Digital Banking prospect in future

DIGITAL BANKING TRANSFORMATION

Digitalization or digital has become a catchphrase across all economic sectors in the world which is affecting human lives and livelihoods. It is a stark reality that at the one side worldwide human beings debilitated under the grip of the COVID-19 pandemic and almost stopped all activities to a grinding halt, somewhere ray of light beaming which changed the entire work culture in a digital chain to such extent that it becomes virtually impossible to escape from this digital era. We explore the core concepts to guide banks into the digital era, problems emerging in this digital disruption to ensure a smooth transition of all stakeholders with minimal distresses sweeping through the financial industry. Facing exponential competition from internet giants, fintech, Facebook, and other players, banks now have a critical need to catch up if they want to remain competitive. Digital-only transactions are expected to increase as technology and people’s comfort in using it improve. However, even the most sophisticated technology can replace human interaction and relationships, which will always be of value to the business and higher net worth clients.

?We could easily observe the following megatrends or larger waves ?pervading in the banking industry over the last decade rapidly spread from 2020:

Ushering in the digital transformation era

Consumerism followed by globalization, with the integration of markets, and brought new business ideas for banking. The aftermath of the dot-com boom of web-based banking based on the ideas of anywhere and anytime banking grew popularity while branch banking began to slide down. The financial collapse in 2008 exposed some banks' lending and fund management under close scrutiny by regulators. After that banking holds the impression of need-based and goal-based banking as the outcome matters more to the banking customer, with uttermost personalization of products and services.

The above environment brought in new-age banks with higher judiciousness levels and paperless transactions with traceability of digital metrics. This opportunity was leveraged by the arrival of fintechs, which took benefit and monetize the ineptitudes of banks.

?Get the digital basics right

It was not a true expression of the common man who understood digital is about a “touch” involvement. In fact, digital is all about ethos – a perception from the front, middle, and back-office of how a bank operates.

For most of the bank Executives described, digital means doing things right, quickly, and without error while simultaneously enriching the customer experience and maintaining operational costs. Therefore, banking transformation became imperative which went via multiple transformations, by investing to adopt new technologies to deliver quicker services and an improved experience. While they are confronted almost daily by shifting regulations and cross-border geopolitical issues. The whole journey of ?banks changing face required digital transformation as ?a necessity for the following reasons:

Altering consumer attitudinal outlines: The rapid exponential proliferation of digital penetration, has made consumers more tech-savvy and the high expectation of their banking experience, as other sectors have done. Consumers do not only require from banks easing only the financial process, but need full personalized services. The general public identifies the bank of the future as a marketplace to serve to all their financial needs without complex procedure.

The growing new fintech very swiftly: Though to some extent they have succeeded in grabbing some market share from the traditional banking business, It has made the banking industry mitigate its shrinking market share by promising specifically for required services, speed, and simplicity. This is intensified by venture capitalists whose investments in fintech grew by 120 percent year-over-year to $40 billion in 2018, to make them capable to grip market share from them.?Thus, it becomes a necessity for banks to be better organized, more agile, and efficient in order to survive, sustain, and propagate. The bank customers is persuaded by Fintech to shift to omnichannel customer experience. Fintechs are “better at engagement” because their design has centered on users from the start, using the latest data about cognitive psychology, usability, accessibility, and behavioral economics. By contrast, the experiences from larger institutions (not necessarily just banks) have evolved over time based on legacy experiences

?Out of sync ?IT systems:?Consumers expect prompt access to products and services. Banks have also realized to offer these services within peer ?TAT ?to retain their market share and also understand. Banks realized that their IT assets are no longer sufficient to support the fast-paced changes happening at the front end of their business. Therefore, banks need to organize their IT landscape and processes to manage risk and build an IT landscape that can respond to the new service landscape. “Instant and real-time are becoming the buzzwords in the banking industry,”.

Digital transformation readiness goes beyond technology — which, of course, has its costs and challenges. But a more difficult barrier is culture. Digital transformation, mainly if it includes adopting an Agile development methodology, requires distributed decision-making to empower lower-level team members. That’s a challenge, particularly in larger, more established organizations where most decision-making is centralized at the top. Also, it is critical to recruit, develop, and retain people who can make the right decisions and thrive in an Agile organization. Shifting hiring practices is neither fast nor straightforward.

Journey to transform

Eliminate redundant processes

Understanding process depth and breadth is essential. However, an Infosys survey revealed that while each bank service line is aware of process importance, enterprise documentation for processes, control systems, execution principles and exception resolution are either missing or outdated. For example, banks employ the “four-eyes” principle, where each lending process is vetted twice and dual validation occurs.

