Digital Transformation: Why now?

Digital Transformation: Why now?

The landscape in Financial services business has been changing rapidly and continuously but still, there is a push for a change now and then under various headings, the latest being Digital transformation.

Why transformation resonates with financial services in general and is the push for transformation a novelty? What should it translate in order to bring value to the transforming entity? Is the risk of embarking on a transformation worth the rewards in the times of Agile and continuous improvement? What are the basic checks a change leader needs to control to keep transformation safe and focused? Let me try to evaluate in this attempt.

The bank that we see today

The banking and financial services have seen a rapid shift in the way business is conducted almost in step with the technology changes. Partly because communication and data management has been an integral part of banking business ever since the days of hand-written bank notes or ledger bookkeeping. The need to match the business they serve in terms of operational speed and efficiency is a basic requirement and banks have been “Transforming” for a century now.

Banking transformation is not new, there has been a large-sized deep impact transformation every decade since 1920. Banks have always been a quick adopter of technologies starting from accounting machines in 1920 and punch card based calculators in 1930 to address the issue of accuracy and human errors, ERM (electronic recording Machine) in 1950 addressing issue of clearing volumes that could not be managed by humans, Vacuum tube diode powered mainframes added a dimension of efficiency and eventually transistor based mainframe in 1980’s established new standards in centralisation and speed. Post that banking and technology have been inseparable and banking process development have piggybacked on technology advancements.

The change which really transformed banks down to the branch banking level was the advent of desktop computers and communication revolution in late 1980, taking the change to the desk of the clerk, fundamentally and visibly modifying the banking operations as well as communications. One does not have to go too far in the past to remember or imagine how bank used to look before 1980. The sleepy ledger based branches changed into neat office outfits they are today. This also changed the business basics from an interest-based safe vault model to a fee-based multiple investment based model, changing the business levers significantly.

The main changes that banking business witnessed over a period of time were

1.    Large monolith local entities lost to network of banks with a large geographical spread, as banks with branches in multiple geographies could be managed efficiently through centralized database and cheaper communication allowing banks to leverage in market reach and cost of funds optimization

2.    Technology also made central banking control and clearing houses more aggressive with increased efficiency, reach and capacity.

3.    The customer is now demanding speed and efficiency over and above the traditional accuracy and conservative risk approach.

4.    Banks had to look into value-add services and banks adopted three-tier model (front office, mid-office, and back office) to clearly segregate functions

5.    The reduced cost of communication brought in outsourcing as well as automation (ATM, centralized clearing and processing) as the game changer, globalizing the banks.

6.    Large universal banks were possible with efficient data management and faster communication infrastructure, this resulted in forward integration of banking in merchant financing, derivatives, hedging, cash management and the list continues to grow

Concluding from the brief above there has been a wave of impacting change in banking services technology every decade since 1920, and obviously, some waves have been bigger and more impactful than others but transformation wave none the less.

With the backdrop above what is the need for a digital transformation now? Is this the harbinger of the next wave or is there a reason?

Let us evaluate the case of Digital transformation from the following viewpoints

1.    Operations landscape,

2.    Business demand

3.    Technology advancement

Operation landscape

Banks have been pushed hard from reviewing risk into owning risks, the penalties by central banks have been especially heavy in past 10 years. This has led banks to look into the solution for risk management especially customer side (AML, KYC and onboarding risk), which needs integrating information from multiple sources both inside as well outside the bank.

The bi-product of increased fines have been a renewed focus on operating expenses this has resulted in increased automation and a focus on taking away any operation that is deemed human error-prone to be controlled by a machine or a robot.

The operations landscape in most of the banks today is a chequered one. This is a result of multiple transformation waves. Every wave of transformation had a different level of impact in various functions. For example, the data management still contends with mainframes while customer delivery has moved into mobile technology, therefore variance of adopted technology greatly varies across the operational and functional landscape of the bank.

The other problem all the banks have to face is the tendency to keep adding process and applications. Applications are phased out or written off more than the process but still, the additions far outweigh subtraction. As a result, banks are strapped with multiple applications and non-optimum processes which do not talk to each other and as a result, some workaround has to be developed to keep data integrity. Process redundancy or non-applicability poses a continuous bleed on cost and efficiency, but it is often under the radar and accepted as a legacy. The discipline of application and process audit should be made stricter, use of technology in this area can surely bring a cost-effective solution.

The continuous use of technology in the banks for past 40 years has led to a mountain of data residing in bank’s system as well and being added at an exponential rate. The use of data science to make sense of this pile of data is strongly felt. The available tools for data analysis promise predictive and investigative capabilities which were considered unviable a few years ago. This has led to a whole new world of behavioral finance which is still nascent to venture and this can only be done with help of technology combined with the business learnings.

