Innovate, Operate, Engage: Defining Digital Transformation in Retail Banking

Digital adoption provides tremendous potential for banks to improve efficiency, optimize processes, and increase customer convenience with innovation, among other benefits. Some of the world’s largest banking institutions are already embracing enterprise software development to tap these values.

While the banking sector has traditionally been resistant to change, the pandemic implications coupled with a fierce competition from fintechs forced banks to accelerate digital transformation.

Banking is changing faster than ever before, and so are its customers. Traditionally, they used to have long-term relationships with their banks. Sometimes this was built on loyalty, but mostly it resulted from inertia and the difficulty of switching banks, which allowed banks to stay complacent and concentrate on pushing products with little regard to the segmentation of their customer base. By perpetuating such an approach in the current customer-centric reality, banks run a risk of losing customers and falling into oblivion.

Considering consumers’ fast-changing attitudes, delivering exceptional customer experience is no longer something that can be put on the back burner. Customers want the ease of use, simplicity, and responsiveness. Not getting these, they are quite likely to switch the provider despite the perceived complexity of the process.

Historically, high fees and low deposit gains have always been the main reasons for considering a provider switch. However, with increasing rates of digitization, the quality and convenience of mobile and online banking services have become almost equally important for consumers.

Finance website abandon rates exceed 75%. The score is so high because lengthy forms, impertinent questions, and cryptic jargon so typical of banking deter visitors and dissuade them from engaging with a website or application. That’s why reducing customer effort at each step of interaction with a bank across all digital channels is conditional to closing sales. Every customer journey is a new business process; it should be refined by removing all unnecessary exchanges, business rules, and hand-offs from the course.

Think of opening a new account and all elements involved in the process. In some cases, it may seem extraordinary how much waste has crept into this basic banking activity—legal and technical stumbling blocks, long application forms, the confusing account offers, visiting a branch to finalize all the forms. Now, examine every single process in your bank from the end customer perspective and determine how you can simplify each of them for the user.

Start from customer journey mapping:

Consider BBVA’s service Bconomy, a personalized banking plug-in that examines user income and spending and benchmarks them against those of people with similar demographics. Using a very simple and intuitive tool, the bank provides customers with a relevant, comprehensive, real-time analysis of their finances and creates personalized recommendations. Another example is Bank of America’s AI chatbot, Erica, which supports customers with simple activities like transaction search, money transfer, or basic advice on products and services. These are examples of unsophisticated digital products that deliver superior customer experience.

Customer-centricity is about "putting the voice of the customer at the center of everything we do” (Miguel Uccelli, CEO and Country Head of Scotiabank Peru). It’s an approach that fosters positive customer experience at every step of customer engagement with a bank. When done right, it optimizes lead conversion, nurtures customer loyalty, and drives repeat business.

Banks can build long-lasting, meaningful relationships with their customers by making customer-centricity the core value not as a one-off effort, but an ongoing, clearly articulated transformative process that penetrates every tissue of their organization. Instead of reactively responding to customers’ feedback, banking institutions can leverage digital tooling to anticipate customers’ behaviors and expectations and redesign services from their perspective, ensuring omnichannel access in the most convenient way.

A general bank (one that offers both corporate and retail services) needs a huge workforce for many areas of the business that are not customer-facing. Like in all businesses that have many bases to cover, some of this work is managed competently while some business units just scrape by, as no company can be excellent in everything it does.

Normally, if a product, service, or business unit is struggling, the parent company will discontinue its efforts in that area, if they can. Banks are not so fortunate, because they have onerous administrative work that they cannot dispose of. Most of this work is in the governance, risk, and compliance areas (GRC). While some banks have no problems with compliance, most banks are less than competent in risk management, which may result in heavy fines. According to Fenegro, enforcement actions against financial institutions totaled $5.4 billion in 2021.

Enter the fintech category that fixes all that: RegTech. These are companies that focus on risk and threat detection and report to the necessary authorities on disciplines ranging from Sarbanes-Oxley to Basel III. These fintechs offer a huge opportunity for banks to unbundle much of their GRC infrastructure and outsource it to these specialist companies.

RegTech is a growing trend, and will probably be the norm in a decade or so (if there will be still any banks around). ClauseMatch, Privitar, and ComplyAdvantage are among the leaders of the pack, with investment and usage by leading banks such as Barclays, HSBC, and RailsBank. Related services, such as cyber security and identity management, are also classed as RegTechs.

Finally, we reach the last critical component of digital transformation in banking—enabling technologies. It is possibly the trickiest part, as, on the one hand, IT spending in banks and financial institutions is expected to grow by 6.1% in 2022 to $623 billion worldwide (Gartner), and on the other hand, those organizations still lag with innovation.

While most banks understand that investing in digital transformation is the only way forward, they are hamstrung by aging legacy systems and have to resort to bolting mobile apps and online banking onto their complex and siloed back-office applications. This is a short-term fix; this outdated architecture has to go and be replaced by a new open digital platform.

Whether or not a bank has moved or is moving to a digital model, all of them recognize technologies that they will need to introduce in the next few years if they want to remain competitive and relevant. Here are the most critical of them.

AI is forcing its way to the top of the list for digital adoption in banking. This is hardly surprising, considering that the collective potential cost savings for banks from AI applications are estimated to reach $447 billion by 2023 (Business Insider).

However, most institutions still have a long way to go before they can realize the business benefit of data and convert it into business intelligence. First, the walls should be broken down between all the data silos common to most banks. They are usually product-based: mortgages, credit cards, and vehicle finance each have their view of the customer, which probably differs from the customer data for the checking account. Second, data quality should be addressed, together with a comprehensive data cleansing exercise to result in a single view of the customer. Once this is done, the linking of social and mobile data can occur, enabling the bank to build a personalized view of the customer.

Once the data is trusted, different AI solutions can be considered to extract value. Banks are using AI in a number of ways to streamline operations and to make the customer interface leaner and more responsive.

Some examples of the use of AI in banking include:

Digital transformation can be as daunting as any radical shift. The sooner banks overcome the fear of technology and develop strategies to onboard new technologies and services, the quicker they will reap the rewards of digitization and position themselves for success.

Digitizing a company’s existing processes, systems, and assets doesn’t have to be an overwhelming task. Take a realistic, objective look at your situation, identify gaps and areas for improvement, and start from crafting strategies for the above three pillars of digital transformation.