Processes can be implemented to overcome the interoperability issues between systems and departments. Determine whether the processes add value to the customer landscape, whether they mitigate risk or whether they support asset classes. Introduce more robust process management systems and validate each process.

?Simplify application management

The average large bank has 4,000 to 5,000 active applications. Today’s technology, with multilayered computational capability, can reduce those applications to a manageable number. A governance structure can be set up to assess the compatibility of applications for each process — where the data resides, how it is extracted, and how it is put into a data transformation. This enables banks to have a clearer picture of what can be removed from their processes and IT application inventory. Considering that there are a limited number of data attributes at the source, simplifying the process of data augmentation can yield a significant benefit to banking operations.

Evaluation of existing ?business infrastructure:

Fix whether the IT applications can support the business volume, technology trends, and customer behavior over the next decade. Retire those applications that cannot lead the bank toward its vision.

Mobile banking is a significant way that people connect with their banks, but we do need to remember that this is not the only way. Recently, banks have invested very heavily in online and mobile banking. But now they need to take a step back and consider how the digital channel works across the entire ecosystem across the experience across all channels, and this includes ATMs, phones, and branches. As much as possible, this experience needs to be consistent and supportive across channels, and customers need to be able to use their channel of choice, when they want, for what they want. Customers who download their bank’s mobile app may already have a higher level of trust and satisfaction with their bank. Customers must make an active choice to download a mobile banking app, whereas Google Pay is pre-loaded into most newer Android phones, and Apple Pay is already part of iOS on iPhones. This, too, is a challenge to banks and their mobile apps.?

?Execute without disturbing the business

Any planned execution must be done without undermining the bank’s business. A big bang approach will not work; a clear mandate about what is required will. An ideal transformation in three years will enable banks to mitigate risk and change the IT landscape to deliver better and faster services to customers. Banks can evaluate their processes internally or bring in an expert evaluator who understands the best practices and analyzes whether there is an opportunity to improve. Benchmarking processes, asset classes, and services against the best in class (such as fintech) provide a fair idea of where banks stand. This helps banks understand why fintech operates at higher efficiency, while their risk-return ratios outperform banks.3?While meeting the best in class will not give banks an advantage, beating the best in class will. Essentially, banks need to move from being explorers to visionaries, which is a Herculean task.

?DIGITAL OUTCOMES

Digital transformation helps banks on the following fronts:

1.??????Increase in market share

Banks can service customers better, faster, and at a lower cost. They can own the customer's need rather than the processes to fulfill the need. This shift in mindset from supporting processes to owning the end goal ensures customer loyalty.

2.??????Rise in profitability

As digital transformation leads to cost-cutting, an added advantage is the improvement in the bottom line and the return on equity. More importantly, it brings down transaction costs, increasing the entry barrier for fintech.

Cultural shift

A bank can build a culture that is cost-conscious, customer-conscious, and efficiency-conscious. This is an uphill task, however, because many systems, processes, and people have grown with the bank. A Boston Consulting Group assessment revealed that among companies that underwent a digital transformation, the number of profitable enterprises was five times higher when they focused on a cultural shift compared to those that ignored it.6?A bank can be an industry leader in keeping costs low, though, without compromising the quality of services. Our analysis of the top 50 banks suggests that the most efficient bank is also the one with a high degree of customer satisfaction.

Encounter hurdles on the journey

The most important hurdles that banks need to overcome when they embark on their digital transformation journey include:

APPREHENSION OF ?FAILURE

Transformation is a large initiative and cuts across stakeholders and multiple years. However, budgeting happens on a year-over-year basis only. The risk of a change in stakeholders and management always leads to apprehension — fear of no\\t getting funded and not getting a commitment from senior management. Insufficient budgets is one of the highest barriers to digital transformation. Some banks are comfortable with their status quo and are reluctant to change. This mindset acts as a hindrance and can impede potential performance progress. A ?lack of talent is a barrier to digital transformation. There are cultural and management aspects, beyond capacity constraints and program management issues. Investing in their workforce makes good business sense and will help banks in their efforts to future-proof themselves.

Evaluate whether the current talent pool can succeed in an ambiguous environment while keeping an eye on the objectives and the broader vision. If not, hire from the market or acquire those capabilities through strategic transactions. Communicate openly with multiple employee layers, from the CEO downwards, so everyone understands why the bank needs a transformation and their role in it. Evangelize the concept, including the need to transform and align with the digital vision and the industry changes. Studies indicate that only 10 percent of all large enterprises reach a 50-year life span. While it may be a slightly larger percentage for banks, only a few of them celebrate their centenary and become industry hallmarks. Cross-industry benchmarking brings in new ideas and fresh thinking. Ensure senior stakeholder commitment toward the support and funding in clear terms to avoid funding issues at a later point in time.

