Impediment to Digital Banking in Incumbent,Traditional Banks

Banking has really changed in the last decade by the entry of New Age Banks (NAB), NeoBanks and Fintechs. They are rolling out new digital features/services at an alarming rate now. Although,the traditional incumbent banks worldwide are trying to cope up with them, but due to the existing impediments, it slows down their pace to match up with them.

       Customer retention is a very critical function for banks substantiality. Although every business looks to acquire new customers, but they would also not want the existing customers to move to a different banking partner.  On top of it, new customer acquisition is not easy these days with a buffet of banks at disposal to the customers to choose from. From the new customer acquiring perspective, it’s a fact that there is cost associated to onboard them.

      But still today things are slightly in favor of the Traditional banks as compared to NAB’s, NeoBanks and Fintechs. Below are the comparisons between the two and who takes the edge on each - 

New Age Banks leads in 6 ways - 

• Fully Digital experience
• Cross sell/up sell and solely dependent on digital channels 
• Lesser time to market new offerings 
• Easy adherence to compliances and regulations due to latest technologies/products and similar IT landscape 
• Lesser operational cost 
• Critical (human)resource availability is much more favorable because of the use of latest technologies and products    

Traditional Banks(TB) leads in 7 ways - 

• Reliability Factor
• More Brand equity as it is well known and thus have more customer inclination
• Very Exhaustive product offerings
• Branches/Engagement with Bank official offer a very personalized experience when needed
• Has added advantage to cross sell/up sell due to personalization factor
• Some Traditional banks are having operations in different geographies
• Customer has different options to reach out to banks for servicing

      These are the major decision-making factors that a customer considers while choosing a preferred banking partner, some might have more weightage on certain factors(given above) than other. This is off Course subject to different attributes such as the kind of offering customer is looking for, location, individual preferences based on trust and needs etc. 

      Incumbent banks hold the advantage for now but the imploding question is Till how long? New age banks or NeoBanks would certainly have the roadmap build to fill in the gaps which gives traditional banks an edge for now but sooner than later they are bound to catch up in future. So, Banks are closely reaching a boiling point situation where they would have to relook at the current barriers which prevent them to match the new entrants.

Major Factors will keep the Traditional Banks(TB) match on the new age capabilities of NABs –

1. Data – Data is often termed as the new gold in modern era. But in most financial institutions it is infused with impurities in form duplication, integrity and redundancy.  Financial Institutions really need to stream line there data streams to remove these imperfections.
2. Legacy Systems – Most TBs have grown over decades and in that journey they acquired new systems/technologies in trying to match up with the everchanging technical landscape and customer needs. But the catch up they have been doing would have its limit someday and could be stretched to an extent that it breaks and cause business disruptions. Decision makers within the banks understand the risk associated with replacing the old legacy systems and their concerns are also valid, but the other side of the coin is a harsh reality awaiting to uncover itself someday. Thus, they would need to strategize now to replace/modernize their legacy applications. This would be a complex and long journey, but sooner the banks start, better prepared they would be in future to complete with new entrants and also build a robust sustainable IT landscape.  Also to note here is that a significant percentage of their annual infrastructure spending is earmarked for these kinds of legacy systems. Thus, it would make much more sense to invest this budget in new technologies.
3. Large and complex Application landscape – most incumbents have complex and varied support applications, many a times different products/applications doing the same thing, servicing the same Line of Business. This is also attributed by the acquisition/mergers some banks would have done over the course of time. There is a need to rationalize there current landscape to a simpler one.

 With time, the above three factors are not getting any simpler or easier to manage and change. The more Banks wait, the more they would have to invest later with added risk associated with it.

The above three factors are the main reasons that today’s banks are not able to realize their full potential in below areas and take Neobanks/FinTechs/New banks head on -

1. RPA – It is about the automation of the processes within any business. To automate any business process, it is far easier if the touch points and handshakes are less, which could be between different systems/applications and humans. But this is often not true and thus banks are facing challenges to automate business processes because of this complexity they currently possess.
2. Data Analytics – Like articulated above, Data is like gold in todays time. But what good it would be if it is impeded with some impurity and relevant data cannot be extracted or unwanted data is taken into considerations which does not help in giving the desired results.
3. AI/ML – Similar is the case with AI/ML. It works on exploring data, defining and understanding patterns. So, it is extremely critical to provide data which makes the learning and decision making more coherent.
4. Cloud adoption – Due to varied and complicated IT landscape, it becomes challenging for Banks to move towards cloud. Due to complex and large IT landscape, banks are also not able to prioritize the cloud adoption. Yes, there are issues related to data security and local regulations/compliances, but the several steps are been taken already to address them.  
5. GRC – Dependency on few SMEs(which is reducing year on year due to retirement and lack of proper KTs) of legacy systems and spread out data across multiple redundant applications makes it more difficult to adhere and implement the regulations and compliance requirements. For example – to adhere to GDPR, banks would have to assess multiple applications/systems which might not be the case for NeoBanks/New Entrants.