competition than ever before with the rapid rise of digital startups in the fintech space. The speed at which some of these fintech companies have grown is incredible. Take, for example, Brex, a US lending startup founded in 2017 that was able to reach a billion-dollar valuation in under two years. This competition means that for traditional banks, dragging their feet on digital transformation is not a viable option.
What are the key areas of digital transformation in banking?
Digital transformation in established industries is not an overnight process and takes place in stages in numerous areas including:
This is the most obvious starting point when discussing digital transformation in any industry. When it comes to banking, probably the most significant technological change in the modern era was the introduction of online banking. While there were some early developments in this space in the US and abroad in the 1980s, a significant milestone was with the introduction of online banking for all customers at Stanford Federal Credit Union in 1994. From that point onwards it gained widespread adoption by banks and acceptance from customers and now it would be difficult to imagine not having online access to our bank accounts.
Moving forward two decades and there are now a number of exciting new technologies driving digital transformation in banking including:
Banks have long relied on mainframe computers to meet the demands of their industry. Security and reliability are essential in banking, as well as providing the computing power to deal with the enormous volume of transaction data generated daily. The downside of using these mainframe computers is that they require significant expense and staffing to maintain. By embracing cloud computing banks are able to save considerable costs, possibly as much as 50%, while improving scalability and security and also unlocking the potential of real-time analytics.
Artificial intelligence (AI) & machine learning (ML)
AI and machine learning has many applications that have the potential to dramatically change the banking landscape. This can be realized in a number of ways including reducing fraud, managing credit risk, identifying a bank's most valuable customers, and utilizing a wealth of available transaction data to improve the customer experience. A study by McKinsey estimates that the value of AI and ML could be worth as much as USD$1 trillion annually to the global banking industry.
While many people have been introduced to the concept of the blockchain as a result of the media coverage of Bitcoin, it is a technology that has the potential to disrupt banking significantly. This is already well realized by numerous fintech companies when it comes to areas such as reducing the time and cost of transaction processing. As a result it has become important that banks be willing to embrace this technology as well, or risk losing more market share to the companies that do. A recent Bank of America study showed that at present only 21% of banks have implemented blockchain technology in some form, leaving plenty of opportunity for growth in this area.
Just as important as the rise of these new technologies are the ways in which using them is changing business processes for bank employees and customers. So what are some of the key processes banks have been updating on their digital transformation journey?
The Covid-19 pandemic played a big role in advancing the timeline for digital transformation across almost all industries around the world. A 2020 survey of C-Suite executives by Twilio, found that 97% agreed that Covid sped up their company digital transformation plans by as much as six years. Furthermore, more than three-quarters of respondents said that Covid increased their budgets for doing so as well. In the early days of the pandemic, with little understanding about how transmission occurred, the need to reduce contact with surfaces and other people became a priority.
Contactless banking and transactions had already seen some degree of adoption through the use of tap and pay technologies, the Covid pandemic saw an explosion in the number of retailers utilizing it. Credit card payments made via contactless methods are expected to rise eight-fold in the next four years and some financial institutions are utilizing the technology to allow access to ATMs without the need to touch any surfaces.
Robotic Process Automation (RPA)
Unlike the digital native fintech startups that are competing within the financial sector, traditional banks have the disadvantage of dealing with the issue of legacy computing systems as we touched upon earlier. One way that banks are able to bridge the gap between these legacy systems and newer technologies is using robotic process automation (RPA). RPA bots can be integrated with existing software platforms and utilized to automate many repetitive tasks, freeing up employee time to perform more complex and valuable tasks. A report by accounting firm KPMG suggested that RPM could save financial institutions as much as 75% in cost savings due to the reduction in need for many offshore jobs.
RPA is able to offer benefits to customers when it comes to services like opening a new account. What once involved a trip to the bank with all of the necessary information and ID paperwork can be achieved in minutes online with RPA. Not only is this significantly more convenient for the customer, it also enables the bank to easier maintain compliance with regulations such as Know Your Customer (KYC) and Anti Money Laundering (AML).
While banking, along with others in the financial sector have been more advanced in their digital transformation process than many other industries, there is still plenty of opportunity for them to thrive in the new normal. Forward-thinking banks will embrace these exciting new technologies to reduce costs, become more efficient and increase customer satisfaction, securing a place for themselves in the digital future.