Banks need to quickly accelerate their digital transformation journey to stay relevant to consumers in the race against fintech. At the same time, banks need to implement necessary systems that mitigate. Banks and fintech are going to start partnering. This could be an acquisition, or this could be a partnership. Through these partnerships, both the large banks and the smaller fintech will be able to do what they do best and be able to rely on the strengths of the others. That partnership is essential, particularly for the fintech. Fintechs will have to be in compliance with these very complicated and arcane regulations.?It’s a barrier to entry for some smaller companies. Like Uber and Lyft, they may start by flying under the radar. But as these companies are getting larger, expanding their reach, and getting the notice of local and federal governments, they're now starting to have to comply with regulations, just as their larger competitors do. That is evening the playing field.?However, banking has several specific characteristics that define the priorities, goals, methods, driving forces, and other features of the DT peculiar to the financial area.?

?ADVANTAGES AND DISADVANTAGES OF DIGITIZATION IN BANKING

Digital transformation offers the following benefits to financial institutions:

1.???Improved security on all levels of data handling. Data encryption saves banks from external and internal leaks of information to frauds and competitors. Most importantly, it increases the safety of transactions.

2.???Faster operation and lower waiting times. Clients don’t like to wait, especially when they trusted your bank with big sums of money. Big Data processing systems with microservice-based architecture ensure fast and safe transaction processing.

3.???Better analysis and risk management for banking operations. You won’t have problems with fraud schemes if you have good fraud detection systems. Also, multi-level validation of transactions will eliminate the possible mistakes of your customers and your staff.

4.???Predictive capabilities. Knowing in advance what problems and transformations your market will face in the future is a key to your financial success. Having trusted information on different possible scenarios from minor stirrups to a global economic crisis will help you to prepare in advance. This way, you can make the right business decisions and integrate winning Fintech solutions before your competitors or switch your business to another more promising and financially rewarding industry.

5.???Customization. Customers hate receiving standard offers they don’t need but are positive about receiving timely offers aimed at solving their particular needs. Software with the right analytical and data mining and processing compounds, you will be able to customize your offers and make this process automated and safe.

6.???Automation of repetitive tasks. When managers extract the same information to build the same reports over and over again, it is mindless and inefficient labor for your staff and your company because you’re paying salaries for something that is done by the people for hours or days and can be done even better by one piece of software within seconds.

However, these benefits have their price, so here are some drawbacks of digital transformation in the banking industry.

1.???High risks in case of poor implementation. Banking is one of the few business areas that involve risks of extremely large financial and reputational losses. That’s why all digital transformation initiatives in this area must be carefully planned, modeled, and tested. The main goal here is to prevent any disruption of the existing flow of business processes and integrate innovations as seamlessly and safely as possible. Otherwise, vulnerabilities may appear that lead to leaks or loss of confidential information or a chance of unauthorized access to bank accounts.??

2.???High requirements for hardware and personnel. Digital technologies need highly skilled specialists to implement them in the most effective way. Moreover, hardware and software become obsolete over time, and businesses have to replace legacy systems with modern alternatives. For banking, the stakes and the requirements are much higher than in many other industries.

3.???High costs. With such high requirements, banking demands cutting-edge technologies and the best specialists available on the market. As a result, significant costs are involved. However, high costs on top-quality software result in bigger income and safety.

?I transformation strategy:

·???????Fraud detection system

·???????Know Your Customer software

·???????Big Data analytics platform

·???????Data Encryption?

·???????Big Data mining and processing software with a microservice-based architecture

·???????Modeling and simulation software (for predictive analytics needs)

·???????Data generation solutions (banks don’t share their information with other financial institutions; thus, banks face problems with getting enough data for machine learning purposes like creating fraud detection systems)

·???????Virtual assistants

·???????Online banking applications

Complex solutions may be costly, but when it comes to banking, there’s no room for a budget decrease in custom software development. The biggest banking market representatives have started their digital transformation years ago and now openly tell about their success.?

CONCLUSION

To sum things up, here are the five keys for successful digital transformation in banking we discussed.

1.???Make a cultural shift from the C-level down.

2.???Learn from the successes and failures of other organizations trying to transform.

3.???Transition to agile methodology, even beyond IT.

4.???Focus on customer experience and making it better at all touchpoints.?

5.???Bridge internal skills gaps in digital capabilities through training incumbent employees.