Business Demand

Banks have come a long way from flip coin to Bitcoin, and business too is getting demanding at the same pace. Efficiency and accuracy of operations have been addressed and become a norm, now the focus is on efficiency and accuracy of decisions. Business is also demanding a greater value in services with quick MI available in all channels in real time.

Increase in online transactions and real-time clearing has raised the bar and opened a new field to cover. Online business has given rise to the need to work on the behavioral aspect of the customers and their choices, the granularity of customization also has become finer.

The competition in providing service has increased due to the convergence of technology, bringing in technology players to provide payments and CRM solutions. Corporates too want a predictive angle to the services and MI they get from the bank, it is only a matter of time that corporates graduate to behavioral finance and expect the banks to be ready to support the same

Technology Advancements

Data management has come a long way from record keeping to database management and now to the blockchain. The data storage has become cheaper resulting in a manifold increase in data handling. The need for data security is increasing with increase in delivery channels and technology. The primary area of thrust in technology that promises transformational changes in banking technology can be seen as below:

Decision support systems once considered a luxury or theoretical are increasingly becoming a low-cost dependency. They have graduated from algorithm based, to scorecard, to neural networks now to intelligent tools. Decision support system is poised to become one of the biggest game changer in banking services in a short time and evolve into an alternate system rather than a support system.

RPA (Robotics Process Automation), especially with a legacy system, can be used for an immediate boost while preparing the system for the next level change. RPA can be used to build manual interface bridges as demanded by the business, the innovation manager should draw a future plan based on the effectiveness and utility of such bridges while offering an immediate performance boost and a cost cut in the short term.

AI (Artificial intelligence) has long been expected to take over many activities which require decision making, choosing the most optimum option and other areas where algorithm, as well as past learnings, can be assimilated. AI is now coming in with a renewed promise, with recent experiments assuring it’s applicability in banking scenario.

Blockchain as a technology is gaining a lot of ground, but as a concept, it is as old as Borland C. Blockchain as a concept is a linked list. With the increased capacity of complex database management Blockchain uses parent hash rather than pointers making it more robust and secured, added to this the protocol build in blockchain to adhere to decentralized model is what amplifies the value over the linked list concept. The usage of blockchain in a ledger, document management, Bank Guarantees, derivatives and crypt currencies is at an advanced stage and the list is growing, banks need to reimagine how to align Blockchain to serve their business imperatives.

Conclusion

Technology is in step with indicators on the horizon, a move towards behavioral finance. In my opinion, banks need to look into possible areas where they can move towards behavioral finance. The word of caution, however, is that banks should apply these solutions based on the need and business applicability separating the bandwagon push they come with. To summarise:-

1.    Digital transformation will mean different things for different banks depending on the business size, geographical spread, and legacy system. The organization should not only be sure about their current state but should also have a very clear vision of the future state.

2.    Digital transformation is a strategic exercise which should question the basics, to answer them senior leadership involvement is imperative. This also poses a challenge for the leadership to chart a strategic vision, if the strategy is defined first the Digital transformation should be able to adjust quickly if a change is imposed. This will also serve right in the volatile business conditions companies today operate in.

3.    The organization willing to embark on the digital transformation journey should be ready to accept radical changes, adopt futuristic solutions and accept the risk that will come along.

4.    The organization needs to take Digital transformation on the value proposition like any transformation. The value that a change is expected to bring should be closely tracked and objectivised.

5.    The Organization should look beyond the fad value of Digital Transformation. A disruptive transformation with a back to basics approach is not a new thought. Business Process Re-engineering by Hammer and Champy in 1990, Disruptive technologies of 1995 by Clayton M. Christensen, Re-imagine! Business Excellence in a Disruptive Age in 2003 by Tom Peter and many more thinkers, more recently in past two decades have found an audience within business leadership for redrawing the business model and start from the basics. As in the past, these concepts cannot be exported in a running business in totality simply because the risk of experimenting with a concept is too big. The concepts, however, pave a way for a thought process and an actionable plan that are in sync with the ground realities of a company. The companies should draw from their own experience to identify the key strategy level problem they need solutions for and translate these concepts into a transformation plan based on their strategic imperatives, cost considerations, and risk appetite.

About the Author:

Ashish is a change and transformation leader in the Banking sector with over 17 years of experience in managing large sized transformation projects with various banks. With an Electrical engineering Degree from IIT and an MBA from IIM, he has a technology as well as a business view. The views expressed here are